Impact of Recent Changes to International Financial Reporting Standards in Banking Industry - Research Paper Example

IFRS 10 establishes a single control model that applies to all types of entities. The control of the investor includes power over the investee, rights to variable returns and their ability to use power to affect the return. It replaces the requirement of both IAS 27 (Consolidated and Separate Financial Statements) and SIG-12 (Consolidation- Special Purpose Entities). According to IFRS 10, an investor has the power over the investee and the investor has the rights to direct the activities that significantly affect the investee’s returns. Such power comes from voting rights granted by equity instruments. The relevant activities for the banks depend on the type of entity.

The purpose of existence and structure of the entity should be analysed at first in order to identify the relevant activities and who has the power to direct those activities. Then the investor has to assess whether they are exposed or has the rights to the variable returns from the investee. According to Shipper (2005), IFRS 10 clarifies that variable returns are not fixed and may vary as per the performance of the investee. Now, the investor has to identify whether it can use its power to influence the returns from the investee. For banks, whether their power will influence the returns often depends on whether the bank is a principal or is it an agent acting on behalf of and for the benefit of other investors; hence, it does not control the entity. For example, if a single investor removes the bank from its decision making role, then the bank would be considered as an agent of the investor and hence not required to consolidate, but if the investor does not have unilateral removal rights, then the bank have to assess whether it is a principal or agent considering few factors like the capacity of its decision making authority over the investee, the rights held by other parties, the remuneration they are entitled to, etc. (Street, Nichole and Gray, 2005).

• Disclosure of interest in other entities

IFRS 12 states the disclosure requirements about a reporting entity’s interest in other entities other than its subsidiaries, associates or joint venture. This new amendment will help the users to analyse the risk which is associated with a reporting entity’s interest in other entities and also the effects of those interests on its financial positions, financial performance and cash flows (Jermakowicz, 2005). These disclosures of IFRS 12 include- i) summarised financial information for each subsidiary having non-controlling interests that matters to the reporting entity, ii) significant judgements used by the management to determine control, joint control and types of joint arrangement i.e., joint operation or joint venture, iii) summarised financial information for each joint venture and associate, iv) nature of the risks connected with an entity’s interests in unconsolidated structure entities (Kaya and Pillhofer, 2013).

It may be difficult for larger banks with diversified product offerings to disclose unconsolidated structured entities. Most important disclosures here include funding, the forms of funding, the weighted average life of the debt funding and maturity analysis of assets and liabilities (Glaum Street, 2005).

• Derivatives and Hedge Accounting

Derivatives are valued at the fair value in the Balance Sheet and provisions are made for the difference in Income Statement for the fair value of those derivatives. Previously, it was not required to document the measurement for fair value for disclosures in the Balance Sheet and Income Statement, but after the changes in IFRS, all such documents for measurement of fair value must be documented. Besides this, hedge effectiveness testing and ineffectiveness testing are also required for the measurement of fair value.

• • 2.2. Impact of changes in IFRS on accounting systems

The change to IFRS regulations proved to be a huge challenge for the international financial market. Many big companies initially could not comply with the changes and viewed the changes as an accounting challenge and failed to consider them into their IT systems (Ahmed, Neel and Wang, 2013). The changes needed to adjust their calculation tables and required additional data. For this reason, many companies modified, remapped, reconfigured and implemented these new changes. One of the major impacts of changed IFRS is the enhanced burden on the organisation to collect, analyze and report new data for complying with the new requirements of IFRS.

More than 80 countries in the world including Australia, through China, South Africa and Venezuela to Zimbabwe, have voluntarily adopted new requirements of IFRS for preparing their financial statements. Other countries like Brazil, Canada, India, Mexico and the USA are still in the process of adopting new IFRS. The implementation of new IFRS made a positive impact on the company’s legal requirements, meeting the demands of the global capital markets and encountering potential stakeholders. The internal and external accounting and reporting processes is now matched and speeded up based on a uniform accounting standard applicable for all subsidiaries. It is now no longer required for performing any additional task in preparing and interpreting the consolidated financial statements or integrating financial statements to accounting standards of the parent company. This definitely has a positive impact on the timeliness and also the quality of information available for the management (Ramirez, 2015).

IFRS not only can help in improving the efficiency of financial reporting, but it can also improve management decision making processes. Some of the major changes that the business organizations had to create in order to comply with the new IFRS standards are discussed below:

• Demands for new data- The new requirements for disclosure and recognition of accounting needs more detailed presentation of information and this information has to be analysed differently following the new IFRS guidelines.

• Changes in the accounting charts- There will be a change in all the accounting charts due to re-classification and additional reporting criteria.

