Republic of the Philippines

Central Mindanao University

College of Commerce and Accountancy
Accountancy Department

A CASE STUDY ON ISSUES AND CHALLENGES FACED BY DIFFERENT

COUNTRIES IN ADOPTING INTERNATIONAL FINANCIAL
REPORTING STANDARDS (IFRS)

In Partial Fulfillment of the Requirements in Accy 99 Synthesis

Submitted by:
Rose Jean A. Pernito

Submitted to:
Ms. Dynnith F. Suaberon, CPA, MBM
Instructor

May 2015

TABLE OF CONTENTS

I.

Body of the Study

A. Introduction

B. Overview of IFRS

C. Methodology....7
II.

Case Study with IFRS Adoption Process 8

A. A study about India

B. A study about Brazil

11

C. A study about South Africa

18

D. A study about Nigeria 22

E. A study about Pakistan 25
F. A study about Turkey

28

G. A study about Malaysia 33

III.

Over-all Conclusion and Recommendation

IV.

References

38

40

I. BODY OF THE STUDY

A. Introduction
As of the beginning of 2005, the global corporate financial reporting
landscape has been transformed in a major way an unprecedented number of
countries around the world adopted International Financial Reporting Standards
(IFRS) which gaining wide acceptance today as their basis for the preparation of
financial statements.
It is well known that companies all over the world have become more and
more internationally oriented during last few decades. They create fusion, make
investment, conduct trade and co-operate over country borders. IFRS is becoming
the global language of business with over 36.84% or 21 out of 57 countries currently
use IFRS in one form or another either as full scale adopters or users of modified
versions of the standards of the world having moved to IFRS in the past few years
(http://governancexborders.com/tag/ifrs/). By 2016, it is expected that all companies
in major markets will be using IFRS.
The globalization creates an increased need for communication in the
terms of language, awareness of culture differences and domestic customs.
Moreover the financial communication such as accounting and financial results is
just as important for business leaders and employees to master. Hence, proponents
of IFRS claim that mandating a uniform set of accounting standards improves
financial statement comparability that in turn attracts greater cross-border
investment.

The benefits of a common set of high-quality financial reporting standards

are very significant. Nevertheless, depending on the general economic situation,
existing regulatory framework and financial reporting tradition of a given country,
practical implementation of IFRS poses considerable challenges and issues.

This study intends to find out the different issues and challenges faced by
different countries that decided to adopt IFRS and how they overcome it. It focuses
only to the developing counties identified by Bloomberg (A major global provider of
24-hour financial news and information including real-time and historic price data,
financials data, trading news and analyst coverage, as well as general news and
sports.) seven cases, seven different studies from seven different countries, namely,
India, Brazil, South Africa, Pakistan and Turkey.

To bring about accounting quality improvement through a uniform set of

standards for financial reporting, I conclude that efficient compliance and
enforcement of standards; complexity of adoption; ethical environment; cost of
conversion; and training of accountants and relevant professionals, posed a great
challenge to the countries in the convergence of IFRS.

B. Overview of Adoption of IFRS

IFRS are accounting rules issued by the International Accounting
Standard Board (IASB), an independent organization based in London, UK. Before
the inception of IASB, international standards were issued by the IASBs
4

predecessor organization, the IASC, a body established in 1973. Up to 2000, the

IASCs rules were described as International Accounting Standards (IAS). In fact,
in 1997 after nearly 25 years of achievement, IASC recognized that to continue to
perform its role effectively, it must find a way to bring about convergence between
national accounting standards and practices and high-quality global accounting
standards.
In late 1997 IASC formed a Strategy Working Party that published a
discussion paper in December 1998 and final recommendations in November 1999.
The IASC Board approved the proposals in December 1999, and the IASC member
bodies did the same in May 2000. The new standards-setting body was named as
International Accounting Standards Board (IASB) and since April 2001, it has been
performing the rule-making function. The IASB describes its rules under the new
label International Financial Reporting Standards (IFRS), though it continues to
recognize the prior rules (IAS) issued by the old standard-setter (IASC).
Financial information is a form of language. And undoubtedly, to ensure its
usefulness, financial information should not only be intelligible, but also be
comparable so that investment and credit decisions can more readily be taken. Over
the past few decades, the accounting profession has been facing the pressure of
globalization and continuously seeking the way to present financial situations using
unique accounting procedures which can be understood by the entire business
community.
The starting point in creation of a unique accounting system needed to
pass a difficult process where the main accounting systems will litigate to impose

their accounting policies and practices. Despite the difficult process Anderson (1993)
said a set of international accounting standards will allow new horizons of evolution
due to the fact that comparative analysis of the rates of returns established based on
the balance sheets and profit and loss account between the companies being in
competition become relevant.
The comparison, as the basic form of economical judgment can be
realized only if the accounting system is unique for all the companies involved in the
analysis. Also harmonization is absolutely necessary because national standards of
financial statements are virtually useless; financial markets in more regulated
countries are threatened with a loss of market share; and multinational corporations
must prepare multiple reports for different nations they do business in (Nobes and
Parker, 1991). In order to accomplish this target the accounting profession
developed the solutions like getting a single set of international accounting
standards such as IFRS because it rapidly gaining acceptance as over 100 countries
have recently moved to IFRS reporting and even the U.S. Securities and Exchange
Commission (SEC) is considering allowing U.S. firms to prepare their financial
statements in accordance with IFRS.
C. Methodology
The study has been conducted mainly on the basis internet source,
literature survey and secondary information. Various journals and research papers,
diagnostic study reports and articles have been surveyed in making this study. Few
qualified accountants have been consulted with in order to have their thoughts on
the problems and solutions in this regards.

