Common mistakes to avoid in IFRS interim reports

On 28th July, 2010 the Federal Executive Council decided that Nigerian entities should adopt the provisions of International Financial Reporting Standards (IFRS) from 2012. Since then, Nigerian companies particularly those listed on the stock exchange have begun earnest preparation towards complying with this directive.

IFRS is a set of principles based standards, interpretations, and framework adopted and issued by the International Accounting Standards Board (IASB) to provide guidance on the content and format of information contained in financial statements in such a ways as to ensure reliability, understandability, comparability and relevance.

It is imperative to use this medium to emphasise that the transition to IFRS is not only the accountant or finance department’s responsibility but also that of top management’s. It is not only accounting matters that are discussed in IFRS reports, but matters relating to the entire business are also disclosed. This is to enable users to better understand how the business is managed, what risk(s) the business is exposed to and what impact this has on the entire financial result of that organization. It is hoped that with the huge information now to be provided to users in IFRS financial statements, shareholders can better appreciate how their wealth is being managed while investors can make better decisions before releasing their funds.

Considering the attendant penalties and fines relating to restatement of financial statements, it is only wise that entities in Nigeria get it right the first time while presenting their financial statements. The manner in which interim reports have been prepared in Nigeria and forwarded to regulatory authorities in previous periods is definitely different from the format under IFRS. One of the interesting things to note under IFRS is that an entity’s financial statement may include either a full set of financial statement or a condensed set of financial statements. When an entity presents its first IFRS financial statements, it is known as a first time adopter. In preparing an interim financial statement therefore, attention should be paid to the following areas:-

Mistake No.1

Omitting the opening IFRS Statement of Financial Position

Comment

In preparing the interim report as a first time adopter of IFRS, there is the need to either include the Opening Transition Balance Sheet as part of the primary financial statement or as part of the notes. The opening statement of financial position must be restated from Nigerian Generally Acceptable Accounting Principles (NGAAP) to IFRS before being presented. IFRS 1 must be reviewed to identify the elections and exemptions that must also be considered while transiting to IFRS. For example if the deemed cost election is made, this must be reflected in the restated opening transition statement of financial position.

Mistake No.2

Not identifying the correct comparative statement of financial position to present

Comment

At the point of transiting to IFRS, there is the need to identify the correct comparative statement of financial (SFP) to use as required by IFRS. Failure to do this would render such a financial statement has not complying with the provisions of IFRS. Many unaudited IFRS results published in Nigerian dailies in recent times have failed to correctly present their interim IFRS report with the correct comparative as required under IFRS.

Mistake No. 3

Non inclusion or tampering with Management Estimates

Comment

When preparing an interim IFRS report, there is the possibility that top management possesses new information that they were not aware of at the point of preparing the NGAAP financial statement. The preparation of the IFRS interim report is not the time to change those estimates. They should not be tampered with retrospectively. Instead where there are material changes to the estimates, these should be disclosed and adjusted prospectively.

Mistake No. 4

Non inclusion of IFRS accounting policies

Comment

One of the areas in IFRS financial statements that make it bulky is the accounting policies. Under NGAAP, a company’s accounting policies may be between 1-4 pages. In practice under NGAAP, some members of the accounting staff may not even be aware of the accounting policies of their companies because it may be different from what they do. Under IFRS however, the accounting policies serve as a basis upon which the financial transactions contained in the financial statement have been prepared. Little wonder that now, under IFRS they are to be included as part of the notes. For a first time adopter, while this is not mandatory, it is essential to include the accounting policies in the interim reports. The wide gap between the treatment of transactions under NGAAP and under IFRS makes it imperative to also disclose the accounting policies surrounding them to ensure that the IFRS compliant financial statements are better understood by users.

Mistake No.5

Incorrect statement of the Basis of Preparation

Comment

In preparing the notes to the IFRS interim reports, it is necessary to correctly identify the basis upon which the interim reports have been prepared and to disclose them. A first timer adopter should disclose the judgments and estimates made by management.

Mistake No.6

Not including the necessary reconciliations

Comment

One of the reconciliations required under IFRS is that where a first time adopter prepares an interim report in the year preceding the year of reporting under IFRS, such a first time adopter must reconcile its equity under NGAAP at the end of that comparable interim period to its equity under IFRSs at that date. Therefore if an entity is preparing its interim report as at March 2012, it should reconcile its equity as at that period under IFRS to what it was under NGAAP. It is necessary to include this reconciliation as well as other reconciliations required under IFRS in an entity’s interim report.

Mistake No.7

Non inclusion of all the statements that are part of the primary financial statement

Comment

In preparing interim financial statements, there is the need to include all the contents of a primary financial statement under IFRS. Therefore preparing only the Statement of Financial position and the Statement of Comprehensive does not meet this requirement. The Statement of Cash flow and the Statement of Changes in Equity must also be included. They may however, be in a condensed form.

In conclusion , an attempt has been made to discuss the common mistakes made in the preparation and presentation of IFRS interim reports by a first time adopter. They do not infer that no other mistakes are being made. It is hoped that they would provide reference points on mistakes that each preparer should avoid.

By Olateru-Olagbegi O