the accounting and auditing board of ethiopia (aabe) … · 2017. 6. 22. · aabe will analyse the...

The Accounting and Auditing Board of

Ethiopia (AABE)

www.aabe.gov.et International Public Sector Accounting

Standards (IPSAS)

Dawit Mengistie

June, 2017

Addis Ababa, Ethiopia

Presentation outline

Background

– The what and why of Financial reporting?

– Regulatory framework in Ethiopia

IPSAS Implementation Road Map

AABE Five Year Strategy

The Ethiopian Regulatory Framework

Financial Reporting Proclamation 847/2014

Council of Ministers Regulation 332/2014

Directives to be issued by AABE

IPSAS

Adoption Road Map

Overview of IPSAS

IPSAS is a globally-accepted set of accounting standards and interpretations established by:

– International Public Sector Accounting Standards Board (IPSASB)

IPSAS assist preparers of financial statements produce and present:

– high quality

– transparent, and

– comparable financial information

IPSASs are designed for use by Public sector including Non-profit oriented entities.

IPSASs are principle based

Background Scope of IPSAS Conversion – Conversion will touch

almost every aspect of the organization. Its impact is

profound!

And conversion to IPSAS does not end with the

publication of the first set of IPSAS compliant

financial statements.

Necessary preparation including changes in

accounting policy, IT system, process, etc. must

precede conversion to IPSAS

Implementation of ISAs – immediate and no road

map needed.

EXAMPLES OF IMPACT OF CONVERSION TO IFRS ON REPORTING ENTIIES.docx

EXAMPLES OF IMPACT OF CONVERSION TO IFRS ON REPORTING ENTIIES.docx

• Early education

• Underlying business performance

• Volatility of earnings and equity

• Hedging strategies

• Re-benchmarking relative to global peer group

Management information

Employee benefits

Tax planning

Financial instruments

Control environment

Operations

Oversight and project

management

Training and knowledge

Processes and systems

doners relations

Business impact of

IPSAS

• Key performance indicators

• Management reporting

• Underlying infrastructure

• Reconciliation to reported results

• IPSAS alignment

• Share based payments

• Pension arrangements and funding

• Retirement benefit costs

• Alignment of remuneration and bonuses

• Impact of accounting on taxation considered irrelevant by IPSASB

• Impact on tax strategies

• Data collection

• Structured products

• Inland Revenue

• Fair value

• Debt vs. equity

• Review of hedging strategies

• Hedging documentation

• Day One profit recognition

• Observability of market prices

• Embedded derivatives

• Reserving policies

• SPEs

• Policies and procedures

• Finance function efficiency

• Finance and Operations transformation

• 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

• Fragmented processes/ systems resulting from IPSAS tactical solutions

• Data capture

• Hedging

• Loan provisions

• Segmental reporting

• Financial Statements presentation

• Not just Finance

• Front Office, research, credit

• Non-executives

• Access to knowledge and tools

• Complex project management

• Audit Committee involvement

• Non-executive understanding and oversight

• Resources and budgets

Statement of Adoption

Ethiopia adopt IPSAS as issued by the International Public Sector Accounting Standards Board (IPSASB).

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 Result Showed ??

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/IPSAS requirements

conclusion the actual accounting practice in Ethiopia differ from IFRS/IPSAS.

IPSAS - What is it?

IPSASs 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.

Financial Reporting: Why is it Important?

No transparency => no trust

No trust => no grant/donation

No grant/donation=> no social service

No social service => no community

development

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 public service entities.

Quality information helps the government properly analyse risks and play their essential roles in resolving the complex and interconnected challenges in variety of sectors, including in health, social protection and education.

Users of Accounting & Financial Reporting

Donors

High-Quality Financial Reporting: 3 Key Dimensions

Standards are Just one Piece of a Complicated Puzzle

Financial Reporting is not just about the Standards

All supporting pillars are important and need to be strengthened

Ensuring Compliance with Reporting Obligations

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

Ensuring Compliance with Reporting Obligations - Monitoring audits

Monitoring audits

Who will guard the guardians?