The main practical challenges that arise in implementing IFRS have been
identified through the country case studies. It is important to note that although for
the purpose of the country case studies efforts have been made to select countries
in a manner that allows for coverage of diverse regions, economic systems and
approaches to IFRS implementation, the case studies contained in this paper do not
necessarily represent the whole range of issues in this area. An in-depth and
detailed analysis of these issues could be a subject of further research and
discussion especially it is not a monetary-based paper.

II. CASE STUDY WITH IFRS ADOPTION PROCESS

A. A study about India

In India, accounting standards are formulated by council of Institute of
Chartered Accounts of India (ICAI). In July 2007, the council of ICAI set a target of
adopting International Financial Reporting Standards (IFRS) for all listed, public
interest and large-sized entities from accounting periods beginning on or after April
1, 2011.

In 2007, India has decided to converge with IFRS. ICAI started the
process of developing a complete set of accounting standard that are converged
with IFRS - which will be known as Indian AS.

With an objective to ensure smooth transition to IFRS from April 1, 2011,

ICAI is taking up the matter of convergence with IFRS with National Advisory
Committee on Accounting Standards (NACAS) established by the Ministry of
Corporate Affairs, Government of India and other regulators including Reserve Bank
of India (RBI), Insurance Regulatory and Development Authority (IRDA) and the
Securities and Exchange Board of India (SEBI).

Analysis of Case (Issues and Challenges)

Adoption of IFRS means that the entire set of financial statements will be
required to undergo a drastic change. It would be a challenge to bring about
awareness of IFRS and its impact among the users of financial statements. While
IGAAP has been converging with IFRS as much as possible in recent years,
differences still remain, and some of these were viewed as significant challenge to
overcome.

ICAI noted these concerns: (1) IFRS is more principle-based than Indian
GAAP. More choice under IFRS will mean the increased need to use professional
judgment that will require a fundamental change in mindset for Indian accountants;
(2) Initial transition will be a challenge given differing recognition and measurement
criteria for assets and liabilities; (3) Specific accounting areas that will be more
complex included business combinations and financial instruments. Many of the
problems associated with them arise from the greater use of fair value accounting
under IFRS.

However, in an interview of Economic Times (ET), Hoogervorst stated this,

If India adopts IFRS, its voice in global market will be heard more. Hoogervorst
also said at a conference in Mumbai, India organized by the IFRS Foundation and
KPMG, Indias recent decision to adopt Indian AS, which is close to IFRS, is a
momentous step that demonstrates the countrys focus on raising standards and
increasing the appeal of Indian companies to foreign investors. Indian AS should
only be seen as a stepping stone towards full IFRS adoption. Otherwise, Indian
companies risk incurring the full costs of making the transition to a new standard
without getting the full benefit, such as better access to capital and at a lower cost.
Only India can make the decision about full IFRS adoption.

Currently, the reporting requirements are governed by various regulators

in India and their provisions override other laws. IFRS does not recognize such
overriding laws. The regulatory and legal requirements in India will pose a challenge
unless the same is been addressed by respective regulatory. IFRS convergence
would affect most of the items in the financial statements and consequently the tax
liabilities would also undergo a change. Thus, the taxation laws should address the
treatment of tax liabilities arising on convergence from Indian GAAP to IFRS.

Yet, Indian Accounting Standards are based on IFRS but have some
carve-outs. Nevertheless, Indian officials have indicated that they plan to move to full
IFRS eventually. In a recent speech, the IASB pointed out, Indian Minister of

Finance Arun Jaitley said there is an urgent need to converge the current Indian
accounting standards with IFRS to achieve a prosperous trade over country borders.

Conclusion and Recommendation

The conversion from Indian GAAP to IFRS faced many difficulties but at
the same time looking at the advantages that this adoption will confer, the
convergence with IFRS is strongly recommended because the measures taken by
ICAI and the other regulatory bodies to facilitate the smooth convergence to IFRS
can be credit and give the positive idea that the country is ready for convergence.
Moreover, the government established an independent oversight body named
Financial Reporting Council to shoulder the responsibility of setting accounting and
auditing standards, monitoring compliance with accounting standards, reviewing
auditors practice and reviewing reporting practices and enforcing sanctions for
violations. The government should ensure capacity and effectiveness of this
regulatory regime to provide a real sense of security to stakeholders.
Ensuring high-quality corporate financial reporting environment depends
on effective enforcement mechanisms especially when Indian AS are most likely the
same with IFRS so only few revisions will be taken up. Hence, I recommend these
three important links and alternatives should exist in the enforcement sequence:
1. Directors and top management must ensure that financial statements are
prepared in compliance with established standards.

