The Accounting and Auditing Board of Ethiopia AABE

The Accounting and Auditing Board of Ethiopia (AABE) www. aabe. gov. et International Financial Reporting Standards (IFRS) Implementation Road Map Dawit Mengistie June, 2017 Addis Ababa, Ethiopia

The Ethiopian Regulatory Framework l l l Financial Reporting Proclamation 847/2014 Council of Ministers Regulation 332/2014 Directives to be issued by AABE

IFRS Adoption Road Map

IFRS - What is it? § § IFRSs are a single set of accounting standards which specify how certain transactions and other events should be reported in financial statements. The main purpose of these standards is to maintain stability and transparency throughout the financial world.

Financial Reporting: Why is it Important? Ø No transparency => no trust Ø No trust => no credit Ø No credit => no investment Ø No investment => no growth

Background l l Scope of IFRS Conversion – Conversion will touch almost every aspect of the company. Its impact is profound! And conversion to IFRS does not end with the publication of the first set of IFRS compliant financial statements. Necessary preparation including changes in accounting policy, IT system, process, etc. must precede conversion to IFRS Implementation of ISAs – immediate and no road map needed.

• • • Not just Finance Front Office, research, credit Non-executives Access to knowledge and tools • • Policies and procedures Finance function efficiency Finance and Operations transformation • • • • • Covenant renegotiation Valuation of earn outs Demand for valuations Impact of consolidation of SPEs Clients’ appetite for existing structured financial products Viability of transactions due to treatment on own balance sheet Ability to assess client suitability and credit Fragmented processes/ systems resulting from IFRS tactical solutions Data capture Hedging Loan provisions Segmental reporting Financial Statements presentation Impact of accounting on taxation considered irrelevant by IASB Impact on tax strategies Data collection Structured products Inland Revenue Control environment • • Training and knowledge Tax planning • • • Business and franchise Financial instruments Business impact of IFRS Processes and systems Oversight and project management • • Management information Investor relations • • Fair value Debt vs. equity Review of hedging strategies Hedging documentation Day One profit recognition Observability of market prices Embedded derivatives Reserving policies SPEs Complex project management Audit Committee involvement Non-executive understanding and oversight Resources and budgets Employee benefits • • • Key performance indicators Management reporting Underlying infrastructure Reconciliation to reported results IFRS alignment • • • Share based payments Pension arrangements and funding Retirement benefit costs Alignment of remuneration and bonuses • • • Early education Underlying business performance Volatility of earnings and equity Hedging strategies Re-benchmarking relative to global peer group

Accounting & Auditing as part of Governance l l l Sound governance and effective institutions are essential to achieve shared prosperity and sustained reductions in poverty. Public accountability and proper governance contribute to better delivery of public services, support competition and growth, including through cooperation with private sector. Quality information helps the government properly analyze risks and play their essential roles in resolving the complex and interconnected challenges in variety of sectors, including in health, social protection and education.

Accounting & Auditing: Key Development Benefits

Users of Accounting & Financial Reporting

Financial Reporting: Multiple Users and Uses

High-Quality Financial Reporting: 3 Key Dimensions

Standards are Just one Piece of a Complicated Puzzle

Financial Reporting is not just about the Standards

All supporting pillars are important and need to be strengthened

TRUST

Why Public Oversight? § § The modern movement towards public oversight of the auditing profession began with the wave of corporate financial reporting scandals starting about 15 years ago in the U. S. , Europe, and Japan. Over the last decade, beginning with the Sarbanes. Oxley Act of 2002, a worldwide consensus has developed that auditors cannot adequately regulate themselves, mainly because they do not have sufficient incentive to do so: – Conflict of interest built into the auditor-client relationship – Market may not adequately recognize and reward audit quality – Unregulated competition may be based on price or willingness to accommodate, rather than on audit quality

Ensuring Compliance with Reporting Obligations

Ensuring Compliance with Reporting Obligations Challenges l l l Making the reporting available to the public Powers of the regulator/supervisor – To investigate – To remedy or sanction Organization of the regulator – Sufficient resources – Cooperation between regulators Market discipline Suitability of the standards

Suitability of the Standards - Financial Reporting

Statement of Adoption l l Ethiopia adopt IFRS as issued by the IASB. A three phase transition over a period of three years for reporting entities Effective and meaningful adoption may be derailed if any of the milestones and timelines is ignored. “voluntary” adoption before the mandatory date permitted. BUT What Does ROSC AA 2007 Review Result Showed ? ?

