Академический Документы
Профессиональный Документы
Культура Документы
Paper presented by Mrs. Titilayo Fowokan (ACA, ACTI) CITN Seminar on IFRS Adoption in Nigeria
Overview
Introduction Why do countries adopt IFRS? IFRS Versus Nigerian GAAP
Conclusion
Introduction
The theoretical foundations underpinning Nigerian Generally Accepted Accounting Policies (GAAP) and International Financial Reporting Standards (IFRS) are not altogether similar. As such, there will be increased responsibilities in setting sound accounting policies that fit business models, on the part of the professional accountant, who must also be ready to explain and justify these policies in the context of the IFRS framework.
accounting standards;
IFRSs are designed for adoption by profit-oriented entities.
IFRSs require that financial statements (FS) give a true and fair view of the financial health of
entities.
3 IFRS Adoption in Nigeria - Tax Implications
standards, and sound regulatory frameworks is key to economic development. Indeed, high quality standards of financial reporting, auditing, and ethics underpin the trust that investors place in financial and non-financial information and, thus, play an integral role in contributing to a countrys economic growth and financial stability.
accounting standards would increase comparability of financial information among companies, and could foster more effective and efficient allocation of capital on a global basis. Enhanced comparability of financial information among all companies in all capital markets should increase the usefulness of the information available to users in making such allocation decisions. IFRS for the preparation of entities financial reports. One of the factors when countries adopt IFRS is the Net economic value of IFRS.
There is the belief that, the use of a single set of high-quality, globallyaccepted
Different countries have their specific consideration for adopting the use of
Proponents of IFRS argue that by adopting a common body of international standards, countries can expect to lower the cost of information processing and auditing to capital market participants (Barth, 2007; 2008). More preparers, users, and auditors of financial reports can be expected to become familiar with one common set of international accounting standards than with various local accounting standards.
The relative quality of local accounting standards is an important determinant in the decision to adopt IFRS. Local accounting standards are part of a complex system of governance institutions that include auditor training, auditing standards, enforcement (regulatory and judicial), precedent for the protection of property rights, government corruption, and the role of the press, among others.
part of its national identity. Nigerias global players are reporting to global finance market, therefore it makes sense to have global financial reporting benchmarks.
Nigerian businesses are making more and more international transactions, cross border
listing is now common place, accounting firms are beginning to follow their growing corporate clients into other countries in order to maintain services (this is what accounts partly for international accounting firms that you see nowadays which is now also forcing significant number of smaller firms to seek international networks) and governments are engaging in wide range reviews that recognise the importance of reassuring the markets and the public at large that corporate reporting and governance frameworks are sufficiently robust.
The adoption of IFRS in Nigeria will create opportunities for a broader finance
transformation for companies in Nigeria, increase centralisation of their process and assist in the realization of economies of scale.
6 IFRS Adoption in Nigeria - Tax Implications
More prescriptive and comprehensive than under Nigerian GAAP. For banks and financial institutions, the impact of these differences could be significant depending on the size of their asset portfolios and nature of fees. More rigorous process of determining goodwill, identifiable assets and liabilities, fair values and purchase price allocation. A key challenge is determining whether a business has been acquired as opposed to an asset.
Business combinations:
The format of financial statements, components and nomenclature of certain items of financial statements are different under IFRS. For instance, there is no value added statements or five-year financial summary under IFRS while statement of changes in equity is required.
10
General implications
The adoption of IFRS will specifically result in the following:
More entities, such as joint ventures, special purpose operations, and
Liabilities will be recognised and measured differently. Development costs will be deferred and amortized. Impairment charges will be recognised earlier and measured differently Financial assets and liabilities will be measured differently Depreciation computation will be more complicated There will be a need to focus more on the economics underlying transactions
and events.
12
Tax department will have to work closely with accounting and corporate
finance teams to examine the impact IFRS might have on new financing structures.
Human resources might be required to adjust the calculation base for certain
types of compensation, such as profit sharing and bonuses as well as retirement benefit entitlements such as gratuity.
Marketing and sales might be confronted with issues related to branding and
trademarks, net value of inventory, revenue recognition, conditions of sale and derivatives.
13
Focus areas
With the adoption of IFRS, companies and tax professionals would have to focus more on:
Record keeping, chart of accounts and mapping Preparation and presentation of financial statements Disclosure requirements Measurement bases of assets and liabilities Revenue recognition Nomenclature and format Approach adopted for audit of tax estimates Preparation of tax computations / Tax compliance requirements
14
treatment of tax sensitive items such as general provisions for bad and doubtful debts, depreciation, provision for gratuity, etc.
to tax on income/profit in Nigeria whereas financial statements are prepared in accordance with Generally Accepted Accounting Practice (GAAP) which is now to be replaced with IFRS. Nigerian Accounting Standards Board (NASB) which stipulates disclosure requirements for financial reports. the Companies and Allied Matters Act (CAMA).
