Harmonization of Accounting. Standards Within the Caribbean and the Implications for the CSME

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Harmonization of Accounting 1 Standards Within the Caribbean and the Implications for the CSME Institute of Chartered Accountants of the Caribbean 23rd Annual Conference Belize June 24, 2005 David Raggay B.Sc., M.Sc., C.A david. avid.raggay@ifrs-consultants.com

Harmonization of 2 Accounting Practices Involves a clustering about some common point Does not adopt a one-size size-fits-all approach Accommodates national differences

Harmonization 3 De jure - rules based, standards, etc.. E.G. 4th and 7th EU directives De facto - market forces persuade companies to harmonise by preparing financial reports that approximate to those the market wants e.g. IAS/IOSCO

Some Benefits of 4 Harmonization Efficient use of resources globally Foreign subsidiaries Stock exchanges listing requirements Easier for accountants, auditors etc Developing countries Taxing MNCs Encourage MNCs to apply common policies

Capital Markets 5 Accounting information is expected to provide important characteristics of: Accuracy Comparability and Transparency This is achieved by means of high-quality accounting standards and effective enforcement mechanisms

Capital Markets 6 Increasing Globalization: Cross-border listings Cross-border markets On-line investing

World Capital Markets as 7 at April 2005 Issuers Foriegn NYSE 1,834 454 NASDAQ 2,884 331 Euronext 1,302 319 London Stock Exch. 2,942 349 Switzerland 347 118 Australia 1,624 69 Singapore 652 102

World Capital Markets 8 Non-US Companies Registered with the US SEC 1,240 companies from 55 countries at 31 December 2004

Harmonization of 9 Accounting Practices The current world trend is towards convergence Moving together toward a common result Overall IASB agenda Specific IASB/FASB project

Harmonization vs 10 Convergence Harmonization Convergence

11 Adoption of IFRS May 2000: (IOSCO) recommended that its members permit incoming multinational issuers to use the 30 IASC 2000 standards to prepare their financial statements for cross- border offerings and listings..

12 Adoption of IFRS May 2002, IOSCO survey: many jurisdictions permit incoming issuers to use IAS, and others are actively working towards this end.

IFRS Convergence 13 Two major sets of GAAP IFRS US GAAP Efforts currently underway to achieve convergence between IFRS and US GAAP

IFRS Convergence 14 IAS/IFRS are the primary accounting standards in use Over 90 countries currently require IAS/IFRS for domestic listed companies

IFRS Convergence 15 Anomalies Australia New Zealand EU

International 16 Convergence Major problems (Wong Report, Sept. 2004): Understanding the meaning of International Convergence Translation of International Standards Complexity and structure of International Standards

International 17 Convergence Major problems (Wong Report, Sept. 2004) continued: Frequency, volume and complexity of Changes to International standards Challenges for SMEs and SMPs Potential Knowledge Shortfall and Implications of Endorsement of IFRS

The Caribbean 18 Dr. Eric St. Cyr: Critical facts" which "Set limits to the nature and possibilities for economic performance in the Caribbean Geography issues that "Pertain to location, size and insular configuration"

The Caribbean 19 CARICOM is vulnerable due to a lack of "critical mass" and needs to widen its membership. In order to facilitate this increase the critical mass two concerns have been identified: Intra-Regional Corporate Integration and Financial Integration

CSME 20 Described as having being "conceived as an instrument to facilitate economic development of the Member States in an increasingly liberalised and globalised international environment".

CSME 21 The major components of the CSME are: Free movement of services Free movement of goods The free movement of people and Free movement of capital

Financial Reporting In 22 The Caribbean As of June 2003 IFRSs are the required Reporting Standards for all those Caribbean countries whose institutes are members of the Institute of Chartered Accountants of the Caribbean, with the exception and St.Kitts-Nevis.

