ACCOUNTING
| Africa embraces IFRSs Tue, 04 Jan 2011 16:14:23 GMT |
| IASB In all the excitement over economic growth in the BRICs countries—Brazil, Russia, India and China—other developing areas of the global marketplace tend to get overlooked. And while the BRICs are making the running no one should take their eyes off the changes that are happening through the African continent. Two recent reports back this up. The International Monetary Fund (IMF) said that sub-Saharan regional GDP was expected to grow by 5 per cent in 2011. According to the UN’s agency for the built environment, urban growth in Africa is running at a rate that is faster than that within Asia. The IMF report backs up the changes that are occurring. ‘The region’s resilience through the global financial crisis owes much to sound economic policy’, it said and then listed its characteristics: ‘steady growth, low inflation, sustainable fiscal balances, rising foreign exchange reserves, and declining government debt.’ There is little doubt that Africa is also focused on rapidly expanding economies elsewhere. ‘A positive development for the region’s dynamism in recent years’, said the IMF report, ‘has been the growing orientation of some of its trade towards the fastest growing parts of the world, particularly China and other developing countries in Asia and Latin America.’ This upward trajectory ties in neatly with the G20’s insistence that improving financial reporting within developing economies and regions is an important part of the remit of the International Accounting Standards Board (IASB). Comparable and credible financial reporting has played its part in the strengthening of the story of economic growth. There is a need to deepen Africa’s capital markets’, says Jeff van Rooyen, a founder member and CEO of Uranus Investment Holdings, past-CEO of the South African Financial Services Board, former Vice-Chairman, Executive Committee of IOSCO, founding member and former president of the Association for the Advancement of Black Accountants and an IFRS Foundation Trustee. ‘There is a range of things that must be done. One of them is moving away from local accounting standards and adopting International Financial Reporting Standards (IFRSs). There is a need to create an investor friendly environment.’ Simon Ridley, Group Financial Director with Standard Bank Group, agrees. ‘There is quite a lot of challenge in implementing IFRSs in Africa’, he says. ‘There is also a lot of hard work, but lots of payback in inward investment linked to disclosure and reporting.’ Zubaidur Rahman, Program Manager, Financial Management Unit, Operations Policy and Country Services with the World Bank Africa is a vast continent and both the strengths and weaknesses of its implementation of a common form of financial reporting through IFRSs and its institutional strengths and weaknesses vary enormously from country to country, and region to region. The Francophone countries north of the Sahara tend to retain their culture of sticking with French domestic accounting rules. South Africa, by contrast, has been a financial reporting powerhouse with a highly regarded stock exchange in Johannesburg and an impetus in implementing the IFRS for SMEs unrivalled around the world. The countries of eastern Africa are steadily moving towards IFRSs, and to the west an economic giant, Nigeria, is on course for IFRS implementation from January 2012. ‘There is no country resistance to IFRSs anymore’, says Zubaidur Rahman, Program Manager, Financial Management Unit, Operations Policy and Country Services with the World Bank. But he points to the other obstacles. ‘It is the capacity, the professional accounting bodies, educational institutions, regulators and auditors, that remain the problem.’ ‘Africa’, says Jerry Mutonga, Manager for Financial Management with the African Development Bank, ‘has a wide spectrum of countries and the accounting capacity varies from next to nil in some, to others, like South Africa, with good capacity. For example, the number of qualified accountants in Francophone countries is so limited. It will take years to get to the technical capabilities required. Even with a simplified version of IFRSs they will not be able to comply in the next 10 years. By 2020 they would struggle to comply.’ But it is a question of whether the African glass is half empty or half full. ‘The upside’, says Mutonga, ‘is that you have countries that are rapidly training accountants and are moving towards a critical mass. For example, Kenya, Uganda and Zambia are all moving up’, he says. ‘You can see that they are beginning to be a vibrant profession.’ Board member Paul Pacter This is the central issue. In Africa there is enthusiasm but the building up of the critical mass of the means to successfully implement IFRSs and derive the long-term benefits that would follow is the difficulty. ‘Africa has been as receptive as any part of the world to IFRSs, and probably more so’, says Paul Pacter, Board member at the IASB and pioneer of its IFRS for SMEs. ‘The issue has been more how to ensure good quality implementation rather than persuading the countries to adopt’. ‘There are often limited resources’, says Ridley, ‘but once there is a government or business acceptance of IFRSs they are vigorously adopted.’ UEMOA, the Economic and Monetary Union of West Africa, for example, which represents Benin, Burkina Faso, Guinea Bissau, Ivory Coast, Mali, Niger, Senegal and Togo, is on the road to implementing the IFRS for SMEs and has the legal ability to enforce it. ‘The economic and monetary union for West Africa is planning to implement the IFRS for SMEs as law in those eight countries’, says Ken Creighton, Director of IFRS Content Services at the IFRS Foundation. The commitment is there. ECSAFA, the Eastern Central and Southern African Federation of Accountants, which represents Angola, Botswana, the Democratic Republic of Congo, Ethiopia, Kenya, Lesotho, Malawi, Mauritius, Namibia, Rwanda, South Africa, Sudan, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe, is also convinced. ‘The countries in the ECSAFA regions have all agreed to adopt IFRSs and the IFRS for SMEs’, says ECSAFA chief executive, Vickson Ncube. ‘If you want to go IFRS then you have to go IFRS’, he says. ‘We agreed that adopting IFRSs was the right thing to do and adapting IFRSs was not the thing to do.’ The powerhouse and the great example has been South Africa. ‘South Africa is a very good reference point for the other jurisdictions in Africa’, says van Rooyen. ‘Our company law makes provision for IFRSs and the Johannesburg stock exchange insists on IFRSs.’ Paul Pacter agrees. ‘South Africa has been the leader and the catalyst. Its national standards have been converging with IFRSs. In addition it requires IFRSs on the stock exchange’, he says. ‘That took care of the listed companies and South Africa was one of the few countries that did not go through an endorsement process. The stock exchange just said IFRSs are a requirement. Full stop. Very few countries do that. Elsewhere governments, for sovereignty reasons, feel the need to go through an endorsement process. South Africa uniquely said: “We will adopt.” End of story.’ And South Africa also led the way on the implementation, in particular, of the IFRS for SMEs. ‘In Africa’, says van Rooyen, ‘the vast majority of companies are SMEs and the IFRS for SMEs was a significant step forward. Very many of the countries of Africa have embraced the standard. At the recent “Train the Trainers” conference in Tanzania it was clear the appetite for the SME standard is large. It is a very good way of introducing IFRSs to the continent.’ And it is a relatively painless way of bringing the mass of companies onto a system that will give them comparability and access to outside investment. ‘We say they should follow the IFRS for SMEs’, says Zubaidur Rahman of the World Bank. ‘But some small-sized companies do not have the capacity to do so and they may not need it. Not all entities should follow the IFRS for SMEs but we use it as a reference point and see what they can do. The IFRS for SMEs is very important for those countries that do not have adequate technical capabilities.’ There are two ways to provide further encouragement: influence from outside and training within. At the highest level it is obvious. When the Industrial and Commercial Bank of China (ICBC) made the largest ever outward investment by a Chinese entity and acquired an interest in the Standard Bank Group (SBG) for $5.5 billion, it was a landmark moment. ‘Chinese companies are cautious and conservative’, says Simon Ridley of SBG. ‘It was their largest ever investment. What struck me was the deep understanding of IFRSs by ICBC. It allowed them to get to the key financial issues very quickly. The common financial reporting language created an instant link in the due diligence.’ It is a striking example of how IFRSs can transcend boundaries. ‘What struck me’, says Ridley, ‘was that an investor from a different part of the globe with a differently written and spoken language could find resonance with the financial language.’ This happens at a lower level as well. ‘Many multi-national companies have operations in Africa’, says van Rooyen. ‘And most of them comply with IFRSs. So they create the capacity around the continent.’ Jerry Mutonga agrees. ‘Multi-nationals are coming’, he says. ‘The growth of the private sector is the driver.’ The other route is training and learning. Recent ‘Train the Trainers’ conferences have been very successful. The events are organised by the accounting organisations, like ECSFA, and the Association of Accountancy Bodies in West Africa, (ABWA), and seek to encourage the growth of accountancy infrastructure and understanding of the IFRS for SMEs in particular through workshops. ‘They are a very positive development’, says Mike Wells, Director, IFRS Education Initiative with the IASB, ‘and they begin to have a snowball effect through the accountancy professions across Africa and become very positive efforts to build capacity.’ A much larger conference organised by both ECSFA and ABWA and with the support of the World Bank is scheduled for Mombasa in Kenya in November 2011. ‘They expect 700 people to attend’, says Wells, ‘and it is a move towards creating an African voice in standard-setting’. This follows a very successful joint conference by the South African ICA and the IFRS Foundation last October in Cape Town. ‘It was really heartening to see the enthusiasm’, says Darrel Scott, former CFO of the FirstRand Banking Group and now a Board member at the IASB. ‘We still need to increase skills but there is enough of a base knowledge and they are very enthusiastic about the SME standard.’ For him it is all leading to greater inward investment. ‘In South Africa you can see the fruits of this. A common presentation format and standardisation of approach changes things. IFRSs are really important.’ And it will work elsewhere. ‘Several banks had to be rescued and their boards sanctioned in a bold move by the Central Bank in Nigeria in 2009’, says Ridley. ‘One of the factors was that the local accounting standards were not rigorous enough to pick up the problems. If they had been on IFRSs, I believe that the problems could have been picked up earlier. Being on a global standard simply improves general financial hygiene and I am sure this had a bearing on Nigeria's announcement in September 2010 that listed companies will be required to adopt IFRS by 2012.’ It is hard work but the effort is beginning to pay off. ‘Clearly, in all developing countries and emerging economies the big issue is to attract capital’, says Paul Pacter. ‘Africa has a wealth of natural resources, and human resources. But it lacks the local capital to develop. Capital providers need information that they can be confident about. And that is why the IASB exists. If people see the IFRS brand they know what they are buying.’ Jeff van Rooyen says that he is optimistic about his country. ‘I am extremely encouraged about Africa’, he says. ‘It is not a hard sell. The benefits are obvious. There is a recognition that it will take a while and to really see the impact of the change it will take 10 years. It is all about human capital and the legislative framework. You need to change legislation from a requirement for local accounting standards to IFRSs. It is a cumbersome process.’ But he feels that the global movement will prove irresistible. ‘The challenge in terms of capacity building can be overwhelming’, he says. ‘I can see the global movement to IFRSs with India and China and other major powers. The whole world is converging. Africa needs to be part of this. It is a learning curve for Africa and learning curve for the world. It is important for us as a continent. We just have to be part of this convergence.’ It will just take time and enthusiasm and patience. ‘There is an old African metaphor’, says van Rooyen: ‘How do you eat an elephant? You have to eat it bit by bit.’ ‘When I first started working in accounting standard-setting and you asked me what we produced I would have said “accounting standards”’, says Paul Pacter. ‘If you ask me today the answer is: “Economic development and better capital markets”.’ And that sums up the growing strength of Africa in the world of international financial reporting standards. |
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