Distinguished speakers, ladies and gentlemen,
- Good morning. I am delighted to have been invited to deliver the keynote address at this 6th IFRS Regional Policy Forum. I am greatly heartened that the Forum is now into its sixth year, testimony of its value and its continued relevance as an important platform to deliberate issues on financial reporting, as well as to share experiences, and address challenges faced by countries in implementing their IFRS Roadmaps. These efforts form a crucial part of developing and promoting the use of a single set of high quality accounting standards globally.
Significance of IFRS and the need for a single reporting framework
- Financial information needs to be relevant, reliable, understandable and comparable. In a world where the flow of capital has become borderless, it is imperative for investors to possess, and for those seeking capital to report, financial information prepared on a consistent basis. For investors, a single reporting framework gives them a common yardstick to make comparisons and reach informed decisions.
On the other hand, a common reporting framework helps those seeking capital compete better globally and lowers their cost of capital. A single set of accounting standards provides credibility to financial reports and protects investors and other stakeholders from biased reporting.
- It is a fact that high quality financial reporting is fundamental to the fairness, efficiency and transparency of securities markets. Thus entities that are funded through the capital markets must provide clear, accurate and useful information that allows for comparability and therefore more informed decision making. This is a critical aspect of promoting investor confidence, and therefore confidence in the capital markets. Thus IOSCO, the International Organisation of Securities Commissions, is committed to supporting the development and enforcement of a globally-accepted set of high quality international accounting standards.
- The establishment of the Monitoring Board in 2009 represents a significant step in this direction. The objective of the Monitoring Board is to serve as a mechanism for formal interaction between capital market authorities and the IFRS Foundation, thereby facilitating the effective discharge by capital market authorities of their mandates relating to investor protection, market integrity and capital formation. The Monitoring Board – as its name suggests – also acts as monitor of the Trustees’ oversight of the IASB’s operations in particular with the aim of ensuring that they serve the public interest and remain accountable to investors, markets and market participants.
- In April 2010, the Monitoring Board commenced a review of the governance structure supporting the IFRS Foundation particularly the composition, roles and responsibilities of the Monitoring Board, the Trustees and the IASB. Concurrently, the IFRS Foundation Trustees also conducted a Strategy Review, with emphasis on the operational aspects of governance, particularly the standard-setter’s due process.
The Monitoring Board and the Trustees have recently concluded their respective reviews, after extensive public consultation, and have proposed a clear strategy and sound governance platform on which the IFRS Foundation and the IASB can continue to work towards their goal of becoming the global accounting standard-setter.
- It is extremely encouraging to note the considerable progress made over the last 11 years during which IFRS has become the internationally accepted language of financial reporting, required or permitted for use by entities in more than 100 countries. This is a significant outcome from the perspective of securities regulators for whom the consistent application of high quality IFRS across jurisdictional boundaries is key to ensuring confidence and transparency in capital markets. The quality of disclosures begins with the integrity of the financial reporting framework upon which they are based, and this underscores the significance of the IASB and IFRS in global capital markets.
Implementation challenges the IASB agenda
- The global financial crisis raised a range of financial reporting issues, and reinforced the interconnectedness and interdependent nature of global business and financial markets. This has made efforts towards establishing a single set of globally accepted and high quality accounting standards an integral component of the global financial sector reform, with the G20 continuing to re-affirm their support for a single set of global accounting standards at successive Summits, including in Cannes in November 2011. It is also pertinent to note that the G20 leaders have called upon the IASB to strengthen cooperation with stakeholders, especially in supporting the emerging economies, within the context of their independent standard-setting framework.
- As such, even as the IASB focuses its efforts on concluding the remaining convergence projects pursuant to its convergence programme with the US Financial Accounting Standards Board, it is imperative that the IASB invests sufficient resources into dealing with issues experienced by emerging economies. In this regard, I am indeed heartened to note that in his recent speech in Mexico, Hans Hoogervorst, the Chairman of the IASB, had indicated that the Board is considering some “less ambitious projects”, but of critical importance to emerging markets, such as agriculture, for inclusion in the IASB agenda.
- The contribution of emerging economies towards global GDP is expanding rapidly. In 2011, emerging economies contributed nearly 50% of global GDP compared to about 37% a decade ago. The IMF expects that emerging economies will account for 80% of world GDP growth in 2012. It seems appropriate therefore, as recognized by the G20, that more attention is directed towards supporting emerging economies in managing the issues they face in the implementation of IFRS and their place in the IASB’s agenda.