Public oversight

– Monitoring and inspections

– Investigations

– Sanctions

The Regulator

Independent

Competent

Transparent

Preconditions for Effective Regulation

Comprehensive and well defined accounting and auditing principles and standards.

Legal requirements for the preparation and publication of FS according to those principles and standards.

Enforcement system for preparers of FS to ensure compliance with accounting standards

Corporate governance arrangements and practices that support high-quality corporate reporting and auditing practice, and

Effective educational and training arrangements for accountants and auditors.

Voluntary Adoption reporting entities are not allowed to make

such unreserved reference to IPSAS unless they fully comply with all the requirements of the IPSASs applicable to their circumstances.

reference to IPSAS 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.

Mandatory Adoption of IFRS and IPSAS

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 IPSAS

PHASE 3: Small and Medium-sized Entities Hamle 1, 2011 the date for adoption of IFRS-SME

2007/08

2008/09

2009/10

2010/11

20011/12

Transition Date: Significant PIEs

Transition Date: Other PIEs

Reporting Date: Significant PIEs

Transition Date: SMEs

Reporting Date: Other PIEs

Reporting Date: SMEs

•Awareness

•Assessment •Amendment of laws, regulation and directives

•Training

•Planning/impact analysis

•Transition adjustments/ opening BS for sig. PIEs

•Transition adjustments

•Prepare IFRS opening SFP

•Dry Runs for “significant PIEs”

•Prepare comparative figures

•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

•IPSAS/Quarterly reporting by other PIEs

•Audit procedures


•Compliance monitoring for sig. PIEs

•SMEs prepare opening SFP and comparative figs


•Dry Runs for SMEs

•IFRS reporting by other SMEs

•Audit procedures


•Compliance monitoring for Other PIEs

Alignment with other initiatives and training for appropriate personnel

Realisation and standardisation of statutory reporting

IPSA

S C

om

pet

en

cy

2007/08

2008/09

2009/10

2010/11

2011/12

IPSAS Implementation

Roadmap

Disclosure Requirements by REs

Prior disclosure of the effects of IPSAS adoption starting from two years prior to adoption

– Preparation plans for IPSAS 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 branches to be consolidated or

description and reason of why it is not possible to

provide such information.

Monitoring Preparation for

IFRS/IPSAS Adoption

• During the preparation period AABE

undertakes survey of reporting entities

that are subject to mandatory IPSAS

application

• Survey results will be utilized to plan

and execute appropriate intervention

measures to facilitate timely adoption.

Reporting Requirement on Audit organizations

• audit organizations to prepare and submit business reports starting from 2008/09 describing the status of their own preparation for the adoption of IPSAS by their clients.

• E.g. teams and staff members dedicated to the firm's preparation for IPSAS adoption, education sessions

• AABE will analyse the reports and examine how organizations are preparing for the adoption of IPSAS.

• AABE will direct the organizations 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 organizations for quality review

IPSAS 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

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

Activities of the IFRS & IPSAS Roadmap Implementation Task Force during Preparation Stages

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/IPSAS Training Centre

Creation of a dedicated Website

IPSAS Implementation

Challenges and Lessons Learned

Not an Easy TASK

there should be no doubt that conversion to IPSASs is a big task and challenging;

practical challenges that may be faced as a result of implementing the IPSAS need to be identified and addressed in order to benefit fully from the introduction of IPSAS

adequate preparation & planning, both at a national and organization level is the critical success factor;

its profound impact requires a great deal of decisiveness and commitment;

Practical Challenges

1. Potential knowledge shortfall,

2. Accounting Education and training,

3. Limited Training Resources,

4. Tax system effect,

5. Legal system effect,

6. Enforcement and Compliance mechanism,

Potential knowledge shortfall (Level of Awareness)

the transition plan to IPSAS 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.