Financial Reporting In 23 The Caribbean The Accounting profession in the Caribbean is largely organized into volunteer organizations We do not currently have the resources for ongoing research and the development of indigenous standards

Regulatory Framework 24 Similar common-law background Accounting Institutes in most countries Legislative enforcement of the application of IFRS in most countries

Regulatory Framework 25 Very little in terms of formal programs for enforcement of accounting and auditing standards Great reliance on disciplinary committees (whistle blowers) to address issues of non-compliance

Financial Reporting In 26 The Caribbean Compliance Issues Inappropriate application of standards (IAS 16, 39) Inadequate or inappropriate disclosure (IAS 12, 16, 19, 39)

The IASB 27 Committed to developing:. a a single set of high quality, understandable and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements Cooperates with national accounting standard setters to achieve convergence in accounting standards around the world.

Structure Of The IASB 28 TRUSTEES S.A.C. Advisory C tees BOARD IFRIC Appoints Reporting Advises

Structure of the IASB 29 Founding Members Australia Canada France Germany Japan The Netherlands Mexico UK/Ireland USA

Structure of the IASB 30 Although the Board has a process of due diligence, the reality is that few comments originate from the Caribbean. Full use is not made of our representation Voluntary nature of the Caribbean accounting profession. Driven by the lack of critical mass in the membership of our accounting institutes which are primarily financed through membership dues.

Convergence With IFRS 31 IFRS have been created largely for transnational enterprises operating from developed-country bases It is difficult to apply them to emerging/developing countries and even more difficult to do so to SMEs there

Convergence With IFRS 32 Illiquid capital markets Equities Bonds Difficulty in estimating fair values

Practice Monitoring 33 IFAC Member bodies should develop quality review programs designed to evaluate whether firms of practicing accountants have established appropriate quality control policies and procedures and are complying with those policies.

Practice Monitoring 34 IFAC Member bodies should establish quality review programs designed to evaluate whether firms of practicing accountants have complied with relevant professional standards for assurance engagements.

International Financial 35 Reporting In most English-speaking speaking Caribbean countries, IFRS apply to all companies, whether listed or not

Why address the 36 Financial Reporting Needs of SMEs Caribbean economies are largely characterized by small and medium enterprises (SMEs( SMEs). Large in number Impact on the labour market Contribution to the economy

Why Address the 37 Financial Reporting Needs of SMEs Number of listed companies in formal stock exchanges Issuers Crosslisted Bahamas 19 1 Barbados 26 5 Jamaica 46 4 Trinidad and Tobago 33 8

Financial Reporting 38 Needs of SMEs Cost of capital Listing requirements are not equivalent to Accounting requirements SMEs typically have significant difficulties in accessing bank and trade credit (FASB 1983 report)- costs of preparation sometimes exceed the benefits to be derived

Financial Reporting 39 Needs of SMEs Users and Uses In the case of the SMEs,, the public will rarely be a user General-purpose financial statements will still be necessary

Financial Reporting 40 Needs of SMEs User Needs Investors In the SME environment, these are often the same as Lenders Banks and other sources of private finance are the primary capital Governments and their agencies interested in the allocation of development resources to SMEs.. They also require information in order to regulate their activities, determine taxation policies etc

Financial Reporting 41 Needs of SMEs User Needs Suppliers and other trade creditors interested in information that enables them to determine whether amounts owing to them will be paid when due Customers have an interest in information about the continuance of an enterprise, especially when they have a long-term Employees interested in information about the stability and profitability of their employers and in information, which enables them to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities.

International Financial 42 Reporting Research indicates that no major developed country requires that SMEs fully comply with GAAP

Issues to Consider 43 IASs of concern to SMEs IAS12 - Income Taxes IAS 17 Leases IAS 19 - Employee Benefits IAS 36 -Asset impairment IAS 32/39

Issues to Consider 44 IAS Issues Many of the disclosures required by IAS are considered to be over the top in the case of SMEs.

Issues to Consider 45 IAS Issues. There is doubt as to the usefulness of fair values to users of SME financial statements.

Results of Consultation 46 Need for concessions for SMEs. There is support for disclosure and presentation as well as recognition and measurement concessions. There was a mixed reaction as to whether SME standards should be presented in a separate volume or together with existing IFRS.