The Companies Income Tax Act (CITA) is the legal basis for assessing companies
16
standards (IFRS) will need to consider the tax implications of such a move.
The adoption of IFRS will have tax implications for organisations, particularly in
been treated as off balance sheet would now be reflected on balance sheet, giving room for fairer presentation of the financial statements that IFRS is set out to achieve.
17
instruments
There are also implications for tax administration, some of which will also be considered.
18
IFRS No specific presentation format prescribed Financial Statements could be in currency other than the functional currency
Possible tax challenges Understanding of IFRS format in relation to CAMAs prescribed format for the purpose of tax preparation Conversion rate from functional currency to other currency for financial statements, tax treatment of exchange gain/loss
CAMA requirements a) is functional currency except for Oil Exploration & Production b) Companies Adjustments are corrected in retained earnings Capitalised
Adjustment of opening equity and comparatives Expensed as incurred regardless of the amount
FIRS not likely to accept changes in equity due to prior year adjustment FIRS may not accept IFRS treatment on the basis of the matching concept
19
IFRS
Can be recognised as investment property under certain conditions Included in coast of inventory and eventually cost of sales
Nigerian GAAP
Silent on whether it can be recognised in the balance sheet No guidance regarding treatment of such costs
No requirement to state exceptional items separately in the Financial Statements. Stating of extraordinary item is prohibited.
Financial Statement is required to state profit on ordinary activities distinct from exceptional or extraordinary items.
a)
b)
Confusion in income recognition between normal business activities and extraordinary or exceptional income. Capital gains tax issue Difficult to determine balancing allowance/ charge
20
Nigerian GAAP No single standards. Revenue is recognised when it is capable of objective measurement and value of asset to be received in exchange is reasonably certain
Possible tax challenges a) Likelihood of paying tax on unrealised income b) Difficulty in separation of income for tax purposes.
Segment reporting
Required by entities that carry out different lines of business or located in different geographical points (E.g. Insurance Life Vs Non-life, Oil & Gas Upstream Vs Mid Vs Down stream, etc)
21
cannot be enforced and IFRS financial statements may not be acceptable for statutory purposes including filing of tax returns, CAC annual returns, filing with NSE/SEC, returns to the CBN, etc.
While companies who already prepare IFRS financial statements out of
necessity may have some sort of advantage, all entities still need to brace up for the significant change in the financial reporting landscape that will be brought about by the adoption of IFRS in Nigeria.
There may be need for introduction of fiscal filters for the transition process.
22
Difficulty level
Complex
IFRS
IFRS 1
Transition adjustments will be registered in equity, namely in retained earnings and reserves. Specific taxation rules should be defined for these adjustments. For example, a transition period of three years for recognition of tax change or income.
Financial Instruments Yes Complex IAS 39
Current fiscal legislation states that only realised capital gains and losses are subject to taxation. In an IFRS environment, current fiscal rules should be maintained. Impairment Evaluate Complex IAS 39, IAS 36 Tax authority should evaluate whether to accept impairment losses determined under IFRS or define specific rules and support the introduction of a fiscal filter. Fixed tangible assets Yes Easy IAS 16 IFRS allow entities to measure fixed tangible assets at amortised cost or at fair value. Each entity can choose between one of the referred measurement methods. For tax purposes, the amortised cost method should be considered, with definition of assets economic life. 23 IFRS Adoption in Nigeria - Tax Implications
IFRS Requirements
Tax Consideration
Impairment
Impairment for loan loss portfolio is based on a) Should loan loss provision on an incurred loss model. In order to calculate portfolio classified as non the impairment loan losses, banks will have to performing assets under segment the portfolio in homogeneous IFRS be treated as specific? If groups, defined impairment triggers, calculate not, consider impact on tax statistical parameters and consider fair value cash flow (taxpayer & collaterals government). b) What should be the tax On transition date any unrecognised loan loss treatment of unrecognised provisions will be recorded against retained loan loss recorded against earnings. retained earnings? Required for assets (tangible and intangible) Should impairment be treated as including financial instruments. provisions (general & specific) or losses (realised & unrealised)? Expenses that do not meet the criteria of capitalisation will be expensed or otherwise reclassified as intangible or fixed assets. Should tax rule on capital expense be modified?
Other assets
24
Under IFRS, International Accounting Standards (IAS) 39 provides a comprehensive code for accounting for financial instruments. In response to this, UK tax law in the loan relationships and derivative contracts rules, currently requires the accounting treatment to be followed in most cases, provided it amounts to either an "authorised accruals basis" or an "authorised mark to market basis".