ROSC 2007 Review Result of FSs l l focused on issues of presentation and disclosure only (not recognition and measurement issues) sample of 35 financial statements from financial institutions, public enterprises, share companies, etc. review result revealed that there were significant differences between the actual accounting practices and IFRS requirements conclusion the actual accounting practice in Ethiopia differ from IFRS.

Voluntary Adoption l l l reporting entities are not allowed to make such unreserved reference to IFRS unless they fully comply with all the requirements of the IFRSs applicable to their circumstances. reference to IFRS by reporting entities prior to the mandatory requirement date shall be considered as “voluntary” adoption and treated accordingly. such claim by reporting entities and their auditors shall be scrutinised strictly and any infraction shall be dealt with firmly.

Mandatory Adoption of IFRS § PHASE 1: Significant Public Interest Entities - Financial Institutions and public enterprises owned by Federal or Regional Governments § Hamle 1, 2009 the date for adoption of IFRS. § PHASE 2: Other Public Interest Entities (ECX member companies and reporting entities that meet PIE quantitative thresholds) and IPSAs for Charities and Societies § Hamle 1, 2010 the date for adoption of IFRS § PHASE 3: Small and Medium-sized Entities § Hamle 1, 2011 the date for adoption of IFRS

IFRS Implementation Roadmap Reporting Date: Other PIEs 2010/11 Transition Date: Other PIEs 2007/08 • Awareness • Assessment • Amendment of laws, regulation and directives • Training • Planning/impact analysis • Transition adjustments/ opening BS for sig. PIEs 2008/09 Transition Date: Significant PIEs • Transition adjustments • Prepare IFRS opening SFP • Dry Runs for “significant PIEs” • Prepare comparative figures 2009/10 IFRS Competency 2010/11 • IFRS/Quarterly reporting by sig. PIEs • Audit procedures • Stakeholders communications • Other PIE’s prepare opening SFP & comparative figs • Dry Runs for other PIEs • SME’s commence transition planning • IFRS/Quarterly reporting by other PIEs • Audit procedures • Stakeholders communications • Compliance monitoring for sig. PIEs • SMEs prepare opening SFP and comparative figs • Stakeholders communications • Dry Runs for SMEs Alignment with other initiatives and training for appropriate personnel Realisation and standardisation of statutory reporting 20011/12 Reporting Date: Significant PIEs Transition Date: SMEs Reporting Date: SMEs 2011/12 • IFRS reporting by other SMEs • Audit procedures • Stakeholders communications • Compliance monitoring for Other PIEs

Disclosure Requirements by REs l Prior disclosure of the effects of IFRS adoption starting from two years prior to adoption – Preparation plans for IFRS adoption and the progress thereof – Different accounting treatments that are expected to have a great impact on the entity – Quantified information about anticipated effects on financial position & performance – Changes in the consolidation scope - increase or decrease in the no of subsidiaries to be consolidated or description and reason of why it is not possible to provide such information.

Monitoring Preparation for IFRS Adoption • During the preparation period AABE undertakes survey of reporting entities that are subject to mandatory IFRS application • Survey results will be utilized to plan and execute appropriate intervention measures to facilitate timely adoption.

