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As Ethiopia continues to integrate with global markets, financial standards become more significant. One accounting standard that is often recognized as the global gold standard is the International Financial Reporting Standards (IFRS). IFRS refers to a single set of globally recognized standards and interpretations applicable to general purpose financial statements and other financial reporting of all profit oriented entities.
IFRS standards prescribe:
- The items that should be recognized as assets, liabilities, income and expenses;
- How to measure those items;
- How to present them in a set of financial statements and the related disclosures about those items.
The adoption of IFRS will result in financial reports for stakeholders that are understandable, reliable and relevant to users and transparent and comparable to other companies. IFRS will also increase the efficiency of contracting with other firms and lenders, and in the long term, such standards make for a more efficient capital market.
Around the globe, 120 nations permit or require IFRS for domestic listed companies, while close to 90 countries have fully conformed with IFRS as proclaimed by the IASB (International Accounting Standard Board). The main objective of IFRS is to make the diverse business language used around the world consistent. However, its adoption and implementation bring opportunities and challenges to both businesses and governments.
IFRS Status in Ethiopia
Previously in Ethiopia, there was not a single accounting standard in use. Businesses had to rely on different regulations and their own internal accounting policies for the preparation of financial reporting. This impacted comparability and reliability of the reporting used by various stakeholders. The government of Ethiopia issued a proclamation called “Financial Report Proclamation of Ethiopia: 847/2014” and Council of Ministers Regulation 332/2014 instructing adoption of IFRS and establishing AABE (Accounting and Audit Board of Ethiopia). AABE is responsible for guiding and dictating the implementation of IFRS as of December 2014.The IFRS implementation roadmap has three phases which started in 2018. Since then, a number of large companies have adopted IFRS in their reporting process while the majority of SMEs and some public interest entities have not been able to adopt the standard. As a result, the government has delayed the implementation enforceability schedule and recently announced a new threshold for the adoption of the full IFRS (listing all applicable rulings or codification to be strictly followed by adopters) and also sectioning out IFRS rules for SMEs, which meet the definition below:
Threshold 1: Minimum criteria to adopt Full IFRS: Entities that meet two of the below four criteria should start adopting the standard by 2023:
- Annual turnover exceeding 300M ETB
- Total employees exceeding 200
- Total asset exceeding 200M ETB
- Total liability exceeding 200M ETB
Threshold 2: Minimum criteria to adopt IFRS for SMEs: Entities that meet two of the below four criteria should start adopting the standards by 2024:
- Annual turnover exceeding 20M ETB
- Total employees exceeding 20
- Total asset exceeding 20M ETB
- Total liability exceeding 20M ETB
Tips for IFRS implementation
Here are a few tips to get started and advance IFRS implementation in your company:
- Dedicate an expert or team who will be leading IFRS research or engagement.
- Determine if your country’s IFRS rulings apply to your company or not.
- If it applies, come up with an IFRS implementation plan, including making a decision on in house adoption or seeking assistance from an external party or consultant.
- Identify the list of all relevant IFRS and IAS standards for effective transition to IFRS.
- Develop the relevant accounting policy for your company.
- Choose an appropriate costing model: Costing model or revaluation model.
- Analyze your existing accounting process and identify deviations with IFRS rulings.
Conversely, in Uganda and Rwanda, IFRS is much more widely adopted. Below is the IFRS status of both countries.
Some Regional Comparisons
Uganda has been using IFRS for more than 20 years. In 1998, the Council of the ICPAU (Institute of Certified Public Accountants of Uganda) adopted IFRS (then known as International Accounting Standards (IAS)). The ICPAU is mandated by the Accountants Act, 2013, to regulate and maintain the standards of accountancy in Uganda. In Uganda:
- IFRS standards are required for listed companies, financial institutions and government-invested companies.
- IFRS standards are required for listings by foreign companies.
- Uganda has adopted the IFRS for SMEs standard without any modifications.
- IFRS for SMEs standards are permitted, although some private companies with state investments are required to use full IFRS standards.
- The IFRS for SMEs was implemented for financial statements covering periods beginning on or after January 1, 2010.
For nearly 15 years, Rwanda has shown a public commitment to move towards a single set of high quality accounting standards by issuing a law requiring all companies to use International Accounting Standards (IAS). Law number 11/2008 of 06/05/2008 established the Institute of Certified Public Accountants of Rwanda (the ICPAR Law) on August 1, 2008. To summarize:
- Rwanda has adopted both full IFRS and the IFRS for SMEs.
- Domestic companies whose securities trade in a public market are required to use IFRS in their consolidated financial statements.
- Foreign companies whose securities trade in a public market are required to use IFRS in their consolidated financial statements.
- IFRS for SMEs is required for all SMEs.
- IFRS for SMEs is permitted for SMEs that are not companies (such as proprietorships and partnerships).
- There are no other local accounting standards.
Questions to help you plan
Below are some common questions others have faced when implementing IFRS. These have been shared by early adopters and are listed below. Be sure to review these challenges before you develop your IFRS transition plan:
- Should we make the transition to IFRS in house or or hire a professional? Who should I hire? Do the necessary research before deciding and take into account the cost, size, complexity, talent gap of the business.
- Is the IFRS implementation a finance role only? Many believe so, but don’t undermine the significance of engineering, HR, legal, marketing, procurement and leadership on key deliverables like estimates, valuation, severance, legal claim, inventory impairment and others.
- Do we keep all original receipts for purchase of assets? Yes. These are needed for valuation purposes.
- Do we have all HR related documents like leave, severance properly accounted for, documented or updated in a timely manner?
- Are your key finance team members well trained or informed in the IFRS rulings or modifications?
- Do I need to re-evaluate all assets to be IFRS compliant? There is a tendency to have everything re-evaluated but you should consult an expert as this might not be the case depending on the circumstances of your business.
- Beware of unrealistic valuation reports as many have reported that inaccurate valuation has led to reporting huge profit with its own tax implications.
- Some IFRS standards are hard to implement in some contexts and a thorough review is needed. For instance, IFRS 9 – Financial Instrument. Hense take time to understand details as relates to your business.
Sources:
- AABE - Accounting and Audit Board of Ethiopia (http://www.aabe.gov.et/) - The information about IFRS standards in Ethiopia was derived from interviews with AABE staff members.
Disclaimer: This blog article is strictly for informational purposes only and does not constitute accounting, tax or legal advice. Readers of this blog should consult their professional advisors to obtain advice with respect to IFRS implementation and any particular accounting or tax matter discussed herein. The information in this blog is provided “as-is” and no representation is made that the information is accurate or complete, nor should it be relied upon as such. Information in this blog may not constitute the most up-to-date accounting or other information. All liability with respect to actions taken or not taken based on the contents of this blog are hereby expressly disclaimed.
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