Asia has recently been making financial news headlines for good reasons. To the south of the continent, the Asian Development Bank is assisting Sri Lanka’s financial industry in implementing IFRS for accounting purposes. This development will, undoubtedly, strengthen the country’s position on the international capital markets.
Further afield in Maritime Southeast Asia, Singapore’s Accounting Standards Council has announced that all companies on the Singapore Stock Exchange “must apply a new financial reporting framework identical to IFRS for annual periods beginning on or after 1 January 2018.”
With almost two decades of management experience at a top IFRS software company, whose business activities stretch across three continents including Asia, I have closely followed, with interest, the events and activities related to the continent’s uptake of IFRS.
At present, roughly two-thirds of Asia’s 50 countries are either in the process of upgrading their national reporting systems, or have begun to switch over directly to IFRS-compliant financial statements that can be compared at international level. In this respect, the macroeconomic opportunities associated with these changes are highlighted while the numerous challenges at microeconomic level are the subject of controversial debate.
It goes without saying that the introduction of IFRS poses a serious challenge to the banking industry. New valuation methods, which, in general, are neither automated nor integrated in current procedure, have to be introduced. Besides the technical integration of these methods, the organisational impacts also need to be considered because in the future, financial departments and risk management teams will need to ensure that consistent results and a sound basis for integrated reporting are made available. In this case, the focus should not only centre on the impacts of external requirements imposed by central banks. In doing so, the opportunities that the implementation of IFRS can bring for financial institutions could be overlooked. Depending on how IFRS is embedded in an organisation, the financial statements, which ensue, can better reflect the economic truth, business value and risk involved in business operations. These statements not only provide salient facts to external stakeholders but also valuable information to decision makers within an organisation.
Furthermore, the introduction of IFRS presents a good opportunity to review current accounting practices. Additional valuation elements in financial reporting procedure allow new perspectives for the analysis and valuation of business operations to develop. Hence, risks are identified more easily, while the effects on liquidity are made more transparent. All in all, a solid decision-making framework based on an integrated reporting approach is formed. Ultimately, this leads to an increase in profitability which is, of course, the driving force behind any thriving financial industry.
To facilitate this, IT departments need to adopt a pivotal role due to the complexity of requirements and the need for multi-dimensional breakdowns and traceability of results (drilldowns), a comprehensive data set is required. The fact that artificial intelligence is most effective when combined with a competent user interface is also true for IFRS implementation.
Developments in other countries have shown that the capabilities of IT departments are instrumental in enabling organisations to reap the benefits of IFRS. In the long term however, companies that are able to overcome the initial challenges benefit from consistency of financial data across their organisations as well as a decision-making basis that has been improved considerably in terms of quantity and quality.
The IFRSs have been advancing at global level for many years now. Asian countries can now profit from the international best practices that have resulted from the experience of early adopters who are long-term users of IFRS.
Nowadays, ready-to-use, fully developed solutions are available which ensure compliance with IFRS requirements and help improve business decisions at the same time. These solutions do not necessarily need to be installed locally in a bank but rather can be provided as “software as a service” (SaaS). This approach ensures that all market players can participate in development and even cost-conscious banks can immediately promote their products as fully IFRS-compliant in a fast moving financial industry.
Good teamwork between product managers as well as financial, risk management and IT departments, which are responsible for providing the necessary data basis and the technical support for the processes, is essential for a successful transition to IFRS. A study of first adopters shows that integration was initially planned as a type of “patchwork” in existing heterogeneous organisational structures. Instead of being a uniform and transparent solution, the introduction of IFRS requirements resulted in an additional level of complexity that often caused the projects to fail.
Therefore, IFRS should be considered as THE company-wide solution and not as just another regulation prescribed by central banks. It is only when this attitude prevails that the implementation of IFRS can be conducive to identifying, minimising and monitoring risks. The switchover to IFRS has to be very well prepared and is generally associated with a lengthy process of learning and gaining experience. It is advisable to use well-proven methods in order to shorten the process and reduce or even avoid the costs incurred. To this end, international software providers offer “out-of-the-box” solutions which have been developed using the experience gained from projects in countries that have already changed to IFRS-compliant procedure.
Rather than being an additional obstacle, the implementation of IFRS will present an opportunity to Asia’s financial industry to create financial institutions that can compete at international level.
* Dr. Karl Kirchgesser, Director, Executive Vice President at FERNBACH