2 weeks ago at the sidelines of the AFA16 conference, Izam Said asked me for my thoughts on International Financial Reporting Standards (IFRS) adoption in Brunei.
Over the last two weeks I’ve had more thoughts on IFRS and some thoughts on a potential way forward for us in Brunei.
More after the break.
So what is this all about again?
Accounting is a set of rules that allows businesses to represent their economic facts to users of accounts. These users are a wide range of stakeholders, from shareholders to creditors, to credit rating agencies and to government authorities.
IFRS were created to address a few common problems: how do we standardise the rules of representing economic facts so that users can compare economic results of one business to another business (Comparability), how do we standardise accounts so that users of accounts only have to learn one set of rules (Understandability), that are capable of being consistently applied (Reliable) and that provide information appropriate for what stakeholders are looking for (Relevant).
IFRS comes in two “flavours” : the full IFRS and the simplified “IFRS for SMEs”.
Simplified IFRS for SMEs
The full IFRS bound volume is over 2,400 pages and requires over 3,000 disclosures. In comparison, the newly issued IFRS for SMEs covers 230 pages and has approximately 300 disclosures.
That’s a 90% reduction in complexity. And that is significant, when there are some barriers to adoption, such as:
Additional time and expense needed to prepare the accounts and the subsequent audits. IFRS introduces some concepts that may be new to some like “amortised cost” for accounts receivable and anual impairment reviews.
Management teams might be better served by their own internal information. If one of the major users of accounts is management teams, then it follows that IFRS is designed to help them run their businesses. And management teams may prefer to use information prepared to their own internal standards for decision making purposes. It’s kind of hard to imagine management teams waiting for their IFRS-compliant accounts to be produced before making business decisions.
Not all accountants have IFRS skills. Younger, recently qualified accountants who have just finished their professional qualifications and accountants who have kept up to date don’t face this problem.
And the benefits to businesses?
Easier consolidation for groups of companies. One of the biggest attractions of Full IFRS is that it makes it brings consistency to group accounts. If all the companies in a group comply with IFRS,
Easier benchmarking of performance of companies in the same industry. As Bruneian companies grow into MNCs, they’ll want to compare their performance against their peers and competitors.
Improved efficiency of capital markets and the allocation of capital. With high quality, globally consistent, financial information and reporting, providers of finance will have one less barrier to global trade to worry about. This is probably a big deal in the more established and sophisticated capital markets, but in Brunei this probably doesn’t make much of a big difference.
The bottom line
At the end of the day, the accounting profession has to manage the expectations of a number of stakeholders. From staff, to Government authorities, to shareholders and management teams. The debate of adopting IFRS in any country must be first lead by the needs of its people, its Rakyat. Already we are seeing users of financial information demanding more comparable, more understandable, more relevant financial information. This trend will continue when the Bruneian business community develops further and we have more MNC’s and we begin to see public listed companies. As Brunei becomes increasingly involved in the global economy, I can foresee that our business community will demand standards that are suited to their needs.
A practical way to approach IFRS in Brunei would be to make it mandatory for all companies to adopt IFRS. We would then give an exemption for companies that are not in the “Public Interest” and that are not Government Linked Companies to be allowed to prepare their accounts in line with “IFRS for SMEs”. “Public Interest” companies are defined in the standard as “entities with public accountability”, whose debt or equity instruments are publicly traded or who hold assets in a fiduciary capacity for outsiders.
Now, this policy would raise a very valid question: Are Bruneian companies ready to adopt IFRS? And that’s probably a topic worthy of a separate blog post.
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