Home' Trinidad and Tobago Guardian : July 27th 2017 Contents BG14 | COMMENTARY
BUSINESS GUARDIAN guardian.co.tt JULY 27 • 2017
As an investor, you set aside your money now
with the expectation that you will receive
a greater amount at some future date. This
money may be invested in stocks, bonds,
mutual funds, real estate companies, mutual
funds and other investment vehicles.
Anyone observing the global economic landscape over the
past few decades should be able to list two or three financial
crises that have had profound effects on the investment land-
scape. Upon examination of the origin of these crises, one
finds that they can be classified into 3 groups.
Group 1: Misleading accounting practices / accounting fraud
(Enron (2001), World Com (2002);
Group 2: Risky business practices (Barings Bank Crash (1995),
sub-prime mortgages crisis (2007) and
Group 3: Investor speculation and misplaced confidence
(Bernie Madoff Ponzi Scheme, (Dot-com/internet companies
What guides the investor towards making sound decisions?
What protects the investor from unscrupulous individuals or
companies? One key guide an investor may use is the analysis
of companies' financial statements. For financial statements
to provide sound guidance, they must be prepared under rules
that ensure that they are accurate, reliable and transparent.
There are rules that exist in the form of accounting standards;
which guide and standardise accounting practice to ensure
that financial statements are meaningful across a variety of
industries and businesses. Financial crises over the years have
led to amendments to existing standards as well as the intro-
duction of new ones.
In T&T, Financial Statements are prepared in accordance with
International Financial Reporting Standards (IFRS) which are
set by the International Accounting Standards Board (IASB).
The IASB's business of setting standards is guided by a concep-
tual framework which speaks to the qualitative characteristics
of useful financial information and the elements of financial
statements. Two main stakeholders of this framework are those
using the standards to prepare financial statements and those
using the financial statements to make decisions.
Disclosure = Transparency
Financial statements report the past performance of com-
panies and guide investors in making decisions for the future.
In recent years, one important standard that has assisted in-
vestors in interpreting past events to make future decisions
is IFRS 7---Financial Instruments: Disclosures. This standard
was issued because, according the IASB "users of financial
statements need information about an entity's exposure to risks
and how those risks are managed." The standard goes on to say
that "greater transparency regarding (sic) risks allows users
to make more informed judgements about risk and return."
Preparers of financial statements may find the IASB standards
particularly useful. Accounting and finance departments that
prepare financial statements in accordance with IFRS, espe-
cially those within the financial services sector, must prepare
for IFRS 9--- Financial Instruments to look forward to in 2018.
This standard was issued in 2014 and is mandatory for periods
beginning on or after January 1, 2018.
IFRS 9 replaces IAS 39 Financial Instruments: Recognition
In the introduction to the standard, IFRS 9 states that "users
of financial statements and other interested parties told the
IASB that the requirements in IAS 39 were difficult to under-
stand, apply and interpret." The IASB responded and IFRS 9
evolved. However, a global advisory services noted that "it will
require three years of preparation to ensure readiness for 2018
given the impact on data, systems, models, regulatory capital."
IFRS should serve as a guide to investors who need to know
more than simply how financial instruments are being ac-
counted for and disclosed.
The standards need to account for people making investment
decisions and the risk management and governance structures
overlaying the decision framework.
Think Governance: Integrated
The IASB has the vital role of revising reporting standards
and issuing new IFRSs. Regardless of the timing of revisions,
investors would not benefit if the companies producing Fi-
nancial Statements were not doing so within the confines of
an iron-clad corporate governance structure. This structure
should include disclosing the full governance framework of
the organization as well as the organisation's strategy and
performance as measured against its own strategic targets
Another inventive approach to supplementing Financial
Statements is the application of Integrated Reporting. This
approach gives all stakeholders insight into the culture of the
organisation and thus a better understanding of the framework
in which management operates.
This comprehensive reporting sheds some light on the issues
an IFRS would not be able to address; for example, the quality
of management's estimates and judgments.
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