By: Sandra Minaburo
Director of the Accounting Research Center spmina@itam.mx
According to the 2010 annual report submitted by the International Accounting Standards Board (IASB), more than 120 countries require or permit companies regulated by their local stock exchanges to report their financial information on the basis of the International Financial Reporting Standards (IFRS).
This report also mentions Mexico, given that beginning 2012, companies listed on the Mexican Stock Exchange (known as the “Bolsa Mexicana de Valores” or its Spanish acronym, BMV) are now required to submit on a compulsory basis financial statements prepared in compliance with IFRS issued by the IASB. Many expect this will help ensure that Mexican companies improve the quality of the information they give to their stakeholders, and therefore allow them more easily accessible sources of external financing.
To guarantee and ensure that the process of adoption by each company is properly implemented, on May 13, 2011 the Mexican National Banking and Securities Commission (CNBV) asked the BMV-listed companies to report on their financial situation and the progress with regard to IFRS adoption no later than June 30, 2011.
These companies produced a document named “progress report on the implementation of IFRS, Company X,” which is divided into four parts: 1) Accounting and business impacts; 2) Impacts on the information systems; 3) Progress in the transition and 4) Additional considerations.
In the section on accounting and business impacts, the companies gave a general overview of their situation with regard to the adoption of IFRS and the effects they expect the mandatory exceptions will produce, as well as the decisions made so far about the voluntary exemptions permitted by IFRS 1, First-Time Adoption of International Financial Reporting Standards, modified on December 31, 2010.
In order to understand the effects of these exceptions and exemptions on Mexican companies, 96 reports were analyzed. They are published on the BMV website in the section corresponding to each of the entities subject to IFRS adoption. From the analysis, different results and approaches emerged regarding the quality of the reports and the company’s interest in making known its progress in the adoption of the rules and the expected effects.
With regard to the mandatory exceptions established in the IFRS 1, five categories can be identified in the reports: 1) No effect is expected: in this category we find the companies in which it was clearly stated that they would not expect to suffer any effect by the application of an exception; 2) An effect is expected: in this category we find the companies in which an effect by the application is expected, although it is not indicated if the effect was significant or not; 3) The effect has not yet been determined: in this category we find the companies in which it was clearly indicated that by the date of the report it would not yet be determined whether there would be an effect or not; 4) It does not apply: in this category, we find the companies in which it was clearly stated that the exception does not apply to them; 5) No information is found: this category includes the companies in which no information on the exception was provided and those in which only an explanation of what the exception consisted of was given, but with no indication of its effect or application. The results obtained are shown in Table 1, which indicates the number of companies found in each category.
These two exceptions were included in the reports because the version of IFRS1 that includes the early application of IFRS 9 was used as a base. Recently, the IASB postponed the effective date of IFRS 9 to January 1, 2015, so that they can change the figures and the decision that the companies make with regard to these two exceptions.
Table 1. Classification of companies, according to the exceptions
From Table 1, it is concluded that, on average, in 15.3% of the companies surveyed an effect is expected; in 33.7% no effect is expected and in 33.7% the exceptions established in the IFRS 1 do not correspond. It is important to note that in 11.3% of the documents, no information was found that would allow the company to be placed in one of the categories.
With respect to the exemptions of certain rules established in the IFRS, five categories can be identified upon reading the reports: 1) No effect is expected: in this category we find the companies in which it was clearly stated that they did not expect an effect by the application of an exemption; 2) The option is applied: in this category we find the companies in which it was indicated they accepted the option of the exemption, but did not indicate whether they expected to have some effect; 3) The effect has not yet been determined or the option has not been selected: in this category we find the companies in which it was clearly indicated that by the date of the report it would not yet be determined whether or not there would be an effect or whether or not they would choose the option; 4) It does not apply: in this category, we find the companies in which it was.clearly stated that the exemption does not apply to them; 5) No information is found: this category includes companies that did not provide information on the exemption or in which only an explanation of what the exemption consisted of was given, but did not indicate its effect or application. The results obtained are shown in Table 2, which indicates the number of companies found in each category.
Table 2. Classification of companies according to the exemptions
From Table 2, it is concluded that 26% of the companies are expected to have an effect or have decided to adhere to the exemption; 7% have not yet determined if they will suffer some effect or if they will accept the exemption; 45% do not have the exemption and in the remaining 23% of the documents, no information was found on the decision to accept the exemption nor about the anticipated effects.
