Accounting Auditing Board of Ethiopia AABE www aabe

Accounting & Auditing Board of Ethiopia (AABE) www. aabe. gov. et Briefing on International Financial Reporting Standards (IFRSs/IASs) For ECX Members By: Sileshi Mirani June 2017 Addis Ababa, Ethiopia

Presentation Outline • • Why standards nationally? Why Reporting? Reporting Requirements (GPFS Vs SPFS) Objectives of GPFS Qualitative characteristics of GPFS Reporting frameworks Background to IFRSs & IASs Summary of IASs & IFRSs

Why standards nationally? • Because we have no reporting standard, and/or • The need for better and high quality reporting standards • Importance from the perspectives of: • • Organizations Professionals Others, and The Country

The need for • HQ, transparent, comparable and understandable FI • Accountability/tran sparency Reporting/Reports Why Financial Reporting? REGULATIONS/Requirements • Gov’t (Proc 847/2014) • Donor • Others regulators • Public ØGeneral purpose FSs ØSpecial purpose FSs/Reports Ensuring Compliance • Auditors • AABE • Others üUsing appropriate Standards (IPSAS, IFRS…) üReporting requirements

Cont’d • In general: Ø No transparency/Accountability Ø No trust Ø No grant/donation No trust No grant/donation No social service Ø No social service No community development, no poverty reduction, no economic development. . . Similarly: If, No Quality FR No/less trust by Lenders/Investor No trust by Investor/Lenders No Finance No investment No development

Reporting requirements GPFR Vs SPFR • General purpose financial statements are those that: – aims to provide useful financial information about the reporting entity to primary users who can not command the reporting entity to provide information directly to them – about the financial position, performance and cash flows of an entity that is useful to those users in making economic decisions – Are prepared inline with some reporting framework – IFRSs/IASs, IPSAS and IFRS for SME apply to all general purpose financial statements – Such financial statements are directed towards the common information needs of a wide range of users, for example, shareholders, creditors, employees and the public at large. • Financial reporting is not an end in itself, unless available to the user • Reflect the qualitative characteristics of FRs (Understandability, relevance, reliability and comparability) • To ensure accountability, transparency and for the purpose of decision-making purposes

Cont’d A complete set of GPFSs comprise: • Statement of financial position, • Statement of Profit/Loss and OCI, • Statement of changes in equity, • Statement of Cash Flows, and • Disclosure, comprising a summary of significant accounting policies and other explanatory notes

Cont’d • Special purpose financial reporting are those designed to: – responds to the requirements of users that have the authority to require the reporting entity to provide the information that they need for their purposes directly to them. Example: • prudential regulation reporting requirements • tax reporting requirements • Donors, and other regulators

Objective: General purpose financial reporting IFRS IPSAS IFRS for SMEs Designed for which entities? Profit-oriented Public sector Not publicly accountable Targeting whose information needs that cannot require information from the entity? Existing and potential investors, lenders, creditors Service recipients and resource providers Broad range Stewardship, compliance, sustainability, adaptability Broad range Service delivery planning, including advancing or withdrawing resources Economic decisionmaking As a basis for assessing Prospects for what? future net cash inflows For informing what actions? Buy, hold, sell decisions and advance or withdraw loan

Qualitative characteristics GPFS • Relevance: • Relevant financial information is capable of making a difference in the decisions made by users • Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value or both • Financial information has predictive value, if it can be used as an input to processes employed by users to predict future outcomes • Financial information has confirmatory value if it provides feedback about (confirms ) previous evaluations • Materiality: • Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity

• Faithful representation • Financial reports represent economic phenomena in words and numbers. • To be useful, financial information must not only represent relevant phenomena, but it must also faithfully represent the phenomena that it purports to represent. Ø To be a perfectly faithful representation, a depiction would have three characteristics. – It would be complete, neutral and free from error. Of course, perfection is seldom, if ever, achievable. The objective is to maximize those qualities to the extent possible – Complete depiction includes full descriptions and explanations about economic phenomena

• Information must be both relevant and faithfully represented if it is to be useful. • Neither a faithful representation of an irrelevant phenomenon nor an unfaithful representation of a relevant phenomenon helps users make good decisions • Comparability, verifiability, timeliness and understandability are qualitative that enhance the usefulness of information that is relevant and faithfully represented – Comparability: Users’ decisions involve choosing between alternatives, for example, selling or holding an investment, or investing in one reporting entity or another • Consequently, information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date

• Verifiability : means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement – Verifiability helps assure users that information faithfully represents the economic phenomena it purports to represent • Timeliness: means having information available to decision-makers in time to be capable of influencing their decisions • Understandability : Classifying, characterizing and presenting information clearly and concisely makes it understandable

