Inevitably, for a region whose nations are at such different stages of economic development, application of international accounting and reporting standards varies widely across Asia. We examine the major changes taking place, from convergence with IFRS to the rising popularity of integrated reporting.
The concept of international convergence of accounting standards first arose in the late 1950s in response to post World War II economic integration and related increases in cross-border capital flows. Indeed, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working together to improve and converge US generally accepted accounting principles – also known as GAAP – and International Financial Reporting Standards (IFRS) since 2002.
Impetus for convergence in Asia has grown since 2013 when Japan and China started working to converge their standards with IFRS. A table detailing the application of International Financial Reporting Standards across Asian-Oceanian Standard-Setters Group (AOSSG) member jurisdictions updated in March 2015 shows that the standards are required for all domestic listed companies in 15 of the 25 jurisdictions.
Audit reports state compliance with IFRS in 14 jurisdictions, although there are some discrepancies between these two groups. For example, Cambodian International Financial Reporting Standards are mandatory for entities that are required to submit their financial statements for audit and have ‘public accountability’, while Nepal Financial Reporting Standards are being implemented for listed companies and government-owned business entities over a three year period starting in 2014. India, Indonesia, Japan, Thailand, Vietnam and Uzbekistan are in the process of converging with IFRS – a process that has been completed in China.
Richard Martin, Head of Corporate Reporting at the Association of Chartered Certified Accountants (ACCA), observes that while IFRS is the key standard that will be affecting corporates in Asia, some elements will be more important than others. “The accounting standards for financial instruments tend to be among the most problematic for many companies – currently IAS 39, IAS 32 and IFRS 7 on disclosures. Corporates (and of course banks, insurers and those with treasury operations) are now gearing up for the new standard IFRS 9.”
Most corporates, according to Martin, are also planning the implementation of IFRS 15 Revenue from Contracts with Customers, which deals with revenue recognition – clearly fundamental as it affects the most quoted number in the accounts. Ian Mackintosh, Vice Chairman of the IASB agrees, adding that when getting ready for the revamped IFRS 9 and IFRS 15 standards, companies “have to invest time in understanding the new requirements and creating an implementation plan and there may be a need for system changes, new ways of gathering data and training of staff. It is important that companies engage with their stakeholders throughout the process, ensuring shareholders in particular are kept informed about what changes they are anticipating so there are no surprises.”
Country-specific issues
Specific countries may face challenges linked to certain standards as they transition to IFRS and these challenges can differ from country to country, adds Mackintosh. “IFRS is principles-based and as such aims to accommodate local variations in culture, practice and law. In the long run, we believe the benefits of principles-based standards are greater than more rules-based standards.”
Here, Mohini Singh, Director of Financial Reporting Policy at the CFA Institute, highlights some specific differences in IFRS adoption across Singapore, India, China and Japan. Singapore has adopted all effective IFRS (except for IFRIC 2 Members’ Shares in Co-operative Entities and Similar Instruments) and has made several modifications primarily to transition provisions and effective dates of the IFRS that it has adopted. Accordingly, the standards, known as Singapore Financial Reporting Standards (SFRS), are largely aligned with IFRS.
Under the Singapore Companies Act, Singapore incorporated companies (both listed and non-listed) are required to use accounting standards as prescribed by the Singapore Accounting Standards Council (ASC) in their consolidated and separate financial statements.
In India, the Indian Ministry of Corporate Affairs (MCA) has released a revised roadmap for the adoption of Indian Accounting Standards (Ind AS), which are largely converged with IFRS. In April 2014, the Institute of Chartered Accountants of India (ICAI) publicly released a summary of its recommendations to the MCA on the timetable for the adoption of Ind AS, which proposed that listed and large entities should mandatorily apply the new standards in consolidated financial statements for accounting periods beginning on or after 1st April 2016.