10

2. Auditors must act independently and judiciously to ensure that financial

statements comply with applicable accounting standards and represent a true
and fair position of the enterprises financial condition.
3. Regulators, both self-regulatory organizations and statutory regulators, must
implement arrangements for efficient monitoring of regulatory compliance and
consistently take appropriate actions against violators especially in tax
matters.

B. A study about Brazil

Brazil has already adopted IFRS for all companies whose securities are
publicly traded and for most financial institutions whose securities are not publicly
traded, for both consolidated and separate (individual) company financial
statements.

However, despite the significant changes that have occurred in the

Brazilian Accounting System in recent years, there are still important differences
between Brazilian accounting standards and IFRS. Some practical and operational
factors, such as the legal environment and economic, tax, cultural and educational
issues, tend to place obstacles in the path of convergence of Brazilian Accounting
Standards and IFRS.

Analysis of Case (Issues and Challenges)

11

According to research by the Brazilian Securities Commission (CVM), the

convergence process of Brazilian standards and IFRS is developing at a moderate
pace. Recently, the Brazilian Securities Commission presented the main differences
between Brazilian accounting standards and IFRS. The following deserve special
mention: (1) the introduction and application of the fair value measurements,
particularly by non-financial companies; (2) accounting for financial instruments in
relation to fair value; (3) accounting for and reporting on finance leases in financial
statements; (4) business combinations; (5) accounting for government grants; and
(6) segment reporting.

The following is a brief description of some of accounting requirements

that Brazil has issues and challenges difficulty because it differs from IFRS.
Property, plant and equipment Revaluation and subsequent costs
Brazilian standards require that property, plant and equipment should be
valued using the cost model but the revaluation model is an allowed alternative;
however, it is not applied routinely. The general tendency in Brazil has been to apply
revalue property, plant and equipment in limited circumstances, for example, when
mergers, incorporation and other corporate restructuring occur.

It is important to remember that, in previous years, revaluation of assets

was inappropriately used in Brazil as a way of increasing assets and equity.
Currently, recognizing inflationary effects on financial statements is prohibited under
corporate reporting law and tax regulation.

12

Some differences between Brazilian accounting standards and IFRS can

been seen in how they account for subsequent costs incurred in relation to property,
plant and equipment. In IFRS, these costs should be expensed when incurred,
unless these expenses contribute towards increasing the future economic benefits of
the related item of PPE. But in Brazil, subsequent costs that cannot be capitalized as
items of PPE are recorded as deferred expenses and must be amortized over a
period of 10 years in accordance with corporate law or within five years according to
tax legislation.

Leasehold
With regard to leaseback operations, IFRS stipulates different approaches
depending on the circumstances of the transaction. If the transaction results in a
finance lease, any profit should be deferred and amortized over the lease term. If it
results in an operating lease, the profit or loss should be recognized immediately. In
Brazil, profit obtained by the lessee on the sale of the leased asset must be
recognized at the time of the transaction. Tax regulations prohibit deferral of such
profit.

Government grants

13

Under Brazilian accounting standards, government investment grants are

recognized in a capital reserve in equity when received and without any specific link
to the assets or the projects lifespan. IFRS require that they should be recognized
only when there is a reasonable certainty concerning compliance with conditions for
receiving the grant. Effects of changes in foreign exchange rates

Business combinations
In Brazil, there is no legal obligation to assess the fair value of assets and
liabilities when a business combination takes place. It is usually done for
management purposes, to determine the value of the asset which is being
restructured. By contrast, this is mandatory in IFRS.
Moreover, with respect to business combinations in Brazil, the legal form
is more important than the essence of the transaction. IFRS principally require an
assessment of the essence of the deal and consider practically all business
combination transactions as acquisitions, unless it is impossible to identify the buyer.

Investments in associates
In order to apply the equity method to investments in associated
companies, Brazilian accounting standards require ownership of 20 percent or more
of the associated companys capital. IFRS stipulate that if an investor, directly or
indirectly, holds 20 percent or more of the voting power of the investee, it is
presumed that the investor has significant influence and the equity method must be
used.

14

Interest payments on shareholders equity

In Brazil, interest payments related to remuneration on shareholders
equity are treated as an expense by tax legislation and as a reduction of the earned
surplus account by corporate legislation. Under both types of legislation, this interest
essentially represents dividend payments. IFRS require that dividend payments on
shares that are wholly recognized as liabilities should be treated in the same way as
interest payments on bonds.

Cash flow statement

Cash flow statements are optional in Brazil, but supplementary information
is required by IFRS. The statement of source and application of funds (known in
Portuguese under the acronym DOAR) is a requirement. Replacing the DOAR with a
cash flow statement is one of the goals of convergence with IFRS. This has been
proposed as one of the amendments to the countrys Corporation Act.

Earnings per share

In Brazil, earnings per share are calculated by dividing fiscal-year net
profit by the number of common and preferred stocks in circulation at the end of the
period, while IFRS require calculation by dividing the periods net profit or loss
attributable to common stockholders by the weighted average of the number of
common stock outstanding during the period.