• Modification to exiting systems- If the existing Enterprise Resource Planning (ERP) system does not have the capability to produce financial reports according to the new IFRS standards, it will be necessary to amend the system parameters.

• Selection and implementation of new systems- When it is found that the previous financial reporting software is not adequate for the IFRS reporting, new systems with modified software were implemented.

• Changes in interface and mapping- With the introduction of new software and systems, it may be needed to change and develop the interfaces and change the existing mapping tables to the financial systems.

• Consolidation of entities- With the implementation of amended IFRS, there will be a change to the number and types of entities that which is needed to be included in the group consolidated financial statements.

• Amendment of the reporting data- It may be necessary to amend the reporting data of a parent company when financial statement is required from its subsidiaries that use a book-keeping system of accounting and hence, does not have an interface to the consolidation system.

The change in IFRS will have an effect on significant investments, unique risks and time pressure. Not only the accounting function and systems will get affected, but also the supporting processes and functions, IT systems and data structures will also have to be amended and the employees of the organizations will have to be trained with the new systems and functions (American Institute of CPAs, 2011)

Investors nowadays think about investing in markets globally. Thus, the capital market should have all the significant financial information in an understandable, transparent and comparative approach. The amendment of some of the IFRS regulations and implementation of some new IFRS standards represents a major milestone for the capital markets globally. The financial data of different business entities are now available in a very transparent and comparative format (Christensen et al., 2015).

A major issue that is faced by many organizations across many countries due to the change in IFRS is whether to continue to prepare the financial statements according to the local accounting standards like commercial laws. While the consolidated financial statements will have to be prepared according to IFRS, local accounting standards can be used for the preparation of the separate financial statements. The organisation will now have to decide whether these separate financial statements will be generated in the ERP system or in manual conversion form.

• • 2.3. Impact of changes in IFRS on others

The new amendments in IFRS not only has an impact on the banking sector and accounting systems, but also the subsequent change of accounting and reporting standards at the international level has an influence on a number of other segments.

• Impact on Corporate Management-

The corporate management will have a benefit from the simpler and modified standards, rules and practices which is applicable to all the countries across the world. This change will give the corporate management the opportunity to raise capital at lower interest rates while lowering risk and the cost of doing business.

• Impact on Investors

The investors will have to learn reading and understanding accounting reports and financial statements by following the internationally accepted new standards. This will also expose them to more available information and it is also simplified because it will not be necessary to convert that information to the standards of their own country. The new standards will also increase the flow of international capital (Florou and Kosi, 2015).

• Impact on Stock Markets

Stock markets are expected to witness a reduction in the costs of entering foreign exchanges and as the whole global market are following the same rules and standards; this will allow stock markets to compete internationally for global investment opportunities (Van Tendeloo and Vanstraelen, 2005).

• Impact on Accounting Professionals

The convergence of the GAAP and IFRS and the new amendments in IFRS standards will demand the accounting professionals to learn the new standards and this will lead to consistency in accounting practices.

• Impact on Accounting Standard Setters

The development of the standards involves a long process and it is time consuming, but once the standards are converged and amended, the process of implementing new international standards will be simpler and they will no longer have to rely on agencies to develop and approve a decision on any special standard.

• 3. The impact of changes in IFRS on some top companies.

The conversion to IFRS and its new amendments affected the global financial market drastically and hence, every business entities has to implement them in their accounting and financial systems. How some top international companies got affected with this change is discussed below:

• KPMG

For multinational organizations like KPMG, sharing existing information and knowledge can be a challenge. Developing and implementing new methodologies on a centralized basis would be possible without influencing this global knowledge management. Only experienced practitioners can develop most suitable software for implementing the new changes in the accounting system (KPMG International Cooperative, 2011).

There will be many hurdles that have to be encountered to implement the new accounting regulations. Many organizations that have already implemented the new IFRS conversion had to incur additional unforeseen expenditure both in terms of costs and personnel due to the wide nature of the project. These additional costs and other drawbacks needs to be avoided, so that any further change in regulations can be implemented without incurring these costs (Müller, 2014).

KPMG member firms offer detailed knowledge of IFRS with strong technological skills and years of experience gained through supporting many organizations in their IFRS conversion projects worldwide.

KPMG has developed their own Global Conversion Services Methodology to guide their clients perform IFRS conversions and advising them on assessment, design and implementation of conversions from the previous accounting standard to IFRS. The Global Conversion Services (GCS) methodology is designed to implement the conversion through different phases like understanding the impact and plan conversion, designing tools for conversion, creating blue-prints for system changes and design training, reaching capability to accumulate IFRS financial statements and finally, sustaining the change (Verriest, Gaeremynck and Thornton, 2013).