Reporting Requirement on Audit Firms • audit firms to prepare and submit business reports starting from 2008/09 describing the status of their own preparation for the adoption of IFRS by their clients. • E. g. teams and staff members dedicated to the firm's preparation for IFRS adoption, education sessions • AABE will analyse the reports and examine how firms are preparing for the adoption of IFRS. • AABE will direct the firms that lacked sufficient preparation to place adequate efforts in the preparation • Result of report examination will be used as input in the selection of audit firms for quality review

IFRS Roadmap Implementation Task Force l l A joint public and private-sector task force for efficient implementation of the Roadmap Goal of TF- to deal with issues arising from adoption and to support the stabilisation of the adoption process. Focus of TF - identifying and providing recommendations for the amendment of the accounting infrastructure including the related laws, regulations and directives. the Task Force may establish different working groups, as required, to deal with specialist areas

Activities of the IFRS Roadmap Implementation Task Force during Preparation Stages § Identify and submit recommendation for amendment of Laws and Regulations contradicting FRP. § Tax Law § Revision of the regulatory requirements for financial Institutions § Clarifying regulatory requirements from the pronouncement of a Standard

Preparatory work for the Implementation of the Roadmap l l l Public sensitization and awareness Training and Education – AABE to organise a series of workshops and training programmes – IFRS Training Centre Creation of a dedicated Website

IFRS Implementation Challenges and Lessons Learned

Not an Easy TASK § there should be no doubt that conversion to IFRSs is a huge task and a big challenge; § practical challenges that may be faced as a result of implementing the IFRS need to be identified and addressed in order to benefit fully from the introduction of IFRS § adequate preparation & planning, both at a national and firm level is the critical success factor; § its profound impact requires a great deal of decisiveness and commitment;

Practical Challenges 1. Potential knowledge shortfall, 2. Accounting Education and training, 3. Limited Training Resources, 4. Tax system effect, 5. Legal system effect, 6. Enforcement and Compliance mechanism,

Potential knowledge shortfall (Level of Awareness) § the transition plan to IFRS and its implications for preparers and users of FS, regulators, educators and other stakeholders need to be effectively coordinated and communicated. § do a lot of sensitisation and awareness raising on the potential impact, communicating the temporary impact of the transition on business performance and financial position.

Accounting Education and Training – Capacity-related issues § inadequate technical capacity among preparers and users of FS, auditors and regulatory authorities § Small number of accountants and auditors who are technically competent in implementing IFRS. § further compounded by short period given for the actual implementation - not long enough to train a good number of competent professionals. § further compounded by the wide gap between accounting education and accounting practice § Weak (none existing) professional accountancy bodies

Limited Training Resources § Professional accountants are required to ensure successful implementation of IFRS. § Along with these accountants, government officials, financial analysts, auditors, tax practitioners, regulators, lecturers, preparers of financial statements and information officers are all responsible for smooth adoption process. § Training materials (and trainers) on IFRSs are not readily available at affordable costs in Ethiopia to train such a large group which poses a great challenge to IFRS adoption.

Tax System Effect/ Tax Reporting § Tax considerations associated with the conversion to IFRS are complex. § IFRS conversion normally calls for a detailed review of tax laws and tax administration. § Specific taxation rules would have to be redefined to accommodate these adjustments. – e. g. , loss relief period may need to be reviewed because transition adjustments may result in huge losses that may not be recoverable within the allowed periods. § Accounting issues that may present significant tax burden on adoption of IFRS, include determination of Impairment, Loan loss provisioning and Investment in Financial Instruments.

Legal System Effect § Inconsistencies may exist between the Financial Reporting Proclamation, and other existing laws that provide some guidelines on preparation of financial statements. § IFRS does not recognize the presence of these laws and the accountants have to follow the IFRS fully with no overriding provisions from these laws. § law makers have to make necessary amendments to ensure a smooth transition to IFRS.

Strategies to address the challenges § Nationwide intensive capacity building program to facilitate and sustain the process of adoption is needed as early as possible. (IFRS Academy) § Raise awareness of professionals, regulators and preparers to improve the knowledge gap. § Improve the legal framework of accounting and auditing to protect the public interest. Identify inconsistencies and propose amendment of the various laws and regulations. § Strengthen the institutional Capacity of AABE to monitor and enforce accounting and auditing standards and codes.