Apart from the particular effects observed in each company or the decision each takes with regard to the exceptions or exemptions established in the IFRS, in the reading of the reports common effects were identified that Mexican companies expected, which are derived mainly from differences that still exist between the Mexican Financial Reporting Standards (“Normas de Información Financiera Mexicanas” or its Spanish acronym, NIIF) and the IFRS. These include the following:
1. Elimination of the effects of inflation from January 1, 1998, for the items of: issued capital, premium in issuance of shares, legal reserve and other reserves, intangible assets (mainly goodwill), non-current assets (when you have chosen another option that is not the previous GAAP revaluation).
2. Write-down of the deferred liability component of the statutory employee profit-sharing (“Participación de los trabajadores en las utilidades” or its Spanish acronym, PTU).
3. Reclassification of the current portion of the long term deferred taxes. .
4. Reclassification of the cumulative translation differences to retained earnings (profits).
5. Reclassification of the restricted cash, which in the case of the NIIF it is presented in “cash and cash equivalents” and under IFRS should be presented in “other current assets or other long-term assets,” as appropriate.
6. Reclassification of the costs of issuing debt of “other assets” to liability, either short or long-term, as appropriate.
7. Reclassification of certain items in “inventory” as “properties, plant and equipment.”
8. Reclassification of certain items in “property, plant and equipment” as “investment property.”
9. Reclassification of the “advance payments by purchases of property, plant and equipment,” which in the case of NIIF are presented within the rubric of “property, plant and equipment” and that, according to the IFRS, should be presented in the item “other current assets.”
10. Change in the depreciation policy by a policy by components, since the IAS 16, Property, Plant and Equipment, is not exactly equal to the newly issued NIF C-6, Property, Plant and Equipment, effective since January 1, 2011.
11. Modification of the procedure for determining the recovery value of a long-term asset to determine, in its case, a possible impairment.
12. Modification of the policy for determining the value of the sales paid in installments without interest.
13. Reclassification of the costs associated with the restructuring of financial debt, which in the case of NIIF is recognized in “advance payments” (short term) or “other assets” (long term) to “retained earnings” because under IFRS any expenditure, premium or discount associated with the issue of a liability should be recognized in net income.
14. Write-down of the “provision for employee termination ” recognized under NIIF, since in IFRS this liability is not recorded until the company does not have a clear commitment to end the employment relationship with the employee or until the company has not made an offer to the employee for a voluntary withdrawal, neither before nor after.
15. As a result of the effects mentioned above, the amount of deferred taxes will be changed.
Finally, if Mexican companies wish to compete in the globalized capital market, they must make their process of adoption more transparent and must clearly show what effects they expect from this process. In this way, the stakeholders will make decisions based on more explicit and clear information. This is a legitimate recommendation because in the analysis presented it is noted that in a large percentage of the analyzed documents information was not found or it was not possible to conclude which of the options was chosen. Some companies simply limited the explanation to what the exceptions and exemptions established in the IFRS 1 consisted of, but they did not indicate which option they chose or the effects they expected.
It is important to emphasize that in the reports submitted by ARCA, ALFA, CEMEX, CYDSASA, GCC, GISSA and LAMOSA the effects expected by the adoption of IFRS are explained in detail. In addition, the anticipated adjustments or reclassifications are clearly shown on the financial statements.
Notes:
i. The analysis shown may vary, since the final effects will not be seen until the first financial statements prepared according to IFRS are presented.
ii. The quote symbol was used as a company code name to simplify its identification on the BMV website.
Bibliography
Bolsa Mexicana de Valores (2011). Sección: Empresas emisoras. Subsección: Eventos Relevantes de cada una de las empresas emisoras. Evento Relevante: Informe de avance en la implementación de IFRS, en http://www.bmv.com.mx, consultado en diciembre de 2011.
IFRS Foundation (2011). Annual Report 2010, en http://www.ifrs.org/NR/rdonlyres/EB99AF27-22F7-45AF-A033-75A36CDC3549/0/IFRSANNUALREPORT_ALL_12July.pdf, consultado en diciembre de 2011.
IFRS Foundation (2011). International Financial Reporting Standards (IFRS), Londres, IFRS Foundation.