• Klépierre

Klépierre is a French real estate investment company. It develops, owns and manages shopping centres in France, Belgium, Scandinavia, Italy and many other European countries. Klépierre supervisory board permitted the consolidated financial statements presented in accordance with IFRS, which is now used as a basis for preparing financial statements (Brüggemann, Hitz and Sellhorn, 2013).

According to them, the adoption of these standards has not led to any major difference in Klépierre’s performance. The change with respect to revenues, net current cash flows and revalued net assets is only marginal. However, for the need of simplicity and full disclosure, Klépierre releases a documented statement presenting the fair values of its investment property. The only significant impact of IFRS on the company was due to the marking to market of its interest-rate hedging instruments, which resulted in decrease in opening balance sheet shareholders’ equity of less than 5% (Nobes, 2013).

• Indian Companies

Some of the India’s blue-chip companies have already started to align their accounting standards to the IFRS. The list of companies includes IT firms like Wipro, Infosys, NIIT; automobile firms like Mahindra & Mahindra, Tata Motors; textile companies like Bombay Dyeing and Pharmaceutical Company like Reddy’s Laboratories (Hung and Subramanyam, 2005)

These companies although being compliant with the US GAAP standards, they have now implemented the new IFRS standards, as because the IFRS has now become mandatory for getting listed in the European markets (Ramanna, 2013). Companies which are exposed in the European markets through debt or equity, for them such transparency and uniformity is essential to raise capital at lower rate (Ramanna and Sletten, 2014).

• HSBC Bank Brazil

The consolidated financial statement of HSBC Brazil comprises the consolidated financial statement of HSBC Bank Brazil S.A- Banco Multiplo and its subsidiaries. HSBC Brazil controls and consolidates an entity. It has the rights to the variable returns from its involvement with the entity and has the capacity to affect those returns with its power over the entity.

Often the voting rights may not be relevant in deciding HSBC Brazil’s power over an entity, the assessment of control is based on other facts and circumstances. HSBC Brazil can have the power over an entity even though it holds less than the majority of the voting rights, if it holds additional rights from other contractual arrangements (HSBC Bank Brasil S.A. - Banco Múltiplo, 2013).

• 4. Evaluation of the impact of changes in IFRS

The change in systems due to the implement of new IFRS standards depends upon many factors like the size and complexity of the business, the strategy how to respond to new changes in IFRS, current infrastructure of the company and capabilities and numbers of applications that are used for collecting financial data and preparing financial statements (Cascino and Gassen, 2015).

When a company starts implementing new IFRS standards, they should consider the opportunities to make improvements in systems, processes and controls. IFRS adoption cannot be only accomplished by finance but it will also include the involvement of experienced technology executives and this will in turn help in avoiding probable costs (Deloitte Development LLC, 2008).

The impact of the changes can be evaluated across five dimensions:

• Upstream Systems- Identifying and documenting all the internal and external data sources which should be updated. Finding missing data due to the difference in accounting systems.
• General Ledger- Assessing high-level changes to charts of accounts based on the difference between new IFRS and old accounting standard GAAP. Evaluating accounting, reporting, consolidation, reconciliation, journal entry methods, the existing expense allocation method and all these needs to be analysed to determine whether the new standards need to be implemented (Odia and Ogiedu, 2013).
• Reporting Data Warehouses- Identifying changes in financial information requirements due to change in IFRS and analyse the current financial reporting capabilities. Evaluating impacts of these new requirements on the existing information management systems.
• Downstream Reporting- Evaluating external reporting pattern to identify the changes needed to support increased disclosure of information. Identifying information sets which is required to meet the new IFRS reporting and disclosure.
• Infrastructure- Evaluating impacts to middleware, rules and allocation programs and understanding the capability to maintain additional transaction details.
• 5. Benefits of new IFRS adoption

Many big companies across the world have already implemented the new IFRS standards in their accounting systems and have been benefited from it. The main benefits that they have noticed are as follows:

• Standardized, improved and uniform set of accounting and financial reporting policies for both separate and consolidated reporting, which has improved the comparability of financial information and tax planning (Brochet, Jagolinzer and Riedl, 2013).
• Improved communication among the subsidiaries, IFRS offer a universal accounting language, which has enhanced management reporting and decision making (Capkun, Collins and Jeanjean, 2013).
• Availability and uses of resources is now more efficient, IFRS provides the opportunity for developing centralized accounting processes through a shared-service method, enabling the efficient use of resources, standardizing training programs and eliminating conflicting accounting systems.
• Improvement in controls as IFRS allows more control over statutory reporting and thus, helps in reducing the risk related to penalties and compliance problems at the local levels.
• Improvement in cash management as previously dividends paid from subsidiaries were based on local financial statements, but now the implementation of new IFRS have a significant effect on cash dividends, facilitating a uniform standard across the world which helps in improving cash flow planning (Pacter, 2014).
• 6. Conclusion