Development of the IASB 47 Project April 1998 - project on Emerging Economies added to the Board s Agenda June, 2002 Accounting and financial reporting by small and medium-sized entities (SME) and in emerging and transition economies

National Standard-Setters Setters 48 1. Australia 2. Canada 3. China 4. EFRAG 5. France 6. Germany Hong Kong 7. Hungary 8. Indonesia

National Standard-Setters Setters 49 cont d 9. Italy 10. Iran 11. Korea 12. Malaysia 13. New Zealand 14. Norway 15. Pakistan 16. Poland

National Standard-Setters Setters 50 cont d 17. Russia 18. Singapore 19. South Africa 20. Spain 21. Sri Lanka 22. Sweden 23. Thailand 24. United Kingdom 25. United States

Responses to 2004 51 Discussion Paper PV 7.3: There would be a rebuttable presumption that no modifications would be made to the recognition and measurement principles in IFRSs. 65% of respondents to DP did not agree. Felt recognition and measurement modifications are needed. Concerned that IASB is prejudging. Cited growing measurement complexities in IFRSs.

January 2005 Board 52 Decisions The Board decided, inter alia,, that Recognition and measurement simplifications will be considered based on user needs and cost/benefit. Mandatory fallback was approved Optional fallback was not approved

January 2005 Board 53 Decisions The Board decided, inter alia,, that IASB Standards for SMEs will focus on financial reporting by those non-publicly accountable entities that have external users of their financial statements (ie users other than owner-managers). This is because the IASB Framework for the Preparation and Presentation of Financial Statements (the IASB Framework) does not deal with management reporting or regulatory reporting. Jurisdictions could, of course, choose to permit or require them for all SMEs,, including very small ones.

February 2005 Board 54 Decisions The Board approved a project plan outlining steps to create standards for what were briefly called Non-publicly Accountable Entities (NPAE), but... Terminology was not widely understood. The term was considered to be possibly have negative connotations (not accountable?). The Board approved the expansion of the Working Group to include preparers and users of financial statements of Non-publicly Accountable Entities

February 2005 Board 55 Decisions Project Plan key elements: 31 March 2005: Brief questionnaire to identify recognition and measurement issues for discussion at round tables. 30 June 2005: Questionnaire comment deadline (those received by 31 May will be analysed for June SAC and Working Group meetings).

February 2005 Board 56 Decisions Project Plan key elements: June 2005 November 2005: Discussion with SAC, WG and Round Table groups on: Recognition and Measurement issues Presentation and Disclosure issues March 2006: Exposure draft 2007 Final Standards effective January 1, 2008

Impact 57 The current focus on those non- publicly accountable entities that have external users of their financial statements is biased towards the larger companies The standards developed using this focus are unlikely to address the needs of the SMEs in the English-speaking speaking Caribbean

Impact 58 We find support for this view in a recent statement issued by CILEA who deemed it unavoidable to make a clear distinction between the rules to be applied to listed companies operating on the world stock-markets and to other big entities, and to those to be applied to all other entities, mainly SMEs.

Impact 59 This was also reportedly the sentiment expressed at the IFAC SME/SMP and Developing Nations Conference held in Prague in March 2005

60 Conclusions and Recommendations Lack of significant influence at decision- making levels of the IASB. Ineffective use of existing opportunities. While the level of convergence with IFRS in published financial statements is generally acceptable, there is room for improvement. We and others may have no choice but to develop our own standards for SMEs if the current trend at the IASB continues

Conclusions and 61 Recommendations Adoption and enforcement of a system of Quality Control for public accountants and auditors Adopting standardized curriculums for accounting degrees at UWI and enforcing mandatory CPD Educating management, investors, bankers, creditors and the public in general of the benefit that will accrue from credible financial information

62 Conclusions and Recommendations ICAC members should adopt standardized examinations in Company Law and Taxation ICAC members should establish an independent regulatory body that sets the requirements for licensing Caribbean accountants in accordance with IFAC guidelines

63 Conclusions and Recommendations Co-operation operation among the following in order to achieve enforcement: The ICAC National Accounting Institutes Regional and International lending institutions National regulators, financial institutions and government institutions

64 Conclusions and Recommendations ICAC should consider fostering close working relationships with othher regional accounting bodies Concerted efforts should be made to make better use of existing representation on the IASB SME Working Group

65 Conclusions and Recommendations We find support for these recommendations from: Sotomayer (2001) Wong (2004)

66 THANK YOU