The Institute of Chartered Accountants of Sri Lanka

The Institute of Chartered Accountants of Sri Lanka National Conference 2011 October 2011

Quest for Balance IFRS – Theory, Practice and Transition

Quest for Balance 3 © 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.

Objective • • • 4 One global set of standards for high-quality financial reporting Why? • Common language • More understandable • Better comparability • Greater access to global capital • Greater trust in financial information • Lower cost of capital However – must balance competing demands and address challenges © 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Update on Global IFRS

Key features • • • 5 Accounting for the substance of transactions • Multiple element arrangements • Embedded features - leases/derivatives • Contractual rights and obligations Heavy use of current values • Fair values – financial instruments, biological assets, business combinations, • Current estimates – actuarial assumptions in pensions & insurance; cash flows in impairment testing Comprehensive disclosures • Financial risks; Operating segment information; Related party transactions © 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Update on Global IFRS

Challenges • • • 6 Breadth of business impacts Application of “global” standards in “local” environments • Alignment of regulatory impacts • Global interpretation/local enforcement ► Loss of sovereignty and influence(? ) over financial reporting ► Local pressures Conflicting objectives © 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Update on Global IFRS

IFRS – a ‘business’ issue • IFRS is not just an “accounting” issue – it is a major “business” issue • Implications for functions, stakeholders, contractual arrangements, processes & systems etc. • 7 Requires engagement across the business • Treasury; Human Resources; Investor Relations; IT; Internal Audit; Finance; Boards and Audit Committee © 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Update on Global IFRS

Business impacts 8 © 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.

Therefore. . . . • Transition is a strategic issue – Board, Audit Committee and Executive involvement needed • Pervasive effect across the organisation • Change management processes required • Project management/work streams • Stakeholder engagement • Training & implementation • 9 Opportunity to enhance existing processes/systems © 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Update on Global IFRS

Application of Global Standards Global Local • Standards • Application • Standard-setting & due process • Regulation & enforcement • Interpretation? • Consistency • Adaptability 10 © 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.

Balancing conflicting objectives • • Principles Reporting for capital markets Transparency Acceptable diversity • Rules Use of reports for regulatory/tax purposes Confidentiality In-country comparability • Global consistency • Local practices • • • 11 • • © 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.

Theory - “in” practice • • 12 Revenue recognition in multiple element arrangements Leases embedded in supply/service contracts Equity reclassified as debt and vice versa Fair value of biological assets, investment property, financial instruments, Determining fair value in emerging markets Loan loss provisioning Depreciation and component accounting of property, plant & equipment Disclosures © 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Update on Global IFRS

Strive for balance 14 © 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.

Thank you