- As more countries around the world adopt IFRS, significant work needs to be undertaken to address issues arising from convergence such as interpretation, compliance, capacity building and attending to emerging developments in the market, so that the value of convergence can be fully realised. Given that jurisdictions which have adopted IFRS are at different stages of economic development with differing legal, cultural and trade practices, it is inevitable that issues arising from convergence will differ, requiring different kinds of intervention. These are challenges that the IASB will need to manage.
- Securities regulators can certainly contribute towards this effort by providing the IASB with observations on how standards are being implemented, and by communicating insights gathered through their regulatory activities. IOSCO continues to track the implementation of IFRS amongst its members. In 2010, a survey carried out by the Emerging Markets Committee Working Group on Multinational Disclosure and Accounting found that the most frequent problems faced particularly for those in the process of implementing IFRS are the interpretation of IFRS, the training of regulators and industry, and local resistance to change.
- Member jurisdictions also cited difficulties in keeping up with changes; a particularly difficult issue both for jurisdictions that have already adopted IFRS as well as for those looking at implementing them. These jurisdictions observed that IFRS had been developed for economic contexts which are different from those prevailing in emerging economies. Additionally, the survey also confirmed that different regions faced different challenges. The Asia Pacific region reported more problems related to translation and local resistance to change, while Latin America and Africa/Middle East felt an acute need for training.
- These responses suggest that resources are among the main challenges that need to be addressed in the implementation of IFRS, especially in emerging economies. Addressing such challenge requires regional and international cooperation including making available experts and financial assistance where required, as well as building capacity and enhancing education.
Role of stakeholders in ensuring effective implementation of IFRS
- It cannot be over emphasised that the value of convergence is dependent on effective and consistent application of IFRS throughout the jurisdictions which have converged. In this regard, it is essential that the various components of the entire financial reporting ecosystem fully understand each other’s roles. One of the findings of the Report On the Observance of Standards and Codes – Accounting and Auditing undergone by Malaysia recently points towards an overarching misconception on the part of some directors that it is the auditors’ role to assist in the preparation of a company’s financial statement including in areas where the company itself has applied significant judgment. This is in contrast to the auditors’ primary responsibility to form an independent opinion as to whether the financial statements present a true and fair view of the company’s financial affairs in accordance with the applicable financial reporting framework. This misconception, which I believe is not only prevalent in Malaysia, can expose auditors to self-review threats and risk their independence when they are overly involved in the preparation of financial statements which they audit. Companies which hold this belief may also under invest in the human resource requirements of their financial reporting functions which in turn can pose a risk to the effectiveness of their financial reporting.
- Preparers should therefore ensure that their finance functions in particular, are capable of preparing financial reports which are IFRS compliant. Investment in systems and technology may be needed as the information required in producing high quality financial reports may go beyond what is traditionally available during the pre-convergence period. More importantly, as management is expected to exercise judgment in many aspects of the standards, robust governance structures are a pre-requisite to effective IFRS implementation.
- Auditors play an important role in IFRS convergence. They have to attest compliance with the standards. Typically, the top 6 accounting firms audit more than two-thirds of listed companies in most markets around the world. Thus the influence that they have on the implementation and application of IFRS is significant. The stand that they take on a particular IFRS would be applied on a global basis by their member firms, thus influencing the global application of the standard. It is absolutely important for these firms to ensure that their views are consistent with the intention of the standards, and that they avoid the expediency of adopting a ‘one size fits all’ approach when there are significant differences in regulation and business practices between jurisdictions.
Ladies and gentlemen,
- The development of IFRS as the global standard to fit a diversity of circumstances and operating environment is not an easy task. Countries adopting IFRS are at different stages of economic growth, and have different trade practices, political systems and accounting profession maturity. Thus it is important that stakeholders are actively involved in providing feedback to the IASB on their implementation challenges and on emerging issues in a timely manner. If we take the amount of feedback received by the Malaysian Accounting Standards Board on implementation as an example, it is clear that stakeholders, particularly preparers, need to change their approach. Submitting feedback after the standards have been issued can be too late. At the same time, it is hoped that the IASB will take into account differences between jurisdictions to ensure sufficient flexibility is built into the IFRS framework and the adoption of IFRS does not stifle or impede economic growth or require more burdensome business practices to be observed.