15

Conclusion and Recommendation

The need to improve the efficiency of the development of accounting
standards is recognized in Brazil. Various efforts are being undertaken to improve
the standard-setting process. These efforts must be expected to result in: (1)
Harmonization of accounting standards for different business sectors; (2) Greater
alignment with international standards; and (3) Faster turnaround time for
implementing new standards.

One of the main lessons I learned so far during the process of

convergence of Brazilian accounting standards and IFRS was the need for better
coordination of efforts among the various organizations involved in this process. As a
number of agencies are involved in the regulatory processes affecting accounting,
legislative approval of proposed accounting standards calls for extensive
consultations and takes a considerable amount of time. As a result, accounting
standards are not keeping pace with changes in the business environment.

Gone are the days when Brazil seemed destined to always remain the
country of the future, said Hans Hoogervorst. Speaking at the recent IFRS
conference in Sao Paulo he continued, For Brazil, the future is now. And IFRS,
have been a significant factor in this change. Brazil has enthusiastically embraced
IFRS and has reaped the benefits.

16

As the statement discussed above, IFRS expertise in Brazil is currently

highly concentrated in a small circle of professional accountants. Thus, I recommend
that only further concerted efforts are needed in the area of education and training
on IFRS-related issues in Brazil.

Another important thing is the Brazilian legal culture has heavily influenced
on the countrys system of accounting is its new Corporate Act, contained in bill No.
3741/2000 and on which consultations have been conducted in the congress for
over five years, proposes substantive changes in the formal structure used for
developing the countrys accounting standards. The law is expected to abandon the
current scope of prescriptive accounting rules and will instead take on an authorizing
role.

The process of developing standards will then be conducted by an

independent agency that will be established by the law, comprising professionals
with specific expertise and academics, trade associations, and businesses. It is
hoped that this change will increase quality, speed and convergence with IFRS.

C. A study about South Africa

The South African economy continues its strong performance, and
translates into increased interest in the market from local and international investors,
and trading volumes reach record level. The building blocks for this success have
been put in place by Government, and we must applaud its efforts in creating an

17

environment in which the economy can thrive. A continued commitment to prudent

macroeconomic policies builds confidence in South Africa as an investment
destination, and boosts the image of the country as a whole.

The South African Institute of Chartered Accountants (SAICA), the

Johannesburg Stock Exchange (JSE) and the Accounting Practices Board (APB) of
South Africa has recognized the need to be part of a global economy with respect to
financial reporting. APB decided to issue the text of international financial reporting
standards (IFRS) as South African statements of generally accepted accounting
practice (GAAP) without any amendments.

Analysis of Case (Issues and Challenges)

The experience in South Africa is that diversity exists in local practice.
However, one of the main advantages of converting to IFRS is that, through this
conversion, many of these divergent practices have been eliminated. By adopting
IFRS, companies have had to evaluate their existing accounting policies and
procedures.

Consistency has been strengthened by industry experts coming together

and resolving related issues. In this regard, the technical partners forum plays a vital
role in resolving issues and creating consistency. Each of these technical partners
also has the support of their international technical desk. However, local issues and

18

diversity in practice that cannot be resolved through the above structures such as
operating leases and black economic empowerment (BEE) transactions are
channeled to the Accounting Practices Committee that have been referred to IFRIC.
In respect of South African dividends tax, a dual tax system for companies
was introduced by the South African Income Tax Act 1993, comprising a normal tax
levied on taxable income and a Secondary Tax on Companies (STC). STC is a tax
levied on dividends declared by South African companies and is based on the
amount by which a declared dividend exceeds dividends previously received. Since
this is a South African-specific issue, the APB issued South African GAAP Standard
AC 501 (secondary tax on companies) to clarify the accounting treatment of STC on
the basis of the principles of IAS 12 on income taxes.
A black economic empowerment (BEE) is a formal process followed in
South Africa to uplift black South Africans. The accounting issue in South Africa
deals with the situation where entities issue equity instruments to black South
Africans or entities controlled by black South Africans at a discount to fair value to
achieve targets for the empowerment of black people. In terms of guidance in IFRIC
8 on scope of IFRS 2 it is clear that IFRS 2 on share-based payment applies to such
BEE transactions where the fair value of cash and other assets received from BEE
partners is less than the fair value of equity instruments granted to the BEE partner.
APB issued AC 503 (accounting for BEE) transactions to clarify whether a
BEE equity credential should be recognized as an intangible asset or as an
expense. The conclusion reached is that BEE equity credentials should be
expensed, except where the cost of the BEE equity credentials is directly attributable
to the acquisition of another intangible asset. The main reason for expensing the
19

BEE equity credentials, based on the principles of IAS 38 on intangible assets, is

that the BEE equity credentials are not controlled by the entity because the entity is
not able to demonstrate that it has the power to obtain the future economic benefits
flowing from the underlying resource, either through legal rights or exchange
transactions.
This issue regarding BEE transactions, although South African-specific,
was referred to IFRIC for clarity and IFRIC issued IFRIC 8 on scope of IFRS 2 in
response.
Another concern raised by the APB and the Accounting Practices
Committee was the application of fair value measurement applied to financial
instruments in cases where there was no active market or where the market was
illiquid. The concern especially relates to instances where fair value measurement is
based on managements estimates.
In South Africa, holding companies were always required to prepare
separate financial statements on the basis of the South African statements of GAAP.
While IFRS are not explicitly written for consolidated financial statements only, there
is almost an implicit focus on the consolidated position rather than the separate
financial statements. Hence, among the things stated above the adoption of IFRS in
South Africa is a difficult task and has many challenges.
Conclusion and Recommendation
The adoption of IFRS has clearly increased South Africas role as a global
player in the accounting field and has strengthened the uniformity in the application
of IFRS in South Africa.

