Harmonization of Accounting Standards withing the Caribbean & the ...

Harmonization3Providing solutions that count• De jure - rules based, standards, etc..E.G. 4th and 7th EU directives• De facto - market forces persuadecompanies to harmonise by preparingfinancial reports that approximate tothose the market wants e.g.IAS/IOSCODavid Raggay June, 2005

World Capital Markets as7Providing solutions that countat April 2005Issuers Foriegn• NYSE 1,834 454• NASDAQ 2,884 331• Euronext 1,302 319• London Stock Exch. 2,942 349• Switzerland 347 118• Australia 1,624 69• Singapore 652 102David Raggay June, 2005

World Capital Markets8Providing solutions that countNon-US Companies Registeredwith the US SEC• 1,240 companies from 55 countriesat 31 December 2004David Raggay June, 2005

Harmonization of9Providing solutions that countAccounting Practices• The current world trend is towardsconvergence• Moving together toward a common result• Overall IASB agenda• Specific IASB/FASB projectDavid Raggay June, 2005

Harmonization vs10Providing solutions that countConvergenceHarmonizationConvergenceDavid Raggay June, 2005

11Adoption of IFRSProviding solutions that count• May 2000: (IOSCO) recommended thatits members “permit incomingmultinational issuers to use the 30“IASC 2000” standards to preparetheir financial statements for cross-border offerings and listings .”.David Raggay June, 2005

12Adoption of IFRSProviding solutions that count• May 2002, IOSCO survey: “manyjurisdictions permit incoming issuers touse IAS, and others are activelyworking towards this end.”David Raggay June, 2005

IFRS Convergence13Providing solutions that countTwo major sets of GAAP• IFRS• US GAAPEfforts currently underway to achieveconvergence between IFRS and USGAAPDavid Raggay June, 2005

IFRS Convergence14Providing solutions that count• IAS/IFRS are the primary accountingstandards in use• Over 90 countries currently requireIAS/IFRS for domestic listed companiesDavid Raggay June, 2005

IFRS Convergence15Providing solutions that countAnomalies• Australia• New Zealand• EUDavid Raggay June, 2005

International16Providing solutions that countConvergenceMajor problems (Wong Report, Sept. 2004):• Understanding the meaning of InternationalConvergence• Translation of International Standards• Complexity and structure of InternationalStandardsDavid Raggay June, 2005

International17Providing solutions that countConvergenceMajor problems (Wong Report, Sept. 2004)continued:• Frequency, volume and complexity ofChanges to International standards• Challenges for SMEs and SMPs• Potential Knowledge Shortfall and• Implications of Endorsement of IFRSDavid Raggay June, 2005

The Caribbean18Providing solutions that countDr. Eric St. Cyr:• “Critical facts" which "Set limits to thenature and possibilities for economicperformance in the Caribbean“• Geography• issues that "Pertain to location, size andinsular configuration"David Raggay June, 2005

The Caribbean19Providing solutions that countCARICOM is vulnerable due to a lack of"critical mass" and needs to widen itsmembership. In order to facilitate thisincrease the critical mass two concernshave been identified:• Intra-Regional Corporate Integration and• Financial IntegrationDavid Raggay June, 2005

CSME20Providing solutions that countDescribed as having being "conceived asan instrument to facilitate economicdevelopment of the Member States inan increasingly liberalisedandglobalised international environment".David Raggay June, 2005

CSME21Providing solutions that countThe major components of the CSME are:• Free movement of services• Free movement of goods• The free movement of people and• Free movement of capitalDavid Raggay June, 2005

Financial Reporting In22Providing solutions that countThe Caribbean• As of June 2003 IFRSs are therequired Reporting Standards forall those Caribbean countrieswhose institutes are members of theInstitute of Chartered Accountantsof the Caribbean, with theexception and St.Kitts-Nevis.David Raggay June, 2005

Financial Reporting In23Providing solutions that countThe Caribbean• The Accounting profession in theCaribbean is largely organized intovolunteer organizations• We do not currently have the resourcesfor ongoing research and thedevelopment of indigenous standardsDavid Raggay June, 2005

Regulatory Framework24Providing solutions that count• Similar common-law background• Accounting Institutes in mostcountries•Legislative enforcement of theapplication of IFRS in most countriesDavid Raggay June, 2005

Regulatory Framework25Providing solutions that count• Very little in terms of formalprograms for enforcement ofaccounting and auditing standards•Great reliance on disciplinarycommittees (whistle blowers) toaddress issues of non-complianceDavid Raggay June, 2005

Financial Reporting In26Providing solutions that countThe CaribbeanCompliance Issues• Inappropriate application ofstandards (IAS 16, 39)• Inadequate or inappropriatedisclosure (IAS 12, 16, 19, 39)David Raggay June, 2005

The IASB27Providing solutions that count• Committed to developing:…. “a a single set ofhigh quality, understandable andenforceable global accounting standardsthat require transparent and comparableinformation in general purpose financialstatements”• “Cooperates with national accountingstandard setters to achieve convergence inaccounting standards around the world.”David Raggay June, 2005