- Regional collaboration is an important mechanism which national standard setters can use to enhance their understanding of challenges and potential solutions through sharing of views, rationalising implementation difficulties and coordinating the communication of feedback to the IASB. The establishment of the Asia-Oceania Standard Setters Group (AOSSG) has been pivotal in ensuring all viewpoints are analysed and discussed from wider perspectives, leveraging on capabilities and experience of like-minded partners. Since its establishment in 2009, AOSSG has made its presence felt through various ways such as providing comments on the proposals of IASB and other functions of the IFRS Foundation, sharing of knowledge and information amongst members and conducting research and surveys on topical IFRS issues. The efforts from groupings such as the AOSSG should be welcome as they provide coherent regional views and perspectives to the IASB on matters relating to IFRS and its implementation.
Ladies and gentlemen
IFRS and Islamic Finance
- I would not do justice to the enormous progress that has been achieved in Islamic finance, if I did not address the issue of the applicability of IFRS to Islamic financial entities and transactions. Over the past decade, the development of Islamic finance has gained significant traction globally. It continues to strengthen its foothold in the international financial landscape as manifested by the significant growth in terms of market size, geographical reach and product diversity. The size of the global Islamic finance market is estimated to be USD 1.13 trillion and continues to grow at the rate of 10% per annum.
- To support further growth of this sector, it is important that the accounting for Islamic finance transactions are kept within the mainstream accounting framework to ensure that the financial impact of such transactions are measured and recognised in similar ways as other transactions. This is becoming more critical as the diversity of products and structures which are based on the Shariah grow in line with the maturity of the sector. The issuers and holders of Islamic finance assets and liabilities are not limited to Shariah-based institutions but include many companies worldwide which are reporting under IFRS.
- AOSSG recently released the results of its survey on “Accounting for Islamic Financial Transactions and Entities” (December 2011). The survey noted that most of the 24 participating standard-setters had indicated that entities involved in Islamic Finance under their purview are subject to IFRS or national standards based on IFRS. An overwhelming majority of respondents thought that having separate Islamic accounting standards would be incompatible with IFRS convergence. Given the pace of growth of Islamic Finance globally, it would be appropriate for IASB to bring Islamic finance into its agenda and ensure that the development and implementation of IFRS accommodate the needs of this sector which is an important component of the financial markets for countries in the Asia-Oceania region in particular. Such a move will promote the desired convergence across all segments of the financial markets.
Capacity building and accounting education
- As I had mentioned earlier, the availability of well trained and competent people is a critical element in the convergence agenda. Thus, capacity building throughout the financial reporting ecosystem is fundamental in ensuring effective implementation of IFRS. In this respect the roles played by institutions of higher learning and professional accounting bodies are vital to ensure the availability of adequate talent in the ecosystem.
- I am pleased to note that the IFRS Foundation has embarked on an education initiative by arranging a series of regional IFRS Teaching workshops to assist IFRS teachers and trainers to educate IFRS accountants more effectively. Since the focus of these sessions is to encourage and support a “Framework-based” approach to teaching IFRS, it would develop students’ ability to make the judgments necessary to apply principles-based accounting standards and to prepare students for lifelong learning.
- Accounting academics should leverage on the learning resources made available by the IFRS Foundation to enhance their teaching. They should also be more involved in global standard setting and share their views in consultations conducted by the IASB, as well as embark on research in areas which are relevant to convergence. Only by being deeply involved in these efforts can accounting academicians be able to ensure accounting programmes offered at institutions of higher learning are relevant and in line with the needs of the market.
- In the emerging markets, the shortage of trained and competent human capital is compounded by the mobility of talent as competence in IFRS provides a person with a passport towards global employability. Emerging economies will continue to be under pressure to retain their talents, notwithstanding having invested significant resources on training. While an immediate solution is not easily identifiable, it is clear that capacity building must be on the agenda of all parties who have a stake in IFRS implementation.
Conclusion
Ladies and gentlemen,
- Navigating the change arising from IFRS convergence requires careful consideration on many fronts. It also requires the unwavering commitment of all stakeholders. A more collaborative approach, it does appear, will also facilitate more effective responses to the challenges, and will generate more value for all.
- I hope the deliberations that you are going to have over the next 2 days will help address some of these challenges. I wish you a very successful Forum and I thank you for your attention.
