By Al Edwards, Business Co-ordinatorAS THE June 30 deadline for the implementation of International Accounting Standards (IAS) draws nearer, the question many Jamaican companies are asking is whether the country is ready or should defer it to some later date.
The challenge facing many companies which have to file their end of year statements at about the same time, is doing so while complying with IAS. Of particular concern is that those companies that employ interim financial reporting will have to make the switch to IAS if their statements are due after June 30.
In discussing the implementation of IAS, a clear distinction must be made between accounting standards and the quality of audit. In Jamaica, there is growing support for the improvement in the quality of the external audit account because that is the protection the shareholder gets against misuse of funds by management - similar to the protection a depositor would get from a financial institution.
Clearly, there are questions to be asked in regard to the quality of accounting in light of the collapse of the financial sector in the 1990s. Looking internationally, the cases of Enron and Tyco brings to the fore the issue of IAS. There are regulators and company directors that have failed to recognise that both accounting standards and corporate governance are inextricably linked and, to that end, it is very important to define precisely what are accounting standards. When one talks of standards, it should not be confused with whether the audit is good enough but whether the presentation of the accounts would conform to a certain pattern. What is clear is that IAS speaks to the disclosure of items, not to whether the figures are any more accurate than before.
The Institute of Chartered Acco-untants of Jamaica (ICAJ) has insisted that the implementation of IAS is paramount to the efficiency of the profession and to proper company practices. Yet the United States and countries in Europe have not fully put IAS in operation and have not signalled a whole-hearted intention to adopt them immediately. Now this begs the question, how does a subsidiary (operating in Jamaica) of a foreign company present its accounts? Does it present them in a different format to that of its parent?
With a June 30 deadline, the ramifications and finer details of IAS have yet to be finalised and many regulatory bodies, including the Financial Services Commission, seem unclear as to its parameters. There are instructions as to the finite details of IAS but they are yet to be fully digested. Many first world countries have decided to defer the implementation of IAS until its details have become fully clear and there are those in Jamaica who concur with this course of action. For the country to adopt these standards at a time when the economy is particularly volatile suggests that there may be trouble ahead.
MONETARY INSTRUMENT
One of the country's most renowned accountants, speaking on condition he remains anonymous, told the Financial Gleaner: "IAS by and large requires you to value a monetary instrument dependent upon its current value. Now if you buy a Government bond that yields you 15 per cent but in the next few weeks then moves to 30 per cent, it now means that the instrument you bought then has a much lower yield and must be marked down to a yield that will give you the equivalent of what the market is now. In that case, it means you have to write the bond down to 50 per cent of its value.
"Now, that strategy is fine if you are operating in a stable monetary environment where interest rates move a quarter or half per cent every six months, but when you have the volatility you have in Jamaica where the interest rates can move by a third to a half in a fortnight, you can't expect financial institutions everytime there is a drive to protect the exchange rate, to write down all the instruments that they have. In many cases it would more than wipe out the net worth of the institutions. Now, to implement standards at the same time you have this volatility and at the same time people are concerned about the stability of financial institutions is tempting fate. I think for these standards to be endorsed by the regulatory authorities and the ICAJ at this stage is highly counter productive."
Responding to those points, a leading managing accountant from one of the top firms, also choosing to speak on condition he remains anonymous, said: "Volatility is an economic reality in Jamaica and that has been the case for a number of years now. We can't delay bringing in IAS simply because there is a degree of volatility and uncertainty now. Can you remember a time where there hasn't been uncertainty in the Jamaican economy?
FINANCIAL STATEMENTS
"I think that volatility should be reflected in the financial statements. Why pretend otherwise when preparing accounts? IAS 39 requires fair value to be reflected on the balance sheet, so we can't say we don't like the implications of telling the truth so we won't tell the truth. IAS is a work in progress, so we shouldn't wait for it to be fully set in place before adopting it. It will evolve and adapt as it meets challenges presented by the profession. Perhaps what is needed is a public education programme so that people can understand what the standards are about and what they mean."
Another accountant pointed out that there was still enormous disparity among companies in Jamaica as to when one recognises a bad debt and what is the appropriate level of depreciation that can be charged, without it having a significant effect on accounts. He is of the opinion that it would be better to settle down and deal with the quality of the audit and the quality of information, rather than changing the format.
Managing partner of KPMG Peat Marwick, Raphael Gordon, drew attention to the fact that IAS is at variance with the existing Companies Act and said that had to be rectified immediately.
"Redeemable preference shares are required to be part of a company's share capital. Now those shares can be redeemable out of a new share issue or redeemed by cash. The Companies Act says it should be transferred to a capital redemption reserve equal to the amount redeemed. This aims to offer protection against the reduction of capital," he said.
Mr. Gordon continued: "IAS, which in effect is now International Financial Reporting Standards (IFRS), requires such shares to be treated as debt unless there are conversion rights. The portion that can be converted can be treated as equity and the balance would be debt."
CURRENT LIABILITY
Turning to dividends, he noted that the Companies Act requires dividends proposed or declared to be treated as a current liability on the balance sheet and such amount is appropriated out of the profit and loss account.
On the other hand, IFRS requires that proposed dividends should not be included on the balance sheet if such dividends are not declared or proposed before a company's year end. The bank loans and overdraft should be shown on a company's balance sheet to comply with the Companies Act. However, the cash flow standards requires netting of overdraft against cash and bank balances under certain specific circumstances.
In this particular case, the Companies Act can be complied with for balance sheet purposes. Netting can take place on the cash flow statement and the composition of the balance identified.
Mr. Gordon added that regulators must pay particular attention to how they will deal with capital adequacies in regards to IAS 12, 19 and 39.
"This is important as share values in a high interest rate regime may have serious implications for fair values and hence a company's net equity. The proposed new Companies Act should be revisited to address variances between IFRS and the provisions of that Act," he said.
For Part II see next week's Financial Gleaner