20

The adoption of IFRS has enhanced consistency of the application of

IFRS and has further confirmed the need for a local technical body that will
contribute to the IASB due process and resolve specific local issues and divergence
in practice.
The South Africa has witnessed a significant growth in the technical
accounting departments of audit firms to cope with the increased technical demand.
However, many accounting specialists trained in South Africa have left the country
because of global demand for their skills.
I conclude that South Africa must to create a process of legal backing for
accounting standards by proper monitoring for their personnel, accountants and
auditors, enforce structures and to implement a system of differential reporting.

D. A study about Nigeria

Nigeria has equally taken steps to converge to IFRS. In 2011, Government
signed into law, the Financial Reporting Council of Nigeria Act of 2011, with the
emphasis that the countrys road map to adoption of IFRS will start by January 1,
2012 beginning with publicly quoted companies. Other Public Interest Entities (PIES)
are to converge to IFRS by January 1, 2013 and small and medium size entities will
converge by January 1, 2014 (NASB, 2011).

However, the Central Bank of Nigeria (CBN) had directed all banks to
comply with IFRS in 2010. The legislation (Financial Reporting Council of Nigeria
Act, 2011) is to create an enabling environment for the implementation of IFRS and
to guarantee credible financial reporting regime in both private and public sector
21

entities in Nigeria. Government has equally empowered the Financial Reporting

Council of Nigeria to issue and regulate accounting, actuarial valuation and auditing
standards. This means that the Nigerian Accounting Standard Board (NASB)
together with the Statement of Accounting Standards (SAS) issued by it is now
replaced.

According to a survey conducted by Department of Economics and

Management sciences, Nigerian Defense Academy, 66 percent of the respondents
agree that adoption of IFRS will be complex and create problem. However, in view of
the anticipated problems that the adoption may create, 91 percent of the
respondents strongly agree that it is good choice that companies will converge to
IFRS in a gradual manner.

Analysis of Case (Issues and Challenges)

In Nigeria, the experiences of money deposit banks that were mandated to
adopt IFRS in 2010 show that there are a lot of difficulties in converging to IFRS. It
includes cost, training and education, differences between local standards and IFRS,
software problems and etc.

Adopting to IFRS has a huge cost outlay which include the cost of training
personnel to understand the new global standards, cost of acquiring new accounting
packages that are needed for the implementation, cost of discarding former

22

accounting packages that are not compatible with IFRS. In this case, it includes the
cost of starting new invention (IFRS) and abandonment of the former (SASs).

Due to IFRS adaptation, educating personnel and management saddled

with the responsibility of preparing financial statement compliant to IFRS
implementation is another problem that is not only costing the banks but also taking
away huge manpower hours.

IFRS is less prescriptive than SAS. For instance, SAS 10- Accounting by
Banks. Some standards in IFRS differ considerably from the local GAAP which
constitute another challenge that is being faced in the process of converging to IFRS
by Nigerian banks. IFRS demands more disclosure requirements than SAS and also
differ in application and interpretation. Implementation of IFRS has increased the
need within the organization to gather analyze and report more data for compliance.

Conclusion and Recommendation

The situation in Nigeria shows that even in the view of the anticipated
problems in adoption that may arise, the study concludes that Nigerian companies
should converge to IFRS in view of the fact that it will enhance better accountability
and transparency and improve quality of reporting.

However, owing to the fact that IFRS being a principle based standards,
allows companies to utilize only the methods they wish, thus allowing the financial

23

statements to show only desired results and leading to revenue or profit

manipulation and hiding of financial problems in the company.
Therefore, this study recommends that Nigeria should borrow the wisdom
of the Germans by making IFRS mandatory only for group accounts of listed
companies leaving Nigerian GAAP to still be mandatory for individual companys
accounts of listed companies. Also, IFRS should be optional for group accounts of
non-listed companies but prohibited for individual companys account.