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 IPSAS.

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

Limited Training Resources

Professional accountants are required to ensure successful implementation of IPSAS.

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 IPSASs are not readily available at affordable costs in Ethiopia to train such a large group which poses a great challenge to IPSAS adoption.

Legal System Effect

Inconsistencies may exist between the Financial Reporting Proclamation, and other existing laws that provide some guidelines on preparation of financial statements.

IPSAS does not recognize the presence of these laws and the accountants have to follow the IPSAS fully with no overriding provisions from these laws.

law makers have to make necessary amendments to ensure a smooth transition to IPSAS.

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.

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 IPSAS 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

Important IPSAS related questions to consider

Four Areas:

1. Initial considerations

2. Financial reporting considerations

3. Conversion project considerations

4. Nonfinancial reporting considerations

Key Questions – Initial consideration

Should we be first mover (adopt voluntarily)?

How can our organization take advantage of opportunities presented by the conversion to IPSAS?

What are the most significant risks associated with converting to IPSAS?

How will converting to IPSAS affect our stakeholders and what should be done to manage their expectations?

Key Questions – Financial Reporting considerations

How will converting to IPSAS 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 IPSAS?

What are competitors and industry peers doing?

Has the Project Team/management considered that PIEs are required to apply IPSAS throughout their group structures?

How will IPSAS impact tax reporting and tax filings?

Key Questions - Conversion project considerations

What will converting to IPSAS mean for the org’n?

How do we plan to approach the conversion to IPSAS 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 IPSAS conversion project, what resources will be required and how much will it cost?

Key Questions – Nonfinancial Reporting considerations

Other than financial reporting, which other operational areas will be affected by the conversion?

Can our current IT systems handle the business’ revised data collection requirements under IPSAS?

Other than financial reporting integrity, what are the other implications for boards of directors?

What IPSAS 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?

A Holistic Approach to IPSAS Conversion Project Management?

Planning and implementing IPSAS conversion ensuring that all linkages and dependencies are established between accounting and reporting, systems and processes, people and operation.

The conversion needs to effectively address the challenges and opportunities of adopting IPSAS to all aspects of your business.

IPSAS

IPSAS

IPSAS

IPSAS

Accounting gap

analysis

IT/process impact

assessment

Tax impact analysis Systems/process

conversion strategy Reporting gap

analysis

Alternative

accounting

treatments Initial IPSAS

awareness

training Financial and

business impact

assessment Management

presentations

Measures to reduce

potential volatility

IPSAS project

plan and budget

IPSAS

Accounting and Reporting The first key area to tackle

It involves a diagnostic and in-depth analysis of the differences between current financial reporting framework and IPSASs

Undertaking accurate and comprehensive upfront assessment of the impact of IPSAS and the “Gap analysis” is critical success factor for the conversion.

It is essential that this is undertaken for your specific entity, even if the sectoral issues are deemed to be similar.

Systems and Processes A major effect of converting to IPSAS will be the

increased effort required throughout the org’n to capture, analyse and report new data to comply with IPSAS requirements.

Making strategic and tactical decisions relating to information systems and supporting processes early in the project helps limit unnecessary costs and risks arising from possible duplication of effort or changes in approach at a later stage.

Some entities take the opportunity of an IPSAS conversion project to streamline the existing systems and processes.

From Accounting Gaps to Information Sources

The foundation of the project is to understand the IPSAS to current reporting framework differences.

The initial analysis needs to be followed by determining the effect of those accounting gaps on internal processes, information systems and internal controls.

What the org’n need to determine is which systems and processes will need to change and translate accounting differences into technical system specifications.

One of the difficulties org’face in creating technical specifications is to understand the detailed end-to-end flow of information from the source systems to the general ledger and further to the consolidation and reporting systems.

People

The success of the project will depend on the people involved. There needs to be an emphasis on communications, engagement, training, support, and senior sponsorship, all of which are part of change management.

