The Accounting and Auditing Board of Ethiopia (AABE) aabe.et

1. The Accounting and Auditing Board of Ethiopia (AABE) www.aabe.gov.et International Financial Reporting Standards (IFRS) Implementation Road Map DawitMengistie June, 2017 Addis Ababa, Ethiopia

2. The Ethiopian Regulatory Framework • Financial Reporting Proclamation 847/2014 • Council of Ministers Regulation 332/2014 • Directives to be issued by AABE

3. IFRSAdoption Road Map

4. IFRS - What is it? • IFRSs are a single set of accounting standards which specify how certain transactions and other events should be reported in financial statements. • The main purpose of these standards is to maintain stability and transparency throughout the financial world.

5. Financial Reporting: Why is it Important? • No transparency => no trust • No trust => no credit • No credit => no investment • No investment => no growth

6. Background • Scope of IFRS Conversion – Conversion will touch almost every aspect of the company. Its impact is profound! • And conversion to IFRS does not end with the publication of the first set of IFRS compliant financial statements. • Necessary preparation including changes in accounting policy, IT system, process, etc. must precede conversion to IFRS • Implementation of ISAs – immediate and no road map needed.

7. Policies and procedures • Finance function efficiency • Finance and Operations transformation • Impact of accounting on taxation considered irrelevant by IASB • Impact on tax strategies • Data collection • Structured products • Inland Revenue • Not just Finance • Front Office, research, credit • Non-executives • Access to knowledge and tools Control environment • Covenant renegotiation • Valuation of earn outs • Demand for valuations • Impact of consolidation of SPEs • Clients’ appetite for existing structured financial products • Viability of transactions due to treatment on own balance sheet • Ability to assess client suitability and credit • Fair value • Debt vs. equity • Review of hedging strategies • Hedging documentation • Day One profit recognition • Observability of market prices • Embedded derivatives • Reserving policies • SPEs Training and knowledge Tax planning Business and franchise Financial instruments Business impact of IFRS Oversight and project management • Fragmented processes/ systems resulting from IFRS tactical solutions • Data capture • Hedging • Loan provisions • Segmental reporting • Financial Statements presentation Processes and systems • Complex project management • Audit Committee involvement • Non-executive understanding and oversight • Resources and budgets Management information Investor relations Employee benefits • Early education • Underlying business performance • Volatility of earnings and equity • Hedging strategies • Re-benchmarking relative to global peer group • Key performance indicators • Management reporting • Underlying infrastructure • Reconciliation to reported results • IFRS alignment • Share based payments • Pension arrangements and funding • Retirement benefit costs • Alignment of remuneration and bonuses

8. Accounting & Auditing as part of Governance • Sound governance and effective institutions are essential to achieve shared prosperity and sustained reductions in poverty. • Public accountability and proper governance contribute to better delivery of public services, support competition and growth, including through cooperation with private sector. • Quality information helps the government properly analyzerisksand play their essential roles in resolving the complex and interconnected challenges in variety of sectors, including in health, social protection and education.

10. Accounting & Auditing: Key Development Benefits

11. Users of Accounting & Financial Reporting

12. Financial Reporting: Multiple Users and Uses

13. High-Quality Financial Reporting: 3 Key Dimensions

14. Standards are Just one Piece of a Complicated Puzzle

15. Financial Reporting is not just about the Standards

16. All supporting pillars are important and need to be strengthened

17. TRUST

18. Why Public Oversight? • The modern movement towards public oversight of the auditing profession began with the wave of corporate financial reporting scandals starting about 15 years ago in the U.S., Europe, and Japan. • Over the last decade,beginning with the Sarbanes-Oxley Act of 2002, a worldwide consensus has developed that auditors cannot adequately regulate themselves, mainly because they do not have sufficient incentive to do so: • Conflict of interest built into the auditor-client relationship • Market may not adequately recognize and reward audit quality • Unregulated competition may be based on price or willingness to accommodate, rather than on audit quality

19. Ensuring Compliance with Reporting Obligations

20. Ensuring Compliance with Reporting Obligations -Challenges • Making the reporting available to the public • Powers of the regulator/supervisor • To investigate • To remedy or sanction • Organization of the regulator • Sufficient resources • Cooperation between regulators • Market discipline • Suitability of the standards

21. Suitability of the Standards - Financial Reporting

22. Statement of Adoption • Ethiopia adopt IFRS as issued by the IASB. • A three phase transition over a period of three years for reporting entities • Effective and meaningful adoption may be derailed if any of the milestones and timelines is ignored. • “voluntary” adoption before the mandatory date permitted. BUT What Does ROSC AA 2007 Review ResultShowed ??

23. ROSC 2007 Review Result of FSs • focused on issues of presentation and disclosure only (not recognition and measurement issues) • sample of 35 financial statements from financial institutions, public enterprises, share companies, etc. • review result revealed that there were significant differences between the actual accounting practices and IFRS requirements • conclusion the actual accounting practice in Ethiopia differ from IFRS.

