The journey to international accounting standards

The world’s economy has changed shape dramatically in the past 25 years. In 2010–2016, the seven largest so-called emerging economies – Brazil, China, India, Indonesia, Mexico, Russia and Turkey – contributed 24 per cent of global economic output, up from 14 per cent in the 1990s. In the same period, the Group of 7 (G7) industrialised economies shrank from 60 per cent of world economic output to 48 per cent, World Bank data reveals.

Maintaining those significant increases in trade and capital from emerging economies, and alleviating poverty in those nations as a result, is a major aim of the World Bank, and it sees the accounting framework developed by the International Financial Reporting Standards (IFRS) Foundation as playing an important role in its program.

More than a third of all financial transactions occur across national borders, according to the IFRS Foundation. Having a single set of high-quality, global accounting standards makes the flow of trade and capital stronger and more transparent. Indeed, the World Bank holds that adopting IFRS can attract investment and boost development in emerging economies.

In May 2017, the IFRS Foundation and the World Bank signed a memorandum of understanding (MoU) to develop education programs and materials to support the implementation of IFRS in developing economies. It also encourages developing economies to play a bigger role in the work of the foundation to set accounting standards.

It’s a start but there is more work to do, says Michel Prada, chairman of the IFRS Foundation Trustees, because “we have seen a large number of developing economies adopt IFRS. However, many of these countries need additional support when adopting the standards or implementing major changes to those standards.”

A step in the right direction

Others in the foundation, including trustee Wiseman Nkuhlu, chancellor of the University of Pretoria and chairman of Rothschild (SA), says the MoU is a major development for emerging markets and developing economies.

“(In Africa) dependency on aid has moved to market participation and growth in the private sector, and it’s very important that accounting standards are in line with international standards,” he says.

Ram Subramanian, CPA Australia’s policy adviser – reporting, policy and corporate affairs, sees the MoU as part of a journey. “It is but another step in the right direction, as emerging economies continue to work towards greater implementation of IFRS through establishing training mechanisms, education and a greater focus on specific challenges such as fair value,” he says.

“We have seen a large number of developing economies adopt IFRS. However, many of these countries need additional support …” Michel Prada, IFRS Foundation

Drill into the practical application of IFRS in emerging economies and the challenges posed by issues such as fair value measurement become clear.

“There are difficulties in measuring fair value in emerging economies that relate to aspects particular to those economies. Fair value aside, there are other challenges, too. For instance, nuances in the local language can throw up challenges in translation, particularly when you consider the use of terms involving judgement such as ‘highly certain’ and ‘highly probable’,” he says.

In order to protect their vulnerable budding capital markets, emerging economies also tend to be more tightly regulated. This can produce an environment not completely driven by market forces, adds Subramanian.

That’s something the Emerging Economies Group of the IFRS Foundation recognised during its discussions in 2011, stating: “The market operations of emerging economies are still developing, and there are often many regulatory restrictions in the areas of market access, operation and exit mechanisms.”

The Malaysia example

Malaysia has the right ingredients needed to become a developed nation. As one of South-East Asia’s big exporters of integrated circuits, palm oil and petroleum, its GDP growth is forecast to average below 5 per cent to 2018, and its economy is relatively open.

Malaysian Financial Reporting Standards (MFRS) are a word-for-word reproduction of IFRS – the culmination of the harmonisation of accounting over time, which gathered pace when the Malaysian Accounting Standards Board (MASB) was set up in 1997.

Tan Bee Leng, the MASB’s executive director, says issues raised at the EEG meeting six years ago that were particularly relevant to Malaysia included the fair value measurement of bearer biological assets.

“The issue was also discussed by groups of national standard-setters, such as the Asian-Oceanian Standard-Setters Group and the International Forum of Accounting Standard-Setters. Following the responses received by the International Accounting Standards Board to its 2011 agenda consultation, the Standard on Agriculture, IAS 41, was subsequently amended in 2014,” she says.

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The 2014 amendments meant a bearer plant (tree) is treated as an asset within the scope of the Property, Plant and Equipment Standard, IAS 16, but the produce of the tree (fruit) is treated as a biological asset, and remains within the scope of IAS 41. This amendment to IAS 41 was of particular interest to the MASB, because palm oil is made from the pulp of the fruit of the oil palm.

A similar issue was raised in relation to property construction. Here, there was disagreement over whether revenue was recognised at a “point in time” or “progressively over a period of time”.

“We had significant debates on this question,” Bee Leng says, “and the Malaysian Institute of Accountants has addressed the issue as ‘progressively’ for residential properties.”

An IFRS-based framework, MFRS has been mandated in Malaysia since 1 January 2012 but its application to agriculture and property development companies (Transitioning Entities) was deferred. Following revision of IAS 41 and the publication of a new standard on revenue recognition, IFRS 15 Revenue from Contracts with Customers, MFRS became the only framework for all non-private entities from 1 January 2018.

IFRS elsewhere in the region

Emerging economies usually have a relatively small number of professional valuers and accountants, the Emerging Economies Group found in 2011. “Even the valuation teams of many large financial institutions are composed of only a few individuals. In addition, many market participants do not set up their own system to capture a fair values database for fair value measurement,” the Group wrote in its Guidelines on the Application of the Fair Value Measurement Standard in Emerging Economies.

This lack of accountants has a flow-on effect. “The costs involved in determining fair values and preparing financial statements could be more than that in developed countries, particularly if countries do not have many qualified personnel to carry out the required valuations,” the Group’s report explained. “For example, the population of Africa is about 10 times that of the United Kingdom, but it has fewer accountants.”

This challenge doesn’t appear to be hampering IFRS adoption in South-East Asia, however. The World Bank’s Report on the Observance of Standards and Codes for developing economies in South-East Asia reveals that, as far as it relates to IFRS adoption in Vietnam, much of the focus of the memorandum is already in place. Vietnam is working with accounting standards based on the 1999 to 2004 versions of IFRS, with plans to move to the current IFRS by 2020.

In the Philippines, too, where that country’s Generally Accepted Accounting Principles adopted IFRS to a substantial degree in 2004 and 2005, the only remaining questions are about supporting the accessibility of standards with training materials, and researching the use and impact of standards.

“The IASB wants feedback on what needs to be done in the provision of educational resources and training, as well as enforcement in legislation and through statutory authorities,” says Subramanian.

“You can see this happening in Vietnam, where things are moving rapidly and we are working with both the government and stakeholders to get them ready for IFRS. Of course, this MoU is just another stage in the development of an ongoing process.”

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