Cont’d IFRS IPSAS IFRS for SMEs fundamen tal ✔ ✔ Faithful representation: complete, fundamen neutral and free from error tal ✔ Similar called reliability Understandability enhancing ✔ ✔ Timeliness enhancing ✔ ✔ Comparability: like things look enhancing alike; different things look different ✔ ✔ Verifiability (direct or indirect): enhancing consensus, but not necessarily complete agreement, that a depiction is a faithful representation ✔ ✔ Relevance: capable of making a difference

Cont’d Generally users of FR are Donors

Reporting frameworks/Standards • IFRS • standard-setter = International Accounting Standards Board (IASB) • More Principle based • IFRS for SME • standard-setter = International Accounting Standards Board (IASB) • More Principle based • IPSAS • standard-setter = International Public Sector Accounting Standards Board (IPSASB) • More Principle based • US-GAAP • Financial Accounting Standard Board (FASB) • Rule- based

Cont’d Who decides who uses which framework? • Decisions on which entities are required or permitted to use particular financial reporting frameworks rest with legislative and regulatory authorities in individual jurisdictions. • For example in Ethiopia see: – Financial Reporting Proclamation 847/2014; and – Council of Ministers Regulation 332/2014.

Cont’d q • • Some jurisdictions’ decisions 119 (83%): require use of IFRS for all or most 2: Ethiopia and Thailand are in the process of adopting IFRS 12: permit rather than require IFRS: Bermuda, Cayman Islands, Guatemala, Honduras, India, Japan, Madagascar, Nicaragua, Panama, Paraguay, Suriname and Switzerland 2: require IFRS for financial institutions but not listed companies: Saudi Arabia and Uzbekistan 1: Indonesia is converging substantially with IFRS 8: use national GAAP: Bolivia, China, Egypt, Guinea-Bissau, Macao, Niger, US, Vietnam Sources: IFRS Foundation jurisdiction profiles covering 143 countries (see http: //www. ifrs. org/Use-around-the-world/Pages/Analysis-of-the-IFRSjurisdictional-profiles. aspx); and for Ethiopia (see Proclamation no. 847/2014)

Cont’d q Some jurisdictions’ decisions • 80 : require or permit use of the IFRS for SMEs – Anguilla, Antigua and Barbuda, Argentina, Armenia, Azerbaijan, Bahamas, Bahrain, Bangladesh, Barbados, Belize, Bermuda, Bhutan, Bosnia and Herzegovina, Botswana, Brazil, Cambodia, Cayman Islands, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Fiji, Gambia, Georgia, Ghana, Grenada, Guatemala, Guyana, Honduras, Hong Kong, Iraq, Ireland, Israel, Jamaica, Jordan, Kenya, Kosovo, Lesotho, Macedonia, Madagascar, Maldives, Mauritius, Montserrat, Myanmar, Nicaragua, Nigeria, Pakistan, Palestine, Panama, Peru, Philippines, Qatar, Rwanda, Saint Lucia, Saudi Arabia, Serbia, Sierra Leone, Singapore, South Africa, Sri Lanka, St Kitts and Nevis, St Vincent and the Grenadines, Suriname, Swaziland, Switzerland, Tanzania, Trinidad & Tobago, Uganda, Ukraine, United Arab Emirates, United Kingdom, Uruguay, Venezuela, Yemen, Zambia, and Zimbabwe • 1: Ethiopia is in the process of adopting • 11 : future use is currently under consideration • Sources: IFRS Foundation jurisdiction profiles covering 143 countries (see http: //www. ifrs. org/Use-around-the-world/Pages/Analysis-of-SME-profiles. aspx; and for Ethiopia (see Proclamation No. 847/2014)

Cont’d ØEthiopian GPFS framework IFRS implementation road map: 3 phase transition over 3 years: • Phase 1: Significant Public Interest Entities (Financial Institutions and public enterprises owned by Federal or Regional Governments- Adoption of IFRS) – Adoption start from EFY 2009 (i. e. specifically July 8, 2017); • Phase 2: Other Public Interest Entities (ECX member companies and those that meet PIE quantitative thresholds) adoption of IFRS and IPSAS for Charities and Societies– start adoption of the standards at the start of EFY 2010 (i. e specifically July 8, 2018) • Phase 3: Small and Medium-sized Entities adoption of the IFRS for SMEs – start adoption of the standards from EFY 2011 (i. e specifically July 8, 2019)

Background to IFRS/IAS • Jargons and Terms • IASC- International Accounting Standards Committee • IASB-International Accounting Standards Board, established in 2001 as part of IASC Foundation • SIC –Standing Interpretations Committee • In 2010, the IASC Foundation was renamed as ‘The IFRS Foundation’ • IFRIC –International Financial Reports Interpretations Committee, that replaced SIC • IAS-International Accounting Standards • IFRS-International Financial Reporting Standards • Both IASs & IFRSs are issued by IASB – Are issued based on the conceptual framework