As mentioned, the MCA has now released a revised roadmap that has been drawn up after what it describes as ‘wide consultations with various stakeholders and regulators’. In essence, companies with a net worth of Rs. 500 crore or more (approximately $80bn) will have to mandatorily follow Ind AS from 1st April 2016. Corporates that have a net worth of less than Rs. 500 crore but are listed, or in the process of getting listed and companies with a net worth of Rs. 250 crore or more will have to follow the new norms from 1st April 2017.
Convergence appeal
The adoption of Ind AS is expected to attract significant foreign investment into India. Yet, despite wide acceptance of the international financial integration benefits, few domestic companies have implemented operational plans for the change to date – owing to transitional costs, compliance burdens and/or pending evaluations. Singh points out that the new roadmap exempts banking, insurance and non-banking finance companies. The roadmap for financial institutions and insurance companies is being determined in a separate process, in consultation with the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority (IRDA).
The impact of convergence with IFRS will be significant for banks in India in areas such as loan loss provisioning, financial instruments and derivative accounting. This is likely to have a large impact on financial position and financial performance, directly affecting parameters like capital adequacy ratios.
In China, the use of IFRS is not permitted for domestic companies. All Chinese companies whose securities trade in a public market in the country are required to use Chinese Accounting Standards for Business Enterprises (ASBEs) for financial reporting within mainland China. These are substantially converged with IFRS. It should be noted, however, that Chinese companies whose securities trade on the Stock Exchange of Hong Kong may choose among IFRS, Hong Kong Financial Reporting Standards (HKFRS) and Chinese Accounting Standards (ASBEs) for purposes of financial reporting to Hong Kong investors.
Voluntary application of IFRS for consolidated financial statements by companies in Japan that meet certain criteria has been permitted since March 2010. As of February 2015, 65 listed companies had either started to use IFRS or had publicly announced their intention to use IFRS as a basis for preparing consolidated financial statements as required by the Financial Instruments and Exchange Act (FIEA).
Regional disparity
Despite progress towards IFRS convergence, key accounting and reporting issues affecting corporates in Asia still vary significantly by jurisdiction explains Singh. “For example, in India the adoption of Ind AS will largely impact revenue recognition and financial instruments, while fixed assets will present practical difficulties.”
Key accounting areas that need to be viewed with a healthy dose of scepticism in China are revenue recognition, inventory and cash, he continues. “There is a proposed new foreign investment law, which appears to change the way China will look at variable interest entities, focusing on who actually controls the entity versus who is the owner of record. That could create problems for many variable interest entities structures that would be found to have prohibited foreign investment.”
In Korea, the key accounting issue relates to party transactions, Singh explains. “The primary reason for intra-group manipulations – such as cross debt guarantee practices and intra-group transactions – is to arbitrarily relocate profits and expand their external size.” International Standard on Quality Control 1 (ISQC1) establishes a firm’s responsibility to set up and maintain a system of quality control for all audit and assurance engagements. Major Asian economies have largely either adopted or are committed to adopting ISQC 1, says Fayez Choudhury, CEO of the International Federation of Accountants (IFAC).
“In addition, members of the Forum of Firms – who audit the vast majority of public companies globally and in Asia – commit to apply ISQC 1 across their networks. The International Auditing and Assurance Standards Board (IAASB) has a project under way on the topic of quality control, in particular to consider inspection findings and implementation challenges that have been identified and may find it necessary to revise ISQC 1 as a result of these deliberations. Jurisdictional regulators/professional accountancy organisations across Asia monitor the application of the requirements in their oversight programmes and national auditing standard setters and professional accountancy organisations may also develop guidance to assist in the effective implementation of ISQC 1.”
Integrated reporting
Elsewhere, the ACCA’s Martin says there is significant interest from Asian companies in both integrated reporting and sustainability reporting and that some are already doing it – albeit at a lower level than in Europe or Australasia. “We see this as likely to be of increasing significance in the future. In 2013, we conducted an integrated reporting roundtable in Malaysia. The main finding from this event was the view that integrated reporting will improve communication about company value, as well as playing a vital role in increasing transparency.”
