IFRS - A Different Perspective

In our rush towards adopting the new language of financial reporting, IFRS (International Financial Reporting Standards), we sometimes tend to forget to ask the fundamental question – why? Why do we need to change our language of accounting, especially now? Why have 110 nations across the globe adopted this new language and what do we, as a jurisdiction, have to gain by following suit? As we move towards our date of adoption, April 1, 2011, one needs to stand back and ask the question who is it for? Is it for corporates, financial institutions, regulators or ultimately the investor? To answer this question one needs to go to the ‘framework’ of IFRS that sets out the determining principles which drive the requirements in the standards. The goal of IFRS is to present high quality information for investors, i.e. to provide investors with information that helps them arrive at a better judgment concerning their investment decisions, thereby achieving a more efficient allocation of capital within an economy. The aim of the standards is to present ‘relevant’, ‘reliable’ and ‘timely’ information to investors.

In order to achieve the above goal, IFRS employs a tripod of principles concerning the ‘recognition’, ‘measurement’ and ‘disclosure’ of financial information. As a triage it aims to provide as complete a picture as possible to investors about their investee companies. [PAGE BREAK]

A PricewaterhouseCoopers / MORI survey of 187 fund managers in Europe post the implementation of IFRS found that 70 per cent of investors found the transition to IFRS to be either very significant or fairly significant. Additionally, over 60 per cent of the fund managers found that IFRS’ overall provided them with a more complete picture of the financial and operational risks being faced by entities. As we move towards the adoption date it is this aim that one should not lose sight of.

Given this primary objective, entities need to focus on investor communication as a primary goal rather than being bogged down in the technical aspects of the accounting literature.

They need to appreciate the fact that the overarching objective of IFRS implementation is to provide better information to their investors i.e. they need to learn how to tell their story in a different language and do it well. It is in this regard that I believe that as a jurisdiction we need to devote a lot more effort. Entities need to focus on not only training themselves but also their investors in the grammar and nuances of IFRS. Our investor community needs to understand the same and our corporates need to be in a position to explain the same. As of today we are yet embark on any significant programme to train our investor community so that they are adequately prepared to interpret the financial statements that are produced post April 1, 2011. Past experience from other jurisdictions that have adopted the IFRS system show this to be a necessary ingredient for a successful transition.

My belief is that as a country that is moving towards adoption, our greatest challenge today is to stay focused on the ‘why’ and not just the ‘how’.

At this juncture my message to all that are preparing to make this transition is to focus on their investor communication plans. Plans as to how they intend to explain their performance in a new language, plans as to how and when they will engage with their investors and plans as to how and when they will prepare their investors so that they are in a position to understand the nuances of the new language. Financial statements prepared under IFRS will fail to achieve their true purpose if in our rush towards adoption we neglect to focus on this fact. In this hurry let us not forget that the ultimate aim is to tell a better and a more robust story using the language of IFRS.