Analysis of the Effects of Adoption that the Mexican Stock Exchange Listed Companies Expect in 2012
By: Sandra Minaburo
Director of the Accounting Research Center
spmina@itam.mx
According to the 2010 annual report submitted by the International Accounting Standards Board (IASB), more than 120 countries require or permit companies regulated by their local stock exchanges to report their financial information on the basis of the International Financial Reporting Standards (IFRS).
This report also mentions Mexico, given that beginning 2012, companies listed on the Mexican Stock Exchange (known as the “Bolsa Mexicana de Valores” or its Spanish acronym, BMV) are now required to submit on a compulsory basis financial statements prepared in compliance with IFRS issued by the IASB. Many expect this will help ensure that Mexican companies improve the quality of the information they give to their stakeholders, and therefore allow them more easily accessible sources of external financing.
To guarantee and ensure that the process of adoption by each company is properly implemented, on May 13, 2011 the Mexican National Banking and Securities Commission (CNBV) asked the BMV-listed companies to report on their financial situation and the progress with regard to IFRS adoption no later than June 30, 2011.
These companies produced a document named “progress report on the implementation of IFRS, Company X,” which is divided into four parts: 1) Accounting and business impacts; 2) Impacts on the information systems; 3) Progress in the transition and 4) Additional considerations.
In the section on accounting and business impacts, the companies gave a general overview of their situation with regard to the adoption of IFRS and the effects they expect the mandatory exceptions will produce, as well as the decisions made so far about the voluntary exemptions permitted by IFRS 1, First-Time Adoption of International Financial Reporting Standards, modified on December 31, 2010.
In order to understand the effects of these exceptions and exemptions on Mexican companies, 96 reports were analyzed. They are published on the BMV website in the section corresponding to each of the entities subject to IFRS adoption. From the analysis, different results and approaches emerged regarding the quality of the reports and the company’s interest in making known its progress in the adoption of the rules and the expected effects.
With regard to the mandatory exceptions established in the IFRS 1, five categories can be identified in the reports: 1) No effect is expected: in this category we find the companies in which it was clearly stated that they would not expect to suffer any effect by the application of an exception; 2) An effect is expected: in this category we find the companies in which an effect by the application is expected, although it is not indicated if the effect was significant or not; 3) The effect has not yet been determined: in this category we find the companies in which it was clearly indicated that by the date of the report it would not yet be determined whether there would be an effect or not; 4) It does not apply: in this category, we find the companies in which it was clearly stated that the exception does not apply to them; 5) No information is found: this category includes the companies in which no information on the exception was provided and those in which only an explanation of what the exception consisted of was given, but with no indication of its effect or application. The results obtained are shown in Table 1, which indicates the number of companies found in each category.
These two exceptions were included in the reports because the version of IFRS1 that includes the early application of IFRS 9 was used as a base. Recently, the IASB postponed the effective date of IFRS 9 to January 1, 2015, so that they can change the figures and the decision that the companies make with regard to these two exceptions.
Table 1. Classification of companies, according to the exceptions
From Table 1, it is concluded that, on average, in 15.3% of the companies surveyed an effect is expected; in 33.7% no effect is expected and in 33.7% the exceptions established in the IFRS 1 do not correspond. It is important to note that in 11.3% of the documents, no information was found that would allow the company to be placed in one of the categories.
With respect to the exemptions of certain rules established in the IFRS, five categories can be identified upon reading the reports: 1) No effect is expected: in this category we find the companies in which it was clearly stated that they did not expect an effect by the application of an exemption; 2) The option is applied: in this category we find the companies in which it was indicated they accepted the option of the exemption, but did not indicate whether they expected to have some effect; 3) The effect has not yet been determined or the option has not been selected: in this category we find the companies in which it was clearly indicated that by the date of the report it would not yet be determined whether or not there would be an effect or whether or not they would choose the option; 4) It does not apply: in this category, we find the companies in which it was.clearly stated that the exemption does not apply to them; 5) No information is found: this category includes companies that did not provide information on the exemption or in which only an explanation of what the exemption consisted of was given, but did not indicate its effect or application. The results obtained are shown in Table 2, which indicates the number of companies found in each category.
Table 2. Classification of companies according to the exemptions
From Table 2, it is concluded that 26% of the companies are expected to have an effect or have decided to adhere to the exemption; 7% have not yet determined if they will suffer some effect or if they will accept the exemption; 45% do not have the exemption and in the remaining 23% of the documents, no information was found on the decision to accept the exemption nor about the anticipated effects.