Strategies to address the challenges § Support the establishment of strong PABs. § Strengthen professional education and training. § Develop internationally recognised national professional qualification (CPA(E)) § Enforce CPD requirements § Facilitate the revision of university accounting curricula to enable students to gain exposure to practical IFRS application. § Take measures to strengthen capacity of regulators to enable them to effectively deal with accounting and financial reporting practices of the regulated entities. § Work with other regulators to identify and achieve regulatory synergies

Important IFRS related questions to consider Four Areas: 1. 2. 3. 4. Initial considerations Financial reporting considerations Conversion project considerations Nonfinancial reporting considerations

Key Questions – Initial consideration § Should we be first mover (adopt voluntarily)? § How can our organization take advantage of opportunities presented by the conversion to IFRS? § What are the most significant risks associated with converting to IFRS? § How will converting to IFRS affect our stakeholders and what should be done to manage their expectations?

Key Questions – Financial Reporting considerations § How will converting to IFRS impact external financial reporting? § What will be the impact on management reporting? § How will management address the need for comparative financial information prepared under both the current system and IFRS? § What are competitors and industry peers doing? § Has the Project Team/management considered that PIEs are required to apply IFRS throughout their group structures? § How will IFRS impact tax reporting and tax filings?

Key Questions - Conversion project considerations l l l What will converting to IFRS mean for the org’n? How do we plan to approach the conversion to IFRS and how ready are we to do this? What are the key areas that need to be addressed during the conversion? What can we learn from the conversion experiences of others? What is the timeline for our IFRS conversion project, what resources will be required and how much will it cost?

Key Questions – Nonfinancial Reporting considerations l l l Other than financial reporting, which other business areas will be affected by the conversion? Can our current IT systems handle the business’ revised data collection requirements under IFRS? Other than financial reporting integrity, what are the other implications for boards of directors? What IFRS training programs are management planning to provide to finance personnel? How should we use a third party advisor? What is the role of our independent auditor?

A Holistic Approach to IFRS Conversion Project Management? l l Planning and implementing IFRS conversion ensuring that all linkages and dependencies are established between accounting and reporting, systems and processes, people and the business. The conversion needs to effectively address the challenges and opportunities of adopting IFRS to all aspects of your business.

Accounting gap analysis Tax impact analysis Reporting gap analysis Alternative accounting treatments Financial and business impact assessment Measures to reduce IT/process impact assessment Systems/process conversion strategy Initial IFRS awareness training Management presentations IFRS project plan

Accounting and Reporting l The first key area to tackle l It involves a diagnostic and in-depth analysis of the differences between current financial reporting framework and IFRSs l Undertaking accurate and comprehensive upfront assessment of the impact of IFRS and the “Gap analysis” is critical success factor for the conversion. l It is essential that this is undertaken for your specific entity, even if the sectoral issues are deemed to be similar.

Systems and Processes l A major effect of converting to IFRS will be the increased effort required throughout the org’n to capture, analyse and report new data to comply with IFRS requirements. l Making strategic and tactical decisions relating to information systems and supporting processes early in the project helps limit unnecessary costs and risks arising from possible duplication of effort or changes in approach at a later stage. l Some entities take the opportunity of an IFRS conversion project to streamline the existing systems and processes.

From Accounting Gaps to Information Sources l The foundation of the project is to understand the IFRS to current reporting framework differences. l The initial analysis needs to be followed by determining the effect of those accounting gaps on internal processes, information systems and internal controls. l What the org’n need to determine is which systems and processes will need to change and translate accounting differences into technical system specifications. l One of the difficulties org’face in creating technical specifications is to understand the detailed end-to-end flow of information from the source systems to the general ledger and further to the consolidation and reporting systems.

People l The success of the project will depend on the people involved. There needs to be an emphasis on communications, engagement, training, support, and senior sponsorship, all of which are part of change management. l Training should not be underestimated and entities often don’t fully appreciate the levels of investment and resource involved in training. l Although most conversions are driven by a central team, you ultimately need to ensure the conversion project is not dependent on key individuals and that the business-asusual operations can be performed when the project ends. l Training tends to be more successful when tailored to the specific needs of the entity.