E. A Study about Pakistan

Pakistan has made significant progress in closing the gap between local
requirements for corporate financial reporting and international standards, by not
only adopting IFRS, but also establishing mechanisms to ensure their enforcement.
Over the past few years, this has contributed to significant improvement in corporate
financial reporting.
Institute of Chartered Accountants of Pakistan (ICAP) plays a major role in
the implementation of IFRS in Pakistan it was set up under the CA Ordinance 1961,
it monitors the accounting regulations. Its member has the authority to sign all the
audit reports of the organizations. And SECP (Securities and Exchange Commission
of Pakistan) implement IFRS under the companies ordinance 1984.
All the companies need to comply these standards as given by the ICAP
in the preparation of their accounting records. All the IFRS principles that are
enforced by the international standard board (IASB) are applicable in Pakistan
except the IFRS 1 and IFRS 9.
Analysis of Case (Issues and Challenges)

24

Pakistan has adopted most but not all International Financial Reporting
Standards (IFRSs) for mandatory application by listed companies, banks and other
financial institutions and Economically Significant Entities (ESE), even when these
are not listed. The major issues that Pakistan faced during the adoption of IGFS is
the differences between accounting system since there are accounting policy that
permitted by IFRS that Pakistan has not yet adopted and modified. IFRS are usually
adopted as issued by the International Accounting Standards Board (IASB) and
generally include any further revisions thereof.
However, some differences are worth noting: (1) Pakistan has not adopted
IFRS 1 First-time Adoption of International Financial Reporting Standards; (2) IAS 39
Financial Instruments: Recognition and Measurement; (3) IAS 40 Investment
Property; (4) IFRS 7 Financial Instruments: Disclosures have not been adopted for
banks and other financial institutions regulated by the State Bank of Pakistan (SBP).
SBP has prescribed its own criteria for recognition and measurement of financial
instruments for such financial entities. Those standards do apply to other companies
not regulated by the SBP.
Pakistan has not also adopted (5) IFRIC 4 Determining whether an
Arrangement contains a Lease; (6) IFRIC 12 Service Concession Arrangements. (7)
Power sector companies have been exempted from the requirements of IAS 21 The
Effects of Changes in Foreign Exchange Rates to the extent of capitalization of a
foreign exchange loss.
Since the regulators of the corporate and financial sectors and ICAP that
represent the accounting profession of Pakistan are of the firm view that financial

25

reporting by public interest entities should be in conformity with the international

financial reporting standards so as to generate high-quality financial information that
is relevant, comparable, consistent and transparent so as to serve the needs of
stakeholders.
Conclusion and Recommendation
ICAPs proactive leadership of the profession and collaborative approach
of working together with the regulators has helped bring about significant
improvement in the quality of financial reporting in line with international standards.
Pakistan is on track and not too far away in achieving full IFRS, in line with
the IFRS strategy approved by the Council of ICAP. If ICAP wants to continuously
create awareness in IFRS adoption in the following issues and goals, various
programs must be committed such as holds separate seminars whenever a new
IFRS or ISA is issued by the standard setters for the guidance of its members,
workshops on IFRS and ISAs for their teams.
But ICAP took some actions already by establishing a capacity-building
measures and enhancing the delivery of professional education. Capacity-building is
imperative to consolidate the prior achievements, improve the knowledge base
among auditors and preparers of financial statements, and strengthen the monitoring
and enforcement mechanisms for ensuring compliance with applicable standards
and codes.
This study strongly recommend to continue the program for it will improve
the capacity of regulators and professional bodies, upgrading accountancy
education and training with focus on practical application of IFRS and ISA,

26

upgrading the licensing procedure of professional accountants and auditors, and

enhancing the delivery of continuing professional education.
Moreover, this study believes that the ultimate objective of this very
important regulatory and educative program is to maintain and enhance the
reputation and images of this prestigious profession.
F. A study about Turkey
As a developing country with an emerging capital market, Turkey closely
follows developments in international financial reporting and auditing. This report
presents the historical development of accounting and financial reporting in the
country and discusses the recent regulatory developments following the attempts at
convergence with the global set of financial reporting standards that is referred to as
the International Financial Reporting Standards. In doing so, this report conveys the
Turkish experience in adapting to IFRS as well as lessons learned in the
implementation process.
The Banking Regulation and Supervision Agency and Capital Markets
Board of Turkey translated IFRS into Turkish in 2002. Banks and Turkish companies
listed on the Istanbul Stock Exchange are required to prepare IFRS reports since
then. The Turkish Accounting Standards Board (called the Public Oversight Authority
after 2011) also translated IFRS in 2005. The new Commercial Code came into force
in 2012. The Public Oversight Authority is the only authorized board regarding
auditing and financial reporting standards. Most businesses authorized by the
Council of Ministers in addition to banks and Turkish companies listed on the
Istanbul Stock Exchange are required to prepare IFRS reports since 2012.

27

Analysis of Case (Issues and Challenges)

Turkey is one of the proactive countries that took steps to improve its
financial reporting and auditing system to align the requirements with the
commencement of IFRS in 2005. In essence, the adoption of IFRS-based standards
turned out to be a three-step process where the first step was the early adoption of
IFRS between 2003 and 2005 by companies whose shares are publicly traded. The
second step was the compulsory adoption of IFRS starting in 2005, again by the
traded companies. The third step was the mandatory adoption by all publicly owned
companies upon the enactment of the draft commercial code.

Undoubtedly, there are certain differences between the old Capital

Markets Board (CMB) rules and IFRS that lead Turkey in difficulty in reporting
different financial results and financial position. Major differences include the
following:
Measurement issues
According to CMB rules, foreign exchange losses that arise from
acquisition of property, plant and equipment can be capitalized after related assets
are put into use. IFRS and IAS, on the other hand, require recording of such foreign
exchange losses as period expenses.
CMB rules require that construction contracts should be accounted for using
the completed contract method, whereas IFRS and IAS require the use of

percentage of completion or cost recovery methods.