Apart from the particular effects observed in each company or the decision each takes with regard to the exceptions or exemptions established in the IFRS, in the reading of the reports common effects were identified that Mexican companies expected, which are derived mainly from differences that still exist between the Mexican Financial Reporting Standards (“Normas de Información Financiera Mexicanas” or its Spanish acronym, NIIF) and the IFRS. These include the following:
1. Elimination of the effects of inflation from January 1, 1998, for the items of: issued capital, premium in issuance of shares, legal reserve and other reserves, intangible assets (mainly goodwill), non-current assets (when you have chosen another option that is not the previous GAAP revaluation).
2. Write-down of the deferred liability component of the statutory employee profit-sharing (“Participación de los trabajadores en las utilidades” or its Spanish acronym, PTU).
3. Reclassification of the current portion of the long term deferred taxes. .
4. Reclassification of the cumulative translation differences to retained earnings (profits).
5. Reclassification of the restricted cash, which in the case of the NIIF it is presented in “cash and cash equivalents” and under IFRS should be presented in “other current assets or other long-term assets,” as appropriate.
6. Reclassification of the costs of issuing debt of “other assets” to liability, either short or long-term, as appropriate.
7. Reclassification of certain items in “inventory” as “properties, plant and equipment.”
8. Reclassification of certain items in “property, plant and equipment” as “investment property.”
9. Reclassification of the “advance payments by purchases of property, plant and equipment,” which in the case of NIIF are presented within the rubric of “property, plant and equipment” and that, according to the IFRS, should be presented in the item “other current assets.”
10. Change in the depreciation policy by a policy by components, since the IAS 16, Property, Plant and Equipment, is not exactly equal to the newly issued NIF C-6, Property, Plant and Equipment, effective since January 1, 2011.
11. Modification of the procedure for determining the recovery value of a long-term asset to determine, in its case, a possible impairment.
12. Modification of the policy for determining the value of the sales paid in installments without interest.
13. Reclassification of the costs associated with the restructuring of financial debt, which in the case of NIIF is recognized in “advance payments” (short term) or “other assets” (long term) to “retained earnings” because under IFRS any expenditure, premium or discount associated with the issue of a liability should be recognized in net income.
14. Write-down of the “provision for employee termination ” recognized under NIIF, since in IFRS this liability is not recorded until the company does not have a clear commitment to end the employment relationship with the employee or until the company has not made an offer to the employee for a voluntary withdrawal, neither before nor after.
15. As a result of the effects mentioned above, the amount of deferred taxes will be changed.
Finally, if Mexican companies wish to compete in the globalized capital market, they must make their process of adoption more transparent and must clearly show what effects they expect from this process. In this way, the stakeholders will make decisions based on more explicit and clear information. This is a legitimate recommendation because in the analysis presented it is noted that in a large percentage of the analyzed documents information was not found or it was not possible to conclude which of the options was chosen. Some companies simply limited the explanation to what the exceptions and exemptions established in the IFRS 1 consisted of, but they did not indicate which option they chose or the effects they expected.
It is important to emphasize that in the reports submitted by ARCA, ALFA, CEMEX, CYDSASA, GCC, GISSA and LAMOSA the effects expected by the adoption of IFRS are explained in detail. In addition, the anticipated adjustments or reclassifications are clearly shown on the financial statements.
Notes:
i. The analysis shown may vary, since the final effects will not be seen until the first financial statements prepared according to IFRS are presented.
ii. The quote symbol was used as a company code name to simplify its identification on the BMV website.
Bibliography
Bolsa Mexicana de Valores (2011). Sección: Empresas emisoras. Subsección: Eventos Relevantes de cada una de las empresas emisoras. Evento Relevante: Informe de avance en la implementación de IFRS, en http://www.bmv.com.mx, consultado en diciembre de 2011.
IFRS Foundation (2011). Annual Report 2010, en http://www.ifrs.org/NR/rdonlyres/EB99AF27-22F7-45AF-A033-75A36CDC3549/0/IFRSANNUALREPORT_ALL_12July.pdf, consultado en diciembre de 2011.
IFRS Foundation (2011). International Financial Reporting Standards (IFRS), Londres, IFRS Foundation.