IFRS and Nigerian Manufacturers – The Countdown to January 1, 2012 is Underway
As with all other business sectors, Nigerian manufacturers need to get ready for the transition to IFRS. What are the some of the critical challenges that manufacturers may face? The challenges can arise in the following areas:
- Potential Financial Impacts
- Financial Statement Disclosures
- Financial Compliance
- Business Metrics, and
- Systems and Data Changes (Potentially)
You can read more about each one of these impact areas in the details below.
In order to assist Nigerian manufacturers we have conducted a number of seminars and workshops over the period from November 2010 through April 2011. The feedback from industry has been that a fresh approach to moving companies from local GAAP (SAS) to IFRS needs to be provided to the Nigerian marketplace to address the concerns about limited time and excessive traditional consulting costs. We are very pleased to have announced in May 2011 a special:
“IFRS Transition Program for Nigerian Manufacturers”
To view the program announcement ad from The Guardian newspaper on 12 May 2011 – please Click Here
The program provides an optimal approach for Nigerian Manufacturers to dramatically reduce IFRS transition costs while maintaining a high quality approach to building an IFRS compliant organisation.
Program enrolment is limited and registration closes as of 3 June, 2011. The program commences the week of 6 June 2011.
For more information please contact George Agu of ActivEdge Technologies at georgeagu@activedgetechnologies.com or call George at 0803 958 2958.
Potential IFRS Changes for the Nigerian Manufacturing Sector
The transition from existing accounting standards to a set of new standards is more than just a technical accounting exercise with quantitative/financial impacts. The transition will affect systems and data, financial reporting processes and outputs, financial compliance controls and certification activities, business metrics and performance management systems, extent and depth of financial disclosures, staff education and training programs, as well as financial measurements.
While the exact magnitude of the impacts is unique for each manufacturer some highlights of anticipated changes will be in the following areas:
1. Potential Financial impacts – Revenue, Fixed Assets, Investment Properties, Financial Instruments and more
- Revenue – The IFRS standard for revenue (IAS 18) will challenge Nigerian manufacturers to review contractual terms, evaluate issues such as “when risk and reward” has been transferred from manufacturers to customer, validation of physical control of goods considerations, and much more.
- Financial Instruments – There is significant effort underway by the IASB to strengthen and simplify critical elements of IAS 39 - Financial Instruments: Recognition and Measurement by the end of 2011. At present a wide variety of differences exist around classification of instruments, more transparency with respect to impairment calculations and disclosures, and simplification of hedge accounting while improving disclosures.
- Investment Properties – IFRS provides some significant change in this area including changes in the approach to fair value and deemed cost. Properties under lease can also be considered as investment properties in certain situations. The need to consider valuation methods will also be a consideration.
- Provisions – IFRS may trigger provision obligations sooner in many cases than under SAS due to the “more likely than not” principle. Contracts and disputes will need to be evaluated carefully.
- Property, Plant & Equipment – The need to consider componentisation of fixed assets into various useful life categories and related depreciation calculations is an area of change that will impact many companies. Ease-of-access and detailed transaction/classification data at the fixed assets sub-ledger level can often be a significant issue.
- And more – Many other areas are affected including impairment, business combinations, joint ventures, employee benefits, financial statement presentation requirements, and more.
2. Disclosures – A New Level of Discussion
The principles-based nature of IFRS can trigger the need for enhanced explanations to provide readers’ with sufficient information to effectively understand your company’s financial statements. This is particularly acute in the 2011 year of transition from SAS to IFRS as the notes will need to be increased to discuss adjustments between the two different accounting standards. The legal implications of greater notes disclosure will also be an important consideration in the move to IFRS.
3. Financial Compliance – Impact on Internal Controls over Financial Reporting and more
Whenever there is a change of accounting policies, and a ripple through to supporting processes and systems, there is a need to evaluate the impact on financial compliance and control activities. IFRS will bring significant changes in some sub-system areas, new financial reporting formats, new chart of account considerations, new accounting concepts that will need to be implemented in the field, and so on. In addition, the need to provide comparative reporting with dual IFRS and SAS reporting for a one year look-back period will require additional controls to ensure that accuracy of transactions.
4. Business Metrics – Need to Review Impacts on Compensation and Contractual Obligations
Changes in accounting policies and resulting financial metrics may have a significant impact on various contractual obligations – both internally and externally. Business and financial metrics may change under IFRS and management and staff compensation plans should be examined for any adverse effects. External obligations, such as banking debt covenants, may also be impacted by IFRS and need to be managed proactively.
5. Systems and Data – Transaction Details and Reporting Structures May Change
The lead times required to change Enterprise Resource Planning (ERP) systems can range from months to years. The adoption of IFRS is likely to impact not only reporting structures but how individual transactions are captured and processed. Typical areas of IT impact include as fixed asset sub-ledgers, contract management and lease tracking systems, treasury systems, tracking of engineering and developments costs, and corporate and segment reporting. In addition, because of the need to provide comparative reporting between Nigerian GAAP (SAS) and IFRS, accounting and reporting systems will need to provide parallel reporting capabilities during the 2011 transition period.