The Institute of Chartered Accountants of Sri Lanka National Conference 2011 October 2011

Quest for Balance IFRS – Theory, Practice and Transition

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Quest for Balance 3

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Objective One global set of standards for high-quality financial reporting Why? Common language More understandable Better comparability Greater access to global capital Greater trust in financial information Lower cost of capital However – must balance competing demands and address challenges Update on Global IFRS 4

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Key features Accounting for the substance of transactions Multiple element arrangements Embedded features - leases/derivatives Contractual rights and obligations Heavy use of current values Fair values – financial instruments, biological assets, business combinations, Current estimates – actuarial assumptions in pensions & insurance; cash flows in impairment testing Comprehensive disclosures Financial risks; Operating segment information; Related party transactions Update on Global IFRS 5

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Challenges Breadth of business impacts Application of “global” standards in “local” environments Alignment of regulatory impacts Global interpretation/local enforcement ► Loss of sovereignty and influence(?) over financial reporting ► Local pressures Conflicting objectives Update on Global IFRS 6

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. IFRS – a ‘business’ issue IFRS is not just an “accounting” issue – it is a major “business” issue Implications for functions, stakeholders, contractual arrangements, processes & systems etc. Requires engagement across the business Treasury; Human Resources; Investor Relations; IT; Internal Audit; Finance; Boards and Audit Committee Update on Global IFRS 7

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Business impacts 8

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Therefore Transition is a strategic issue – Board, Audit Committee and Executive involvement needed Pervasive effect across the organisation Change management processes required Project management/work streams Stakeholder engagement Training & implementation Opportunity to enhance existing processes/systems Update on Global IFRS 9

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Application of Global Standards Global Local Application Regulation & enforcement Interpretation? Adaptability Standards Standard-setting & due process Interpretation Consistency 10

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Balancing conflicting objectives Principles Reporting for capital markets Transparency Acceptable diversity Global consistency Rules Use of reports for regulatory/tax purposes Confidentiality In-country comparability Local practices 11

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Theory - “in” practice Revenue recognition in multiple element arrangements Leases embedded in supply/service contracts Equity reclassified as debt and vice versa Fair value of biological assets, investment property, financial instruments, Determining fair value in emerging markets Loan loss provisioning Depreciation and component accounting of property, plant & equipment Disclosures Update on Global IFRS 12

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. IFRS – a moving target Leases Revenue recognition Fair value measurement Consolidation Financial instruments I Financial Instruments II Exposure draft Final standard Standard implementation Standard effective Financial Instruments III

© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. Strive for balance 14

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