While IFRS and IAS require discounting of the pension obligations to present
value, CMB rules do not impose such a requirement.

28

All types of leases are accounted for as operating leases according to CMB
rules.

Disclosure issues
According to the CMB rules the applicability of related parties is limited to
shareholders, subsidiary and equity investments whereas related parties are more
broadly defined in IFRS.

There are no specific disclosure requirements relating to the fair value of

financial assets and liabilities except for marketable securities under the CMB

rules.
Statement of changes in shareholders equity is not required by the CMB rules.
CMB rules on format of the statement of cash flows do not require a breakdown
of cash flows by type of activity.

Conclusion and Recommendation

Encouraging the traded companies to adopt IFRS or IFRS-based CMB
standards before 2005 led to two benefits. (1) More transparent financial statements
were introduced; (2) The experience of the early adopters during the transition
period helped the other publicly traded companies.
The adoption of IFRS by the traded companies before the other private
companies will ease the way for the latter companies. Thus, non-publicly-owned
private companies will benefit from their publicly traded counterparts experience
during the implementation.
Turkish accounting standards will affect many parties covering both the
internal and external users of financial statements. For external users such as
foreign and domestic stock investors, Turkish accounting standards will bring
29

transparency and comparability. These users will find themselves at ease while
making investment decisions with the help of comparable and consistent financial
data.
One of the urgent issues in Turkey is to solve the multi-institutional
structure of the accounting environment. There should be one accounting standardsetting body for all entities. A related issue is the enforcement of Turkish accounting
standards. Until the draft commercial code is enacted, the Turkish Accounting
Standards Board does not have any power to enforce the adoption of Turkish
accounting standards by all companies.
This study also recommends that significant amounts of training and
education for financial statement preparers and small and local auditing companies
are needed. A lesson learned from the initial implementation is the insufficient
understanding of accounting standards. Generally, accounting standards do not
address the full details of application that requires judgment from the management
of entities. Turkish accounting standards involve a great deal of management
judgment. As significant judgment is exercised in applying the accounting standards,
incomplete comprehension of standards would lead to lower-quality financial
information.
Since Turkey is a code law country, laws need to be changed in order to
enforce an accounting standard. The Turkish experience regarding the process of
enacting the new commercial code is an excellent example. Well-known lawyers and
accountants from the country have been working on the draft code for more than six

30

years. Therefore, countries that intend to implement IFRS should have their
transition plans ready well ahead of launching IFRS.
G. A study about Malaysia
Malaysian Accounting Standard Boards (MASB) chairman, Dato' Zainal
Abidin Putih, announced that Malaysia will be converging with IABs International
Financial Reporting Standard (IFRS). In order to educate, train and inform all the
relevant stakeholders in tandem with fast approaching deadline to converge, which
is for the earliest year-end financial reporting date, December 31, 2012 many
initiatives were lined up by MASB and the Malaysian Institute of Accountants (MIA).
MASB issued the third accounting framework to be applied in Malaysia
and this new accounting framework is the IFRS dubbed as Malaysian Financial
Reporting Standards Framework (MFRS). The issuance of MRFS is vital to show
and prove the Malaysian commitment and also it becomes a solid guideline for all
entities that are administered by Securities Commission of Malaysia.
Mohammad Faiz Azmi stated in forums that the Malaysian story of
convergence has been a slow and steady approach and even though its slower it
is expected to put Malaysian entities in a better position as the problems and
challenges faced by Malaysian companies are far much reduced compared to other
countries that adopted the big bang approach for instance, in South Korea where
the accounting standard setters and regulators agreed on full adoption of IFRS
(Nazatul Izma, 2009; Suh, 2011).

Analysis of Case (Issues and Challenges)

31

The challenge for full adoption of IFRS in Malaysia is that under MFRS 1,
if the cost of complying with MFRS exceeds the benefits to the users of financial
statements, IASB would grant exemptions. Therefore, this would create a bias
system amongst non-private entities in Malaysia that are supposed to apply MFRS
as the criterion for full-adoption.

To ensure that the reporting entities in Malaysia are MFRS compliant,

these entities should perform a comprehensive, thorough and detailed examination
of the readiness of their entity in becoming MFRS compliance to avoid any
investigation by the authority due to non-compliance after the grace period for full
adoption is over.

If Malaysia ends up trimming its MFRS as a convergence framework that

can be adapted to fit the local conditions and not a one size fits all set of standards,
because a full adoption forces countries to surrender their sovereignty, then
Malaysia will have serious issues and will face difficulties to be endorsed as a
country that compliances to full IFRS adoption. This sort of issues should be
communicated clearly to the practitioners. Education and training of the practitioners
is way for a successful full adoption of IFRS. For instance, MFRS 141 (IAS 41)
disagreement with IASB need to be entirely made clear to the Malaysian
practitioners, as IASB currently have agreed to recognize palm oil tree as a
noncurrent asset and not as an inventory.