• Require high quality, transparent and comparable information in FRs to help investors, other participants in the various capital markets of the world and other users of financial information make economic decisions • IFRSs/IASs set out recognition, measurement, presentation and disclosure requirements dealing with transactions and events that are important in GPFS • They may also set out such requirements for transactions and events that arise mainly in specific industries • IFRSs/IASs are based on the Conceptual Framework, which addresses the concepts underlying the information presented in general purpose financial statements • IFRSs/IASs are designed to apply to the general purpose financial statements and other financial reporting of profit-oriented entities • Profit-oriented entities include those engaged in commercial, industrial, financial and similar activities, whether organized in corporate or in other forms

Cont’d • They are developed with due process – IFRSs are developed through an international due process that involves: • Accounting firms, Auditors, Finance professionals, Financial analysts and other users of financial statements, • the business community, stock exchanges, regulatory and legal authorities, academics and other interested individuals and organizations from around the world

• IAS 1: Presentation of FSs – This Standard prescribes the basis for presentation of general purpose financial statements to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities. – It sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content • IAS 2: Inventories – The objective of this Standard is to prescribe the accounting treatment for inventories – A primary issue in accounting for inventories is the amount of cost to be recognized as an asset and carried forward until the related revenues are recognized – This Standard provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value – It also provides guidance on the cost formulas that are used to assign costs to inventories

• IAS 7: Statement of Cash Flows Ø The objective of this Standard is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows which classifies cash flows during the period from operating, investing and financing activities • IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors Ø The objective of this Standard is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors • IAS 10: Events after the Reporting Period Ø The objective of this Standard is to prescribe: Ø when an entity should adjust its financial statements for events after the reporting period; and Ø the disclosures that an entity should give about the date when the financial statements were authorized for issue and about events after the reporting period

• IAS 12: Income Taxes Ø The objective of this Standard is to prescribe the accounting treatment for income taxes. The principal issue in accounting for income taxes is how to account for the current and future tax consequences of: a) the future recovery (settlement) of the carrying amount of assets (liabilities) that are recognized in an entity’s statement of financial position; and b) transactions and other events of the current period that are recognized in an entity’s financial statements § IAS 16: Property, Plant and Equipment(PPE) ü The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investment. ü The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognized in relation to them

• IAS 19: Employee Benefits Ø The objective of this Standard is to prescribe the accounting and disclosure for employee benefits. The ttandard requires an entity to recognize: i. a liability when an employee has provided service in exchange for employee benefits to be paid in the future; and ii. an expense when the entity consumes the economic benefit arising from service provided by an employee in exchange for employee benefits • IAS 20: Accounting for Government Grants and Disclosure of Government Assistance Ø Deals with the treatment of any grants, considerations or transfers made by government including the way of presentation and disclosure requirements • IAS 21: The Effects of Changes in Foreign Exchange Rates ü The objective of this standard is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency

• IAS 23: Borrowing Costs Ø Sets out criteria for borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset Ø Other borrowing costs are recognized as an expense • IAS 24: Related Party Disclosures o The objective of this Standard is to ensure that an entity’s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances, including commitments, with such parties • IAS 26: Accounting and Reporting by Retirement Benefit Plans – This Standard shall be applied in the financial statements of retirement benefit plans where such financial statements are prepared – This Standard deals with accounting and reporting by the plan to all participants as a group. It does not deal with reports to individual participants about their retirement benefit rights

• • • IAS 27: Separate Financial Statements o The objective of this Standard is to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements IAS 28: Investments in Associates and Joint Ventures ü The aim of this Standard is to prescribe the accounting for investments in associates and to set out the requirements for the application of the equity method when accounting for investments in associates and joint ventures IAS 29: Financial Reporting in Hyperinflationary Economies ü This standard applies to the financial statements, including the consolidated financial statements, of any entity whose functional currency is the currency of a hyperinflationary economy • IAS 32: Financial Instruments: Presentation ü The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. ü It applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset

IAS 33: Earnings per Share Ø The objective of this standard is to prescribe principles for the determination and presentation of earnings per share, so as to improve performance comparisons between different entities in the same reporting period and between different reporting periods for the same entity Ø IAS 34: Interim Financial Reporting o prescribes the minimum content of an interim financial report and the principles for recognition and measurement in complete or condensed financial statements for an interim period o Timely and reliable interim financial reporting improves the ability of investors, creditors, and others to understand an entity’s capacity to generate earnings and cash flows and its financial condition and liquidity • IAS 36: Impairment of Assets • § The objective of this Standard is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount § An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset § If this is the case, the asset is described as impaired and the Standard requires the entity to recognize an impairment loss § The Standard also specifies when an entity should reverse an impairment loss and prescribes disclosures