The implementation of new IFRS standards has a major impact on all the sectors of the financial markets- banking, individual business entities, investors, stock markets, corporate management, accounting systems, accounting professionals, accounting standard setters, etc. The impact of the change is not only on the different financial instruments, but also on investments, cash flows, information technology systems and the global financial market as a whole (Fox, 2013).

According to the feedback given by some of the companies who have implemented new IFRS standards in their accounting systems, it is a long term process and it is important to recognize the size and complexity of the IFRS systems. The IFRS conversion program should be designed in such a way which helps the organizations in achieving the overall business objectives. Technology plays a huge role in implementing the new IFRS standards and preparing financial statements with the use of it.

The necessary changes required in technology and other organization systems have to be identified and evaluated at the very early stage of the conversion program. The changes in technologies and information systems have to be aligned with the new accounting language that is amended by IFRS across the world. The new IFRS 10 gives the investors special rights to consolidate an investee and to control the activities of the investee and according to the new IFRS 12, every business entity has to disclose their interest in other entities other than their own subsidiary, associate or joint venture. These new amendments make the accounting standards uniform and make more disclosed information available in the global financial market. The new IFRS standards are also considered as an opportunity to improve and modify business processes, controls and systems and there should be adequate level of flexibility to facilitate additional accounting and regulatory changes in the future.

• Reference List

Adibah Wan Ismail, W., Anuar Kamarudin, K., Van Zijl, T. and Dunstan, K., 2013. Earnings quality and the adoption of IFRS-based accounting standards: Evidence from an emerging market. Asian review of accounting, 21(1), pp.53-73.

Ahmed, A.S., Neel, M. and Wang, D., 2013. Does mandatory adoption of IFRS improve accounting quality? Preliminary evidence. Contemporary Accounting Research, 30(4), pp.1344-1372.

American Institute of CPAs, 2011. International Financial Reporting Standards (IFRS). [pdf] available at: <http://www.ifrs.com/pdf/ifrsupdate_v8.pdf> [Accessed 21 May 2016].

Brochet, F., Jagolinzer, A.D. and Riedl, E.J., 2013. Mandatory IFRS adoption and financial statement comparability. Contemporary Accounting Research, 30(4), pp.1373-1400.

Brüggemann, U., Hitz, J.M. and Sellhorn, T., 2013. Intended and unintended consequences of mandatory IFRS adoption: A review of extant evidence and suggestions for future research. European Accounting Review, 22(1), pp.1-37.

Capkun, V., Collins, D.W. and Jeanjean, T., 2013. The effect of IAS/IFRS adoption on earnings management (smoothing): a closer look at competing explanations. Journal of Accounting and Public Policy, Forthcoming., 16(3), pp.152-160.

Cascino, S. and Gassen, J., 2015. What drives the comparability effect of mandatory IFRS adoption? Review of Accounting Studies, 20(1), pp.242-282.

Christensen, H.B., Hail, L. and Leuz, C., 2013. Mandatory IFRS reporting and changes in enforcement. Journal of Accounting and Economics,56(2), pp.147-177.

Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption? European Accounting Review, 24(1), pp.31-61.

Daske, H., Hail, L., Leuz, C. and Verdi, R., 2013. Adopting a label: Heterogeneity in the economic consequences around IAS/IFRS adoptions. Journal of Accounting Research, 51(3), pp.495-547.

Deloitte Development LLC, 2008. Adopting IFRS is more than a technical accounting change. Technology implications of IFRS adoption for U.S. companies. [pdf]. Available at: <http://www2.deloitte.com/content/dam/Deloitte/sg/Documents/audit/sea-audit-gios-ifrs-implementation-services-noexp.pdf> [Accessed 20 May 2016]

EYGM Limited, 2013. IFRS changes impacting the banking industry. [pdf]. Available at: <https://www.eycom.ch/en/Publications/20130516-IFRS-changes-impacting-the-banking-industry/download> [Accessed 21 May 2016]

Florou, A. and Kosi, U., 2015. Does mandatory IFRS adoption facilitate debt financing?. Review of Accounting Studies, 20(4), pp.1407-1456.