24. Voluntary Adoption • reporting entities are not allowed to make such unreserved reference to IFRS unless they fully comply with all the requirements of the IFRSs applicable to their circumstances. • reference to IFRS by reporting entities prior to the mandatory requirement date shall be considered as “voluntary” adoption and treated accordingly. • such claim by reporting entities and their auditors shall be scrutinised strictly and any infraction shall be dealt with firmly.

25. Mandatory Adoption of IFRS • PHASE 1: Significant Public Interest Entities - Financial Institutions and public enterprises owned by Federal or Regional Governments • Hamle 1, 2009 the date for adoption of IFRS. • PHASE 2: Other Public Interest Entities (ECX member companies and reporting entities that meet PIE quantitative thresholds) and IPSAs for Charities and Societies • Hamle 1, 2010 the date for adoption of IFRS • PHASE 3: Small and Medium-sized Entities • Hamle 1, 2011 the date for adoption of IFRS

26. IFRS Competency Reporting Date: SMEs IFRS Implementation Roadmap Reporting Date: Other PIEs 20011/12 Reporting Date: Significant PIEs Transition Date: SMEs 2010/11 • IFRS reporting by other SMEs • Audit procedures • Stakeholders communications • Compliance monitoring for Other PIEs Transition Date: Other PIEs 2009/10 • IFRS/Quarterly reporting by other PIEs • Audit procedures • Stakeholders communications • Compliance monitoring for sig. PIEs • SMEs prepare opening SFP and comparative figs • Stakeholders communications • Dry Runs for SMEs Transition Date: Significant PIEs 2008/09 • IFRS/Quarterly reporting by sig. PIEs • Audit procedures • Stakeholders communications • Other PIE’s prepare opening SFP & comparative figs • Dry Runs for other PIEs • SME’s commence transition planning 2007/08 • Transition adjustments • Prepare IFRS opening SFP • Dry Runs for “significant PIEs” • Prepare comparative figures • Awareness • Assessment • Amendment of laws, regulation and directives • Training • Planning/impact analysis • Transition adjustments/ opening BS for sig. PIEs Alignment with other initiatives and training for appropriate personnel Realisation and standardisation of statutory reporting 2011/12 2010/11 2009/10 2008/09 2007/08

27. Disclosure Requirements by REs • Prior disclosure of the effects of IFRS adoption starting from two years prior to adoption • Preparation plans for IFRS adoption and the progress thereof • Different accounting treatments that are expected to have a great impact on the entity • Quantified information about anticipated effects on financial position & performance • Changes in the consolidation scope - increase or decrease in the no of subsidiaries to be consolidated or description and reason of why it is not possible to provide such information.

28. Monitoring Preparation for IFRS Adoption • During the preparation period AABE undertakes survey of reporting entities that are subject to mandatory IFRS application • Survey results will be utilized to plan and execute appropriate intervention measures to facilitate timely adoption.

29. Reporting Requirement on Audit Firms • audit firms to prepare and submit business reports starting from 2008/09 describing the status of their own preparation for the adoption of IFRS by their clients. • E.g. teams and staff members dedicated to the firm's preparation for IFRS adoption, education sessions • AABE will analyse the reports and examine how firms are preparing for the adoption of IFRS. • AABE will direct the firms that lacked sufficient preparation to place adequate efforts in the preparation • Result of report examination will be used as input in the selection of audit firms for quality review

30. IFRS Roadmap Implementation Task Force • A joint public and private-sector task force for efficient implementation of the Roadmap • Goal of TF- to deal with issues arising from adoption and to support the stabilisation of the adoption process. • Focus of TF - identifying and providing recommendations for the amendment of the accounting infrastructure including the related laws, regulations and directives. • the Task Force may establish different working groups, as required, to deal with specialist areas

31. Activities of the IFRS Roadmap Implementation Task Force during Preparation Stages • Identify and submit recommendation for amendment of Laws and Regulations contradicting FRP. • Tax Law • Revision of the regulatory requirements for financial Institutions • Clarifying regulatory requirements from the pronouncement of a Standard

32. Preparatory work for the Implementation of the Roadmap • Public sensitization and awareness • Training and Education • AABE to organise a series of workshops and training programmes • IFRS Training Centre • Creation of a dedicated Website

33. IFRS Implementation Challenges and Lessons Learned

34. Not an Easy TASK • there should be no doubt that conversion to IFRSs is a huge task and a big challenge; • practical challenges that may be faced as a result of implementing the IFRS need to be identified and addressed in order to benefit fully from the introduction of IFRS • adequate preparation & planning, both at a national and firm level is the critical success factor; • its profound impact requires a great deal of decisiveness and commitment;

35. Practical Challenges • Potential knowledge shortfall, • Accounting Education and training, • Limited Training Resources, • Tax system effect, • Legal system effect, • Enforcement and Compliance mechanism,

36. Potential knowledge shortfall (Level of Awareness) • the transition plan to IFRS and its implications for preparers and users of FS, regulators, educators and other stakeholders need to be effectively coordinated and communicated. • do a lot of sensitisation and awareness raising on the potential impact, communicating the temporary impact of the transition on business performance and financial position.