• IAS 37: Provisions, Contingent Liabilities and Contingent Assets o The objective of this standard is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to enable users to understand their nature, timing and amount • IAS 38: Intangible Assets – the objective of this Standard is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another Standard – this standard requires an entity to recognize an intangible asset if, and only if, specified criteria are met – the standard also specifies how to measure the carrying amount of intangible assets and requires specified disclosures about intangible assets • IAS 39: Investment Property Ø The objective of this Standard is to prescribe the accounting treatment for investment property and related disclosure requirements • IAS 41: Agriculture Ø The objective of this Standard is to prescribe the accounting treatment and disclosures related to agricultural activity

• IFRS 1: First-time Adoption of IFRS Ø The objective of this IFRS is to ensure that an entity’s first IFRS financial statements, and its interim financial reports for part of the period covered by those financial statements, contain high quality information that: i. is transparent for users and comparable over all periods presented; ii. provides a suitable starting point for accounting in accordance with IIFRSs; and iii. can be generated at a cost that does not exceed the benefits • IFRS 2: Share-based Payment ü The objective of this IFRS is to specify the financial reporting by an entity when it undertakes a share-based payment transaction. ü In particular, it requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees

• IFRS 3: Business Combinations ü The objective of this IFRS is to improve the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects ü To accomplish that, this IFRS establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed any non-controlling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and c) what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination

• IFRS 4 (17): Insurance Contracts Ø The objective of this IFRS is to specify the financial reporting for insurance contracts by any entity that issues such contracts (described in this IFRS as an insurer) until the Board completes the second phase of its project on insurance contracts (IFRS 17). In particular, this IFRS requires: a) limited improvements to accounting by insurers for insurance contracts b) disclosure that identifies and explains the amounts in an insurer’s financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts

• • IFRS 5: Non-current Assets Held for Sale and Discontinued Operations o The objective of this IFRS is to specify the accounting for assets held for sale, and the presentation and disclosure of discontinued operations o In particular, the IFRS requires: a. assets that meet the criteria to be classified as held for sale to be measured at the lower of carrying amount and fair value less costs to sell, and depreciation on such assets to cease; and b. assets that meet the criteria to be classified as held for sale to be presented separately in the statement of financial position and the results of discontinued operations to be presented separately in the statement of comprehensive income IFRS 6: Exploration for and Evaluation of Mineral Resources ü The objective of this IFRS is to specify the financial reporting for the exploration for and evaluation of mineral resources ü In particular, the IFRS requires: i. limited improvements to existing accounting practices for exploration and evaluation expenditures ii. entities that recognize exploration and evaluation assets to assess such assets for impairment in accordance with this IFRS and measure any impairment in accordance with IAS 36 Impairment of Assets iii. disclosures that identify and explain the amounts in the entity’s financial statements arising from the exploration for and evaluation of mineral resources and help users of those financial statements understand the amount, timing and certainty of future cash flows from any exploration and evaluation assets recognized

• IFRS 7: Financial Instruments: Disclosures Ø The objective of this IFRS is to require entities to provide disclosures in their financial statements that enable users to evaluate: a. the significance of financial instruments for the entity’s financial position and performance; and b. the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the end of the reporting period, and how the entity manages those risks – The principles in this IFRS complement the principles for recognizing, measuring and presenting financial assets and financial liabilities in IAS 32 Financial Instruments: Presentation and IFRS 9 Financial Instruments • IFRS 8: Operating Segments ü Prescribes for the need for disclosure of information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates

• IFRS 9: Financial Instruments (From Jan 1, 2018) Ø The objective of this Standard is to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows Ø It supersedes IFRS 39 • IFRS 9: Consolidated Financial Statements o The aim of this IFRS is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities • IFRS 11: Joint Arrangements ü The objective of this IFRS is to establish principles for financial reporting by entities that have an interest in arrangements that are controlled jointly (ie joint arrangements)

• IFRS 12: Disclosure of Interests in Other Entities o The objective of this IFRS is to require an entity to disclose information that enables users of its financial statements to evaluate: a) the nature of, and risks associated with, its interests in other entities; and b) the effects of those interests on its financial position, financial performance and cash flows • IFRS 13: Fair Value Measurement o This IFRS ü defines fair value; ü sets out in a single IFRS a framework for measuring fair value; and ü requires disclosures about fair value measurements

• IFRS 14: Regulatory Deferral Accounts Ø The objective of this standard is to specify the financial reporting requirements for regulatory deferral account balances that arise when an entity provides goods or services to customers at a price or rate that is subject to rate regulation • IFRS 15: Revenue from Contracts with Customers ü This standard establishes the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer • IAS 17 (IFRS 16): Leases (From January 1, 2019, IFRS 16) Ø The objective of this Standard is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosure to apply in relation to leases • IFRS 17: Insurance contracts ED • Also refer SIC & IFRICs

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