IFRS PROVISION FOR FINANCIAL INSTITUTIONS
As the forces of globalization prompt more and more countries to open their doors to foreign investments and as businesses expand across borders, Banks recognize the benefits of having a commonly understood financial reporting framework supported by strong globally accepted accounting standards.
In addition, the regulatory authorities namely, Central Bank of Nigeria and Security & Exchange Commission (CBN & SEC) have also adopted this date as the compliance date by deposit money banks and have issued relevant circulars to this effect.
IFRS are a set of international accounting standards issued by the International Accounting Standards Boards (IASB). The adoption of IFRS is aimed at:
Increasing quality and efficiency of financial reporting •
Providing financial statements that will engender investors’ confidence (due to the robust disclosure requirements of IFRS). •
Facilitating cross-border stock exchange listing.
IFRS adoption is not just an accounting exercise and the conversion is expected to affect our processes, systems, people and other areas of our business.
The IASB describes its pronouncements under the label "International Financial Reporting Standards", though it continues to recognise (accept as legitimate and adopted by them) the IAS issued by the defunct IASC.
With the adoption of IFRS in Nigeria, a lot stands to be gained from the seemingly distressed global economy. With successful implementation of IFRS, Nigeria will benefit economically by receiving a boost on foreign direct investments (FDIs).
In 2010, the Central Bank of Nigeria (CBN), in a bid to integrate the banking system into the global best practices in financial reporting and disclosure, commenced partial adoption of the International Financial Reporting Standards (IFRS) in the Nigerian banking system. The move, according to the CBN, was to enhance market discipline and reduce uncertainties which limit the risk of unwarranted contagion.
The basic requirement of IFRS 1 on the adoption of IFRS as at the transition date is as follows: Recognition of all assets and liabilities whose recognition is required by IFRSs; De-recognition of items as assets or liabilities if IFRSs do not permit such recognition; Reclassification of items that it recognised in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with IFRSs; and Application of IFRSs in measuring all recognized assets and liabilities.
The basics of the application of IFRS in the preparation and presentation of 1st IFRS financial statements is to retrospectively apply the relevant IFRSs to all transactions and balances as at the transition date.
SPECIFIC ISSUES FOR FINANCIAL INSTITUTIONS
1. Measurement of Unquoted equity classified as Available for sale assets: Financial Assets classified as Available for sale are to be measured at fair value and fair value differences accounted for in other comprehensive income. The challenge with unquoted equity is that they are not quoted in an exchange and as such the fair values of the instruments are not easily determinable from the market except valuation techniques are used to estimate the values of such unquoted instruments. The standards allows the use of income approach like the discounted cash flow methods, market approach like price multiple methods and other present value methods.
However, the standard does not allow the use of net asset method which financial institutions have been using under NGAAP.
Financial institution would have to train staff and develop competencies in this area especially for investment entities.
2. Ability of the system to determine effective interest rate of financial instruments carried at amortized cost: Banks are known to charge certain fees on loans like processing fees, monitoring fees,...
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