Structure Of The IASB28Providing solutions that countTRUSTEESS.A.C.AdvisoryC’teesBOARDIFRICAppointsReportingAdvisesDavid Raggay June, 2005

Structure of the IASB29Providing solutions that count• Founding MembersAustraliaCanadaFranceGermanyJapanThe NetherlandsMexicoUK/IrelandUSADavid Raggay June, 2005

Structure of the IASB30Providing solutions that count• Although the Board has a process of duediligence, the reality is that few commentsoriginate from the Caribbean.• Full use is not made of our representation• Voluntary nature of the Caribbean accountingprofession.• Driven by the lack of critical mass in themembership of our accounting institutes whichare primarily financed through membershipdues.David Raggay June, 2005

Convergence With IFRS31Providing solutions that count• IFRS have been created largely fortransnational enterprises operatingfrom developed-country bases• It is difficult to apply them toemerging/developing countries andeven more difficult to do so to SMEsthereDavid Raggay June, 2005

Convergence With IFRS32Providing solutions that count• Illiquid capital markets• Equities• Bonds• Difficulty in estimating fair valuesDavid Raggay June, 2005

Practice Monitoring33Providing solutions that count• IFAC• Member bodies should develop qualityreview programs designed to evaluatewhether firms of practicing accountantshave established appropriate qualitycontrol policies and procedures and arecomplying with those policies.David Raggay June, 2005

Practice Monitoring34Providing solutions that count• IFAC• Member bodies should establish qualityreview programs designed to evaluatewhether firms of practicing accountantshave complied with relevant professionalstandards for assurance engagements .David Raggay June, 2005

International Financial35Providing solutions that countReporting• In most English-speaking speaking Caribbeancountries, IFRS apply to all companies,whether listed or notDavid Raggay June, 2005

Why address the36Providing solutions that countFinancial ReportingNeeds of SMEs• Caribbean economies are largelycharacterized by small and mediumenterprises (SMEs(SMEs).• Large in number• Impact on the labour market• Contribution to the economyDavid Raggay June, 2005

Why Address the37Providing solutions that countFinancial ReportingNeeds of SMEsNumber of listed companies in formalstock exchangesIssuers Crosslisted• Bahamas 19 1• Barbados 26 5• Jamaica 46 4• Trinidad and Tobago 33 8David Raggay June, 2005

Financial Reporting38Providing solutions that countNeeds of SMEs• Cost of capital• Listing requirements are not equivalent toAccounting requirements• SMEs typically have significant difficulties inaccessing bank and trade credit• (FASB 1983 report)- costs of preparationsometimes exceed the benefits to be derivedDavid Raggay June, 2005

Financial Reporting39Providing solutions that countNeeds of SMEs• Users and Uses• In the case of the SMEs, , the public will rarely bea user• General-purpose financial statements will stillbe necessaryDavid Raggay June, 2005

Financial Reporting40Providing solutions that countNeeds of SMEs• User Needs• Investors – In the SME environment, these are often thesame as• Lenders – Banks and other sources of private finance arethe primary capital• Governments and their agencies – interested in theallocation of development resources to SMEs. . They alsorequire information in order to regulate their activities,determine taxation policies etcDavid Raggay June, 2005

Financial Reporting41Providing solutions that countNeeds of SMEs• User Needs• Suppliers and other trade creditors – interested ininformation that enables them to determine whetheramounts owing to them will be paid when due• Customers – have an interest in information about thecontinuance of an enterprise, especially when they havea long-term• Employees – interested in information about the stabilityand profitability of their employers and in information,which enables them to assess the ability of theenterprise to provide remuneration, retirement benefitsand employment opportunities.David Raggay June, 2005

International Financial42Providing solutions that countReporting• Research indicates that no majordeveloped country requires that SMEsfully comply with GAAPDavid Raggay June, 2005

Issues to Consider43Providing solutions that countIASs of concern to SMEs• IAS12 - Income Taxes• IAS 17 – Leases• IAS 19 - Employee Benefits• IAS 36 -Asset impairment• IAS 32/39David Raggay June, 2005

Issues to Consider44Providing solutions that countIAS IssuesMany of the disclosures required by IASare considered to be “over the top” inthe case of SMEs.David Raggay June, 2005

Issues to Consider45Providing solutions that countIAS Issues.There is doubt as to the usefulness of fairvalues to users of SME financialstatements.David Raggay June, 2005

Results of Consultation46Providing solutions that countNeed for concessions for SMEs.There is support for disclosure andpresentation as well as recognition andmeasurement concessions. There was amixed reaction as to whether SMEstandards should be presented in a separatevolume or together with existing IFRS.David Raggay June, 2005

Development of the IASB47Providing solutions that countProject• April 1998 - project on “EmergingEconomies” added to the Board’sAgenda• June, 2002 – “Accounting and financialreporting by small and medium-sizedentities (SME) and in emerging andtransition economies”David Raggay June, 2005

National Standard-SettersSetters48Providing solutions that count1. Australia2. Canada3. China4. EFRAG5. France6. Germany Hong Kong7. Hungary8. IndonesiaDavid Raggay June, 2005