Roles and Responsibilities Audit Committee/Board of Directors Ensure that Management: § § Is sensitive to the issues/timelines and has the appropriate resources and skills to conduct an IFRS conversion Has considered reporting implications and impacts on all areas of the business Has a conversion plan to meet the requirements, including appropriate controls required to manage through the period of change and maintain reporting integrity Ongoing monitoring

Roles and Responsibilities Management § § § Form IFRS Project Team Implement and manage the conversion process by active supervision and communication with the IFRS Project Team Project Sponsorship

Roles and Responsibilities IFRS Project Team Formed by management to: § Manage budget, resources and timelines § Ensure compliance to IFRS standards § Coordinate all aspects of the conversion (people, process, technology) across business units

Roles and Responsibilities Internal Audit § § § The “eyes and ears” of the Audit Committee / Board of Directors Assess the overall project governance (e. g. , risk assessment of the conversion) On-going monitoring of the project benchmarks, deliverables and meeting of expectations Business Process Advisors Conduct ongoing business process, pre-implementation and post-implementation reviews to evaluate aspects of the convergence implementation (i. e. , controls around key business process and systems changes)

Roles and Responsibilities External Auditors § § Communicate with management and internal audit on risk impacts associated with changes to impacted processes and internal controls Measure success from a financial reporting perspective

IFRS Implementation Key Risk Areas § Financial Reporting and Disclosures § Financial and Business Processes and Controls § Management Reporting § IT Systems § Conversion Project Management § Overall Change Management * Risk/impact assessment across each of these risk areas will vary between reporting entities and should be assessed individually.

Key risks of an IFRS conversion project? Vision and direction § Unresolved or uncertain strategy from the IFRS diagnostic § Lack of clear project scope and requirements § No assessment on business impact or priority § Poorly defined critical success factors § Unclear governance and oversight § Lack of management support

Key risks of an IFRS conversion project? Planning § Project planning function not completed in adequate detail § Skills/resources in place inadequate for project needs § Unrealistic and incomplete timelines § Accounting policies selected not compliant with IFRS rules § Inadequate risk assessment and determination of project risks

Key risks of an IFRS conversion project? Execution § Unidentified transition issues impact critical deliverables § Poor communication between project team and end users § Insufficient business unit involvement § Conversion project interdependencies not recognized § Financial reporting disclosure requirements inaccurately or not completely identified

Key risks of an IFRS conversion project? Business acceptance § § § § Ineffective deployment strategy Lack of business impact of IFRS Unresolved problems and disputes Incomplete operating and maintenance information Insufficient user satisfaction Scale and volume of defects No project close-out Global sourcing conflicts

Key risks of an IFRS conversion project? Measuring and monitoring § Ineffective project management systems § Insufficient project monitoring and reporting § Lack of continuity in project staff § Poor communication with stakeholders § Lack of control in change order process § Ineffective decision making and resolution of issues § Poor quality management and assurance plans § Changing design and scope

Lessons learned: typical pitfalls l l l Rapid start to implementing work without a structured assessment Time to complete and/ or resources are underestimated: “We will just switch to IFRS” Accounting rules are seen as “pretty similar”, but small differences can matter a lot. Impacts of IFRS conversion are not addressed with stakeholders – Lack of clarity about strategies for selecting the various accounting options – Inability to provide information on all areas impacted by IFRS (e. g. to analysts) Lack of sufficient communication with auditors

Key take away l l Understand the IFRS impact early in the project lifecycle –accounting, process, people and IT Complexities not to be underestimated –it cannot be done in isolation Not just a finance project –adopt a holistic approach Post conversion activities –the hard work may just be beginning –develop a sustainable approach

Thank you Questions or Comments?

Some key impact areas – presentation and accounting l Components/Presentation of Financial statements l Use of fair values –relevance over reliability l Business Combinations l l Detailed guidance on treatment of government grants Extensive disclosure requirements

Anticipating the challenge to solve it faster l l l Key decision makers to adopt principles Availability of IFRS technical resources Cost of bridging gaps in knowledge –budget constraints Organization wide training in IFRS principles relevant to entity IFRS 1 may also require going back in time to evaluate impact – unless record retention is reasonably effective just gathering information could be a challenge Applying fair values to accounting

Multiple impacting areas to consider…….

The IFRS Clouds (Challenges)

IFRS transition challenges