IFRS - War stories and beyond

Global financial markets have in the last few years become increasingly interconnected. Financial events in one part of the world can have an immediate impact in other parts of the world. In such a globalised world, it is essential to understand the financial performance of different companies in different parts of the world through a common language.  

International Financial Reporting Standards (IFRS) is a global financial reporting language used by companies in more than 100 countries. The G20 have since the financial crisis of 2008 called for a rapid move towards a single set of high quality global accounting standards. Most G20 members now require the use of IFRSs, and the remaining major economies have established plans to migrate towards the use of IFRSs.  

Banks and financial institutions play a very important role in an economy.  The financial crisis of 2008 has shown that collapse of a bank can have a wide ranging impact in an economy of a country and beyond. That is why we saw the governments of US, UK and Europe bail out some of the large banks which are even to date tax-payer funded.  We have seen numerous financial reporting issues arise from the global financial crises, with the spotlight on financial instruments. Warren Buffet, the American billionaire and investor has related derivatives to time bombs and financial weapons of mass destruction. However, if understood and used appropriately, derivatives can be very effective instruments for managing some of the risks. The G20 has called on the standard-setters to improve standards on valuation and provisioning. As a result of all this, the International Accounting Standards Board (IASB) has accelerated the project to replace IAS 39 Financial instruments: Recognition and Measurement with IFRS 9 Financial instruments.

The reported earnings and balance sheet of banks and financial institutions will be significantly affected by this change and the amendments or replacements of several other standards. The changes to the reporting standards can have a huge impact on management decisions with regards to mergers, acquisitions, financial and cross-border transactions. The use of financial instruments, especially complex products creates risks for banks which could potentially be hedged through appropriate use of principles within IFRS. Banks not only provide hedging solutions to clients but also hedge their own exposures to various types of risks like interest rate, foreign currency, cash flow, equity and so on. In this way, IFRS also provides opportunities to banks, financial institutions and other companies to effectively manage risks on their balance sheet. In addition, the proper understanding and use of global financial reporting language helps reduce cost of raising capital and undertaking transactions.

Banks and financial institutions the world over have been impacted by the financial crisis, the resultant changes to existing regulation and introduction of new regulation. The Dodd-Frank Act and Basel III accord has forced banks to review their business including exiting some of the business lines, and look at managing their risks to avoid a repeat of the financial crisis we saw four years ago. Profitable transactions in the pre-financial crisis era may no longer work due to additional capital requirements and liquidity concerns. The focus of the senior management has shifted to improving the capital and liquidity position of the bank to ensure they are in compliance with the above regulations. A thorough understanding of IFRS financial statements and impact of financial regulation on banks and financial institutions has become a must for accountants, financial controllers, auditors, analysts, portfolio managers and senior management.

There is only one thing constant, and that is change. We live in a financially interesting era and professionals with expertise in IFRS and financial regulation will not feel the pinch of recession. In the globalized world that we all live in, never have there been better opportunities than now for finance professionals to actively participate in driving the business forward..

Saket Modi