EghtesadOnline: In the Iranian banking world, the IFRS fever has been running high in the past few months.
While almost everyone agrees with its implementation, there seems to be relatively little discussion about the potential hurdles and key steps required for adopting and reporting in accordance with the International Financial Reporting Standards in Iranian banks.
The concept of IFRS is not new. They are a set of accounting standards developed by the International Accounting Standards Board that is becoming the global standard for the preparation of financial statements.
The IASB is an independent accounting standard-setting body, based in London, consisting of 15 members from nine countries, according to Financial Tribune.
The predecessor to IFRS was International Accounting Standards issued by International Accounting Standards Committee. IASC was founded in June 1973 in London and was replaced by IASB on 1 April 2001.
IFRS applies to all businesses, including banking. By adopting IFRS, a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier.
Currently, there are 41 accounting standards (IFRS and IAS) in existence. The most recent and arguably the most complex IFRS applicable to banks is IFRS 9 that addresses the accounting for financial instruments. It contains three main topics: classification and measurement of financial instruments, impairment of financial assets and hedge accounting. It will replace the earlier standard for financial instruments, IAS 39, when it becomes effective in 2018.
IFRS 9 introduces a new methodology for financial instruments’ classification and the incurred loss impairment model is replaced with a more forward looking expected loss model. This is all in addition to the major new requirements on hedge accounting.
The implementation of an IFRS 9 program is a complex exercise that requires coordination between the risk, finance and IT teams within the bank.
IFRS has an impact on all aspects of a company, including financial reporting systems, internal controls, taxes, treasury, management compensation, cash management and legal affairs, among others. It requires a transformation that involves employees, processes and systems.
From my experience of over 25 years in US and European banks, the implementation of high-quality financial reporting standards is usually challenging and broadly a function of the following broad categories:
* Completeness, accuracy and granularity in the capture and recording of transactions entered into by the bank
* Quality of information systems of the bank and level of information in various sub systems
* Control frameworks, information technology architecture and data flow
* The qualification and experience level, competency and skill sets of the firm’s human resources, including finance, risk management and IT departments.
The importance of sufficient advance planning, project management, continuous monitoring and guidance required for the success of a project of this magnitude in scale and content is thus further raised. Additionally, leveraging previous lessons learned and experience will enable better navigation of the implementation and rollout process.
A successful implementation can result in substantial improvements in the performance of the finance function, streamline the financial reporting process, enhance controls and reduce costs.
It is imperative that professionals engaged in the process have extensive prior experience in helping firms plan and execute complex and challenging IFRS implementation for the first time. They can provide assistance with all aspects of the implementation process, including evaluating the potential impacts of IFRS, assessing readiness for IFRS conversion and preparing a detailed implementation plan.
Typically, the IFRS implementation involves four key stages:
(I) Assessment Stage: This stage involves a clear understanding and analysis of the impact of IFRS on consolidated and statutory reporting and accounting policies, functional and business processes and controls, financial systems, operations and technology. Tax implications and magnitude of change on the firm also need to be clearly assessed and determined at this stage.
(II) Planning Stage: A clear and detailed roadmap for the implementation of IFRS, including definition and specification of the project, people’s detailed roles and responsibilities, main processes and timelines, should be developed.
(III) Conversion Stage: Performing a comprehensive IFRS conversion at the consolidated and/or statutory reporting level, developing a judgment framework for documenting and resolving issues, performing tax conversion, designing IFRS accounting, reporting, consolidation and reconciliation processes and controls are undertaken at this stage.
(IV) Sustainability Stage: This calls for developing a plan for sustainability to enable continued IFRS reporting and perform knowledge transfer.
In order to ensure the complete success of the project, it is imperative that there is total commitment, ownership and engagement from the board level.
Ultimately, it is the responsibility of the board of directors and chief financial officer to set up the required infrastructure, skill sets, systems and processes, and oversee the implementation of IFRS reporting applicable and appropriate to the firm.