32

Mohammad Faiz Azmi indicated that Malaysia will not require the IFRS for
SMEs to avoid an under converged version used by SMEs due to the lack of
human resources to implement new IFRS based regulations. Therefore MASB is still
uncertain about how exactly they should deal with the issue related to SME and
IFRS.

MFRS uses fair value accounting and this valuation method has an effect
on the tax liability of an entity and how fair value will change the amount of tax
deductible expenses and the taxable amount will not only affect the tax paid by the
entity but also the tax collected by the Inland Revenue Board (IRB). Besides the tax
regulatory issues, Securities Commission Malaysias requirement will also affect the
distributable profits for dividend payment and also the amount of realized and
unrealized profits and these computations complication on tax might not be in line
with the requirements of regulatory bodies.

However, this issue must be solved and consistent with the new financial
reporting system. Then, Mohammad Faiz Azmi mentioned that MASB is working with
enforcers to amend the Financial Reporting Act (1997). This study assumes will be
useful to allow in making amendments to accounting standards in Malaysia if there
are any substantial issues that MASB disagrees with IASB.

Conclusion and Recommendation

33

It is recognized that Malaysia has inherited and built strong national

accounting policies, coupled with adequate funding to by MASB. Malaysian
education system, in theory at least, is very much in line with the current
developments in the accounting and business, hence, MASB together with MIA will
just have to look into the issue of the readiness of the Malaysian education system
to deliver enough trained accountants that are IFRS savvy, as a full IFRS adoption
can be burdensome and the human capital need to be created to fulfill this need.
There is no lack of local capacity as far as education and training is
concerned and the accountants in training are well prepared to enter the job market
to a huge extent (Nordin Zain, 2012). At the end of the day, what is more important
than IFRS convergence is the full adoption of IFRS though the complete adoption of
MFRS framework.
As a closing note, Mohammad Faiz Azmi mentioned in his with interview
with Accountants Today 2012, that the Malaysian convergence success will only be
determined as the full cycle of the year 2012 completes. Besides, Companies Act
1965 and Financial reporting Act 1997 are the two most important acts pertaining
financial statements reporting in Malaysia. The directors are supposed to be
responsible for the preparation and presentation of a true and fair set of financial
statements of reporting entities and these directors should be aware and be sure
that their entities are IFRS ready.

34

III. OVER-ALL CONCLUSION AND RECOMMENDATION

This synthesis paper provides evidence of the different issues and
challenges faced by different countries in the adoption of IFRS. In fact convergence
with IFRS is not just a technical exercise but also involves an overall change not
only the perspective but also the very objective of accounting in the country.

The researcher points out certain key areas that require close attention
while dealing with conversion to IFRS. It has to be realized that this conversion is not
just the any technical exercise. Even after the later gets introduced, the preparers,
users and auditors will continue to encounter practical implementation challenges.

Based on the seven studies, I conclude that efficient compliance and

enforcement of standards; complexity of adoption; ethical environment; cost of
conversion; and training of accountants and relevant professionals, posed a great
challenge to the countries in the convergence of IFRS.

One of the components of sound corporate governance is to have a

transparent ethical environment. It ensures the protection of the interested and
related parties who have financial interests with the entity through producing a
reliable and relevant set of financial statements.

In addition, since IFRS is more on principles, it requires a thorough

understanding of the conceptual framework or the underlying principles. A shift from

35

an accounting standard to IFRS requires funding for better implementation in which

the finance personnel, employees, accountants and auditors involved must be
trained and knowledgeable to the new accounting disclosures and standards of
different transactions.

It is common that most, if not all, countries suffered a divergence between

its local GAAP and IFRS because of countrys laws and regulations, specially the tax
laws, must be in congruent with the accounting standards. To facilitate this transition,
government authorities played a big role in it.

The

rapid

development

of

global

financial

markets

demands

harmonization of accounting standards and approaches around the world. Hence,

accounting profession has been facing the pressure of globalization and
continuously seeking the way to present financial situations using unique accounting
procedures which can be understood by the entire business community. IFRS
answers the need of different countries to have the same financial language in order
to established fusion that will lead these countries to cooperate each other.

36

IV. REFERENCES
Nyor, T. (2012, June 2). Challenges of Converging to IFRS in Nigeria. International
Journal of Business & Information Technology, 2, 26 31
Hanefah, H. and Singh, J. (2012). Convergence Towards IFRS in Malaysia: Issues,
Challenges and Opportunities. International Journal of Business, Economics and
Law, 1, 43-47

UNCTAD team. Practical implementation of international financial reporting

standards: Lessons learned, page 15-142.

UNCTAD secretariat. REVIEW OF PRACTICAL IMPLEMENTATION ISSUES OF

INTERNATIONAL

FINANCIAL

REPORTING

STANDARDS.

United

Nations

Conference on Trade and Development, 1-13.

http://articles.economictimes.indiatimes.com/2014-03-11/news/48118262_1_ifrs
iasb-revenue-recognition-standard

http://www.iasplus.com/en/jurisdictions/asia/pakistan
http://www.bloomerg.com

37