National Standard-SettersSetters49Providing solutions that countcont’d9. Italy10. Iran11. Korea12. Malaysia13. New Zealand14. Norway15. Pakistan16. PolandDavid Raggay June, 2005

National Standard-SettersSetters50Providing solutions that countcont’d17. Russia18. Singapore19. South Africa20. Spain21. Sri Lanka22. Sweden23. Thailand24. United Kingdom25. United StatesDavid Raggay June, 2005

Responses to 200451Providing solutions that countDiscussion Paper• PV 7.3: There would be a rebuttablepresumption that no modifications would bemade to the recognition and measurementprinciples in IFRSs.• 65% of respondents to DP did not agree.• Felt recognition and measurementmodifications are needed.• Concerned that IASB is prejudging.• Cited growing measurement complexities inIFRSs.David Raggay June, 2005

January 2005 Board52Providing solutions that countDecisions• The Board decided, inter alia, , that• Recognition and measurementsimplifications will be considered– basedon user needs and cost/benefit.• “Mandatory fallback” was approved• “Optional fallback” was not approvedDavid Raggay June, 2005

January 2005 Board53Providing solutions that countDecisions• The Board decided, inter alia, , that• IASB Standards for SMEs will focus on financialreporting by those non-publicly accountableentities that have external users of their financialstatements (ieusers other than owner-managers).This is because the IASB Framework for thePreparation and Presentation of FinancialStatements (the IASB Framework) does not dealwith management reporting or regulatoryreporting. Jurisdictions could, of course, chooseto permit or require them for all SMEs, , includingvery small ones.David Raggay June, 2005

February 2005 Board54Providing solutions that countDecisions• The Board approved a project plan outliningsteps to create standards for what werebriefly called Non-publicly AccountableEntities (NPAE), but...• Terminology was not widely understood.• The term was considered to be possibly havenegative connotations (not accountable?).• The Board approved the expansion of theWorking Group to include preparers andusers of financial statements of Non-publiclyAccountable EntitiesDavid Raggay June, 2005

February 2005 Board55Providing solutions that countDecisions• Project Plan key elements:• 31 March 2005:– Brief questionnaire to identify recognitionand measurement issues for discussion atround tables.• 30 June 2005:• Questionnaire comment deadline (thosereceived by 31 May will be analysed forJune SAC and Working Group meetings).David Raggay June, 2005

February 2005 Board56Providing solutions that countDecisions• Project Plan key elements:• June 2005 – November 2005:– Discussion with SAC, WG and RoundTable groups on:– Recognition and Measurement issues– Presentation and Disclosure issues• March 2006:– Exposure draft• 2007– Final Standards effective January 1, 2008David Raggay June, 2005

Impact57Providing solutions that count• The current focus on “those“non-publicly accountable entities that haveexternal users of their financialstatements” is biased towards the largercompanies• The standards developed using thisfocus are unlikely to address the needsof the SMEs in the English-speakingspeakingCaribbeanDavid Raggay June, 2005

Impact58Providing solutions that count• We find support for this view in arecent statement issued by CILEA who“deemed it unavoidable to make a cleardistinction between the rules to beapplied to listed companies operating onthe world stock-markets and to otherbig entities, and to those to be applied toall other entities, mainly SMEs.”David Raggay June, 2005

Impact59Providing solutions that count• This was also reportedly the sentimentexpressed at the IFAC SME/SMP andDeveloping Nations Conference held inPrague in March 2005David Raggay June, 2005

60Providing solutions that countConclusions andRecommendations• Lack of significant influence at decision-making levels of the IASB.• Ineffective use of existing opportunities.• While the level of convergence with IFRS inpublished financial statements is generallyacceptable, there is room for improvement.• We and others may have no choice but todevelop our own standards for SMEs if thecurrent trend at the IASB continuesDavid Raggay June, 2005

Conclusions and61Providing solutions that countRecommendations• Adoption and enforcement of a system ofQuality Control for public accountants andauditors• Adopting standardized curriculums foraccounting degrees at UWI and enforcingmandatory CPD• Educating management, investors, bankers,creditors and the public in general of thebenefit that will accrue from credible financialinformationDavid Raggay June, 2005

62Conclusions andProviding solutions that countRecommendations• ICAC members should adoptstandardized examinations inCompany Law and Taxation• ICAC members should establish anindependent regulatory body thatsets the requirements for licensingCaribbean accountants inaccordance with IFAC guidelinesDavid Raggay June, 2005

63Providing solutions that countConclusions andRecommendations• Co-operation operation among the following inorder to achieve enforcement:• The ICAC• National Accounting Institutes• Regional and International lendinginstitutions• National regulators, financial institutionsand government institutionsDavid Raggay June, 2005

64Providing solutions that countConclusions andRecommendations• ICAC should consider fostering closeworking relationships with othherregional accounting bodies• Concerted efforts should be made tomake better use of existingrepresentation on the IASB SMEWorking GroupDavid Raggay June, 2005

65Providing solutions that countConclusions andRecommendationsWe find support for theserecommendations from:• Sotomayer (2001)• Wong (2004)David Raggay June, 2005

66Providing solutions that countTHANK YOUDavid Raggay June, 2005