Choudhury describes the uptake of integrated reporting and sustainability reporting as variable, while acknowledging that a number of Asian jurisdictions and companies have clearly led in implementing and promoting enhanced corporate reporting such as sustainability reports under the Global Reporting Initiative guidelines and integrated reporting. The chairman of the Singapore Accountancy Commission (SAC) has described integrated reporting as a significant innovation and “the future of corporate reporting”. A market-led steering committee has been created to move from concept to execution, with committee members including the Institute of Singapore Chartered Accountants (ISCA), the Singapore Institute of Directors and Singapore Stock Exchange.
The Japan Investor Relations Association estimates that around 130 Japanese businesses are practising integrated reporting currently. Professor Kitagawa from the Graduate School of International Management at Aoyama Gakuin University believes that between 300 and 400 Japanese businesses will adopt it over the next two reporting cycles.
One of the proposals in the national growth strategy revealed by Japan’s Prime Minister Shinzo Abe in June 2014 is the establishment of a platform consisting of investors, business and interested bodies for the purpose of discussions on the future of corporate reporting and how to promote constructive dialogues between business and investors. Integrated reporting is referred to in the ‘future of corporate reporting’ agenda.
In India, the International Integrated Reporting Council (IIRC) has created a multi-stakeholder integrated reporting lab through collaboration with the Confederation of Indian industry (CII). Designed to facilitate knowledge sharing, it is chaired by Koushik Chatterjee, CFO of Tata Steel, and includes CFOs of leading Indian companies, academics and regulators. Following the launch of the initiative in August 2014, the Securities and Exchange Board of India (SEBI) requested an industry-led roadmap setting out the plan for business adoption of integrated reporting over the next decade.
The Malaysian Securities Commission has embedded integrated reporting within its capital markets plan, which has a strategic focus on inclusiveness. Integrated reporting is seen as an essential part of the infrastructure underpinning this strategy and the Malaysian Securities Commission is encouraging businesses to adopt the framework.
Following the lead?
The OECD is pushing the Common Reporting Standard as a key component of its single global standard for exchange of financial information. According to Choudhury, several Asian countries have committed to implementing the Common Reporting Standard by 2018, including China, Hong Kong, Indonesia, Japan, Malaysia and Singapore. “A primary concern around the standard is how the associated compliance burden and technical capacity can be addressed in developing countries. This is as much a concern in Asia as it is in the rest of the world and will really only be resolved with the experience of implementation.”
On the subject of compliance burdens, Singapore and Hong Kong have extremely well run regulatory and compliance systems in place and make an effort to be transparent and help local companies do the same explains Chris Devonshire-Ellis, Managing Partner at Asia Dezan Shira & Associates. “Others, such as India are difficult to understand and vary so much within the country that it can be nearly impossible to fully understand the system from both the regulatory and compliance viewpoints. China meanwhile continues to treat local companies (and especially state owned enterprises) in a different fashion to foreign investors, despite both having to abide by the same rules.
“Other emerging countries are still developing both their regulatory platform and their monitoring of it, so it is a moving target. But by and large, General Anti-Avoidance Act (GAAR) is a good benchmark and is used by most internationally minded companies as a standard to refer to when things become uncertain.” While internationally minded businesses refer to IFRS as an operating standard, locally focused businesses may not as it could be more advantageous for them to take advantage of the more lax local arrangements, he continues.
Devonshire-Ellis refers to similar inconsistency around integrated reporting and sustainability reporting. “The majority of Asian firms remain small and although they may have relationships with other practices, such as Singapore practices with other firms in Jakarta and Kuala Lumpur, very few have actually reached out to establish and invest in their own subsidiaries in other Asian countries. There are very few firms that have a viable Asian-wide presence and can integrate financial reporting.”
The OECD, he says, is viewed in Asia as an organisation with roots in international trade development. Accordingly initiatives promoted by it – and others – tend to be recognised, in the main, by businesses that are operating across borders, which by definition means larger companies. “At a local level, throughout the region, businesses will not be so aware and currently have little opportunity or reason to improve upon that until they start to gain a more international awareness,” he concludes.