Training should not be underestimated and entities often don’t fully appreciate the levels of investment and resource involved in training.

Although most conversions are driven by a central team, you ultimately need to ensure the conversion project is not dependent on key individuals and that the business-as-usual operations can be performed when the project ends.

Training tends to be more successful when tailored to the specific needs of the entity.

Audit Committee/Board of Directors

Ensure that Management:

Is sensitive to the issues/timelines and has the appropriate resources and skills to conduct an IPSAS conversion

Has considered reporting implications and impacts on all areas of the business

Has a conversion plan to meet the requirements, including appropriate controls required to manage through the period of change and maintain reporting integrity

Ongoing monitoring

Roles and Responsibilities

Management

Form IPSAS Project Team

Implement and manage the conversion process by active supervision and communication with the IPSAS Project Team

Project Sponsorship


IPSAS Project Team

Formed by management to:

Manage budget, resources and timelines

Ensure compliance to IPSAS standards

Coordinate all aspects of the conversion (people, process, technology) across business units


Internal Audit

The “eyes and ears” of the Audit Committee / Board of Directors

Assess the overall project governance (e.g., risk assessment of the conversion)

On-going monitoring of the project benchmarks, deliverables and meeting of expectations

Business Process Advisors

Conduct ongoing business process, pre-implementation and post-implementation reviews to evaluate aspects of the convergence implementation (i.e., controls around key business process and systems changes)


External Auditors

Communicate with management and internal audit on risk impacts associated with changes to impacted processes and internal controls

Measure success from a financial reporting perspective


IPSAS Implementation Key Risk Areas

Financial Reporting and Disclosures

Financial and Business Processes and

Controls

Management Reporting

IT Systems

Conversion Project Management

Overall Change Management * Risk/impact assessment across each of these risk areas will vary between reporting entities and should be assessed individually.

Key risks of an IPSAS conversion project?

Vision and direction

Unresolved or uncertain strategy from the IPSAS diagnostic

Lack of clear project scope and requirements

No assessment on business impact or priority

Poorly defined critical success factors

Unclear governance and oversight

Lack of management support


Planning

Project planning function not completed in adequate

detail

Skills/resources in place inadequate for project needs

Unrealistic and incomplete timelines

Accounting policies selected not compliant with IPSAS

rules

Inadequate risk assessment and determination of

project risks


Execution

Unidentified transition issues impact critical deliverables

Poor communication between project team and end users

Insufficient business unit involvement

Conversion project interdependencies not recognized

Financial reporting disclosure requirements inaccurately or not completely identified


Business acceptance

Ineffective deployment strategy

Lack of business impact of IPSAS

Unresolved problems and disputes

Incomplete operating and maintenance information

Insufficient user satisfaction

Scale and volume of defects

No project close-out

Global sourcing conflicts


Measuring and monitoring

Ineffective project management systems

Insufficient project monitoring and reporting

Lack of continuity in project staff

Poor communication with stakeholders

Lack of control in change order process

Ineffective decision making and resolution of issues

Poor quality management and assurance plans

Changing design and scope

Lessons learned: typical pitfalls Rapid start to implementing work without a structured

assessment Time to complete and/ or resources are underestimated:

“We will just switch to IPSAS” Accounting rules are seen as “pretty similar”, but small

differences can matter a lot. Impacts of IPSAS conversion are not addressed with

stakeholders – Lack of clarity about strategies for selecting the various

accounting options – Inability to provide information on all areas impacted by

IPSAS (e.g. to analysts)

Lack of sufficient communication with auditors

Key take away Understand the IPSAS impact early in the

project lifecycle –accounting, process, people and IT

Complexities not to be underestimated –it cannot be done in isolation

Not just a finance project –adopt a holistic approach

Post conversion activities –the hard work may just be beginning –develop a sustainable approach

Questions or

Comments?

Thank you

the accounting and auditing board of ethiopia (aabe) … · 2017. 6. 22. · aabe will analyse the...

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