Fox, A., Hannah, G., Helliar, C. and Veneziani, M., 2013. The costs and benefits of IFRS implementation in the UK and Italy. Journal of Applied Accounting Research, 14(1), pp.86-101.

Glaum, M. and Street, D. L. 2005. Compliance with the disclosure requirements of Germany’s New Market: IAS versus US GAAP. Journal of International Financial Management and Accounting, 14, 64-100

Grant Thornton, 2012. Adviser alert— Under control- A practical guide to IFRS 10 Consolidated Financial Statements. The Grant Thornton International. [pdf] Available at: < www.gti.org> [Accessed 20 May 2016]

HSBC Bank Brasil S.A. - Banco Múltiplo, 2013. Annual Report and Consolidated IFRS Financial Statements 2013 [pdf] Available at: <http://www.hsbc.com/~/media/hsbc-com/investorrelationsassets/financialresults/2014/140402-hbbr2013ar_en> [Accessed 21 May 2016]

Horton, J., Serafeim, G. and Serafeim, I., 2013. Does Mandatory IFRS Adoption Improve the Information Environment? Contemporary Accounting Research, 30(1), pp.388-423.

Hung, M. and Subramanyam, K. R. 2005. Financial statements effects of adopting International Accounting Standards: The case of Germany. Working paper, University of Southern California, 11, pp. 62-65

International Accounting Standards Board (IASB)- Project Summary and Feedback Statement, 2011. IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosure of interests in Other Entities Available at: < http://www.ifrs.org/Pages/default.aspx> [Accessed: 20 May 2016]

International Accounting Standards Board (IASB). 2013. Effect analysis- IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosure of interest in other entities. [pdf] Available at: <http://www.ifrs.org/Current-Projects/IASB-Projects/Consolidation/Consol-disclosure/Documents/Effect-Analysis-IFRS%2010-and-IFRS-12-Updated-July-2013.pdf> [Accessed 21 May 2016]

Istrate, C., 2014. Impact of IFRS on the accounting. Accounting and Management Information Systems, 13(3), p.466.

Jermakowicz, E. K. 2005. Effect of adoption of International Reporting Standards in Belgium: The evidence from BEL-20 companies. Accounting in Europe, 1, 121-131

Kaya, D. and Pillhofer, J.A., 2013. Potential adoption of IFRS by the United States: a critical view. Accounting Horizons, 27(2), pp.271-299.

KPMG International Cooperative, 2011. Impact of IFRS: Banking. [pdf] Available at: <www.kpmg.com/KY/en/PublishingImages/impact-of-ifrs-banking-web.pdf> [Accessed 21 May 2016].

Müller, V.O., 2014. The impact of IFRS adoption on the quality of consolidated financial reporting. Procedia-Social and Behavioral Sciences, 109, pp.976-982.

Nobes, C., 2013. The continued survival of international differences under IFRS. Accounting and Business Research, 43(2), pp.83-111.

Odia, J.O. and Ogiedu, K.O., 2013. IFRS Adoption: Issues, Challenges and Lessons for Nigeria and other Adopters. Mediterranean Journal of Social Sciences, 4(3), p.389.

Pacter, P., 2014. Global Accounting Standards-From Vision to Reality. The CPA Journal, 84(1), p.6.

Preiato, J.P., Brown, P.R. and Tarca, A., 2013. Mandatory Adoption of IFRS and Analysts’ Forecasts: How Much Does Enforcement Matter?. UNSW Australian School of Business Research Paper, 2009.

Ramanna, K. and Sletten, E., 2014. Network effects in countries' adoption of IFRS. The Accounting Review, 89(4), pp.1517-1543.

Ramanna, K., 2013. The international politics of IFRS harmonization.Accounting, Economics and Law, 3(2), pp.1-46.

Ramirez, J., 2015. Accounting for Derivatives: Advanced Hedging Under IFRS 9. New York: John Wiley & Sons.

Shipper, K. 2005. The introduction to International Accounting Standards in Europe: Implications for international convergence. The European Accounting Review, 14, 101-126

Street, D. L., Nichols, N. B. & Gray, S. J. 2005. Assessing the acceptability of international accounting standards in the US: An empirical study of the materiality of US GAAP reconciliations by non-US companies complying with IASC standards. The International Journal of Accounting, 35, pp. 27-63

Van Tendeloo, B. and Vanstraelen, A. 2005. Earnings management under German GAAP and IFRS. The European Accounting Review, 14, pp. 155-180.

Verriest, A., Gaeremynck, A. and Thornton, D.B., 2013. The impact of corporate governance on IFRS adoption choices. European accounting review, 22(1), pp.39-77.