37. Accounting Education and Training – Capacity-related issues • inadequate technical capacity among preparers and users of FS, auditors and regulatory authorities • Small number of accountants and auditors who are technically competent in implementing IFRS. • further compounded by short period given for the actual implementation - not long enough to train a good number of competent professionals. • further compounded by the wide gap between accounting education and accounting practice • Weak (none existing) professional accountancy bodies

38. Limited Training Resources • Professional accountants are required to ensure successful implementation of IFRS. • Along with these accountants, government officials, financial analysts, auditors, tax practitioners, regulators, lecturers, preparers of financial statements and information officers are all responsible for smooth adoption process. • Training materials (and trainers) on IFRSs are not readily available at affordable costs in Ethiopia to train such a large group which poses a great challenge to IFRS adoption.

39. Tax System Effect/ Tax Reporting • Tax considerations associated with the conversion to IFRS are complex. • IFRS conversion normally calls for a detailed review of tax laws and tax administration. • Specific taxation rules would have to be redefined to accommodate these adjustments. • e.g., loss relief period may need to be reviewed because transition adjustments may result in huge losses that may not be recoverable within the allowed periods. • Accounting issues that may present significant tax burden on adoption of IFRS, include determination of Impairment, Loan loss provisioning and Investment in Financial Instruments.

40. Legal System Effect • Inconsistencies may exist between the Financial Reporting Proclamation, and other existing laws that provide some guidelines on preparation of financial statements. • IFRS does not recognize the presence of these laws and the accountants have to follow the IFRS fully with no overriding provisions from these laws. • law makers have to make necessary amendments to ensure a smooth transition to IFRS.

41. Strategies to address the challenges • Nationwide intensive capacity building program to facilitate and sustain the process of adoption is needed as early as possible. (IFRS Academy) • Raise awareness of professionals, regulators and preparers to improve the knowledge gap. • Improve the legal framework of accounting and auditing to protect the public interest. Identify inconsistencies and propose amendment of the various laws and regulations. • Strengthen the institutional Capacity of AABE to monitor and enforce accounting and auditing standards and codes.

42. Strategies to address the challenges • Support the establishment of strong PABs. • Strengthen professional education and training. • Develop internationally recognised national professional qualification (CPA(E)) • Enforce CPD requirements • Facilitate the revision of university accounting curricula to enable students to gain exposure to practical IFRS application. • Take measures to strengthen capacity of regulators to enable them to effectively deal with accounting and financial reporting practices of the regulated entities. • Work with other regulators to identify and achieve regulatory synergies

43. Important IFRS related questions to consider Four Areas: • Initial considerations • Financial reporting considerations • Conversion project considerations • Nonfinancial reporting considerations

44. Key Questions – Initial consideration • Should we be first mover (adopt voluntarily)? • How can our organization take advantage of opportunities presented by the conversion to IFRS? • What are the most significant risks associated with converting to IFRS? • How will converting to IFRS affect our stakeholders and what should be done to manage their expectations?

45. Key Questions – Financial Reporting considerations • How will converting to IFRS impact external financial reporting? • What will be the impact on management reporting? • How will management address the need for comparative financial information prepared under both the current system and IFRS? • What are competitors and industry peers doing? • Has the Project Team/management considered that PIEs are required to apply IFRS throughout their group structures? • How will IFRS impact tax reporting and tax filings?

46. Key Questions - Conversion project considerations • What will converting to IFRS mean for the org’n? • How do we plan to approach the conversion to IFRS and how ready are we to do this? • What are the key areas that need to be addressed during the conversion? • What can we learn from the conversion experiences of others? • What is the timeline for our IFRS conversion project, what resources will be required and how much will it cost?

47. Key Questions – Nonfinancial Reporting considerations • Other than financial reporting, which other business areas will be affected by the conversion? • Can our current IT systems handle the business’ revised data collection requirements under IFRS? • Other than financial reporting integrity, what are the other implications for boards of directors? • What IFRS training programs are management planning to provide to finance personnel? • How should we use a third party advisor? • What is the role of our independent auditor?

48. A Holistic Approach to IFRS Conversion Project Management? • Planning and implementing IFRS conversion ensuring that all linkages and dependencies are established between accounting and reporting, systems and processes, people and the business. • The conversion needs to effectively address the challenges and opportunities of adopting IFRS to all aspects of your business.