The main change brought about by IAS 39 will be to require certain assets to be accounted for on a mark-to-market basis. If this were followed for tax purposes, it would require unrealized profits and losses on the instruments affected to be brought into account. This includes all derivative financial instruments, any part of a hedged asset where the hedging instrument is fair-valued and other financial instruments that are designated as "available for sale". The UK Inland Revenue has accepted that this will not be appropriate in relation to certain hedging arrangements and "available for sale" assets. Certain equity and property derivatives, will be split for tax purposes.
25
IFRS (IAS 38) will not permit amortization of goodwill. Tax relief for amortization of goodwill will not therefore be available for companies adopting IFRS. Companies that opt to show goodwill at its amortized cost upon adopting IAS will not suffer a clawback of any relief already claimed but companies that do not exercise this option may suffer a tax charge.
IFRS 22 requires immediate recognition of negative goodwill in some circumstances and this may give rise to a tax charge where the negative goodwill relates to intangibles. There is no UK revenue recognition accounting standard and IAS 18 will be followed. This may have the effect of changing the time of recognition of certain income. The tax treatment of share-based payments, pension contributions and employee incentives will continue to be determined by statutory rules rather than the accounting treatment.
Investment properties Under IAS 40, companies can opt to account for investment properties at fair value. If followed for tax purposes, this would have the effect of taxing revaluations. However, the Inland Revenue has confirmed that there are no proposals to require fair value changes to be brought into account for tax.
26 IFRS Adoption in Nigeria - Tax Implications
Tax issues
Resetting of balances
Tax Implications
a) b) Deferred Tax Income & Education tax c) Capital Allowances d) Balancing Adjustments a) Deferred Tax b) Income & Education tax Income & Education tax a) b) c)
FIRS Requirements
Statement of Reconciliations from SAS to IFRS Audit Adjustment Journals Audit Adjustment Journals Acceptance Certificate Purchase receipts
3)
Statement of Financial Position Communicates financial position at the reporting date on Assets, Liabilities and Equity.
28
Tax issues
Operating income
Tax Implications
a) b) c) a) b) c) d) a) b) a) Income & Education tax Value Added Tax Withholding Tax Income & Education tax Value Added Tax Withholding Tax Capital Gains Tax Income & Education tax Withholding Tax Income & Education tax Capital Gains Tax Deferred Tax
FIRS Requirements
1) 2) 1) 2) 1) 2)
Third party documents Impairment test computation Third party documents Detailed Schedule Third party documents Detailed Schedule
b) c)
Tax issues
Statement of Changes in Equity
Tax Implications
a) b) Tax on dividend Share-based payment
FIRS Requirements
Schedule of retained earnings
30
Conclusion
IFRS adoption may result in companies in the same industry communicating with each other about IFRS issues they are facing. This is to aid the identification of IFRS issues that impact them. From tax perspective, IFRS adoption will result in changes to the way and manner of preparation of financial records and presentation of financial statements. This poses a challenge to Tax administrators and Tax practitioners/advisors on how to handle the gap between the current legal framework of financial reporting and the significant changes required for compliance with IFRS requirements. The place of record keeping cannot be over emphasized as transition adjustments have to be proved beyond reasonable doubt to aid fair treatment of transactions in line with the current legislations guiding tax accounting and reporting in Nigeria. There is no doubt that the Tax Institute, Tax Authorities and Tax Practitioners need to go back to the drawing board on how to fix the challenges posed by IFRS adoption in order to achieve the goal of creating a tax friendly environment for business enterprises and international investors. There is also the need to make the tax environment attractive to foreign direct investments by streamlining the provisions in the tax legislations along global standards as IFRS adoption by Nigeria is geared towards complying with global convergence on financial reporting.
31
THANK YOU
Q & A?
References
The Revolutionary world of accounting Publication by PricewaterhouseCoopers IFRS Conversion: Tax Implications Paper presented by Taiwo Oyedele, PricewaterhouseCoopers Nigerias approach to IFRS adoption Paper presented by Obazee, Jim Osayande, Nigerian Accounting Standards Board (NASB) UK: Tax implications of international accounting standards by Herbert Smith Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers by KPMG LLP, a U.S. limited liability partnership Adoption of International Financial Reporting Standards - Prudential implications by Australia Prudential Regulation Authority Challenges and successes in implementing international standards: achieving convergence to IFRSs and ISAs by Peter Wong, a former member of the Board of the International Federation of Accountants (IFAC), Financial Sector IFRS Transition Paper presented by PricewaterhouseCoopers Why do countries adopt International Financial Reporting Standards? By Karthik Ramanna and Ewa Sletten, Harvard Business School Acceptance Speech by Jim Osayande Obazee, Chairman, Committee of Roadmap to the adoption of IFRS in Nigeria Adoption of International Financial Reporting Standard (IFRS): Implications on Tax Administration by Mr. Ajayi J. Bamidele, FIRS, Abuja Tax Consequences for adopting IFRS by Kris E. David Principal Partner, Midaspage Nigeria
33