Accounting, Edition 34

Impact Of Adoption of International Financial Reporting Standards in Mexican Companies

By: Sandra Minaburo

Starting in 2012, public entities in Mexico mandatorily will have to submit their financial statements prepared with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board (IASB), in accordance with the press bulletin PRESS BULLETIN No. 056/2008, published on November 11, 2008 by Comisión Nacional Bancaria y de Valores (National Banking and Securities Commission or CNBV as per initials in Spanish) in México.

According to the CNBV, this adoption will generate several benefits to the market and to the investing public, amongst other:

  1. Enabling both Mexican and foreign analysts and investors to compare financial information prepared by Mexican issuers to that of foreign issuers, producing similar information in financial reports and providing equal parameters in different markets around the world.
  2. Elaborating consolidated financial statements, in the case of economic groups that have presence in several countries.
  3. 1.Promoting issuance of the foreign companies’ securities in the Mexican market and accept as valid the financial statements based on International Financial Reporting Standards.

Regardless of the benefits mentioned by the CNBV, it is important for entities to think about the impact of the adoption of international standards on the financial, operational and of course accounting decisions, and also the impact and changes users and analysts will have to make to use the financial information prepared under international standards.

Although in Mexico we have been immersed in a process of continuous change in accounting policies, the adoption of IFRSs may generate several problems and one of them is the amount of historical information that has to be gathered to present the financial information; the additional effort to adopt the new standards with new disclosure, presentation and evaluation requirements; the application of an accounting system whose fundamental basis is the professional judgment and the lack of previous experience that could be the framework of reference.

The European experience, as per the UNCTAD 2008 study, shows that the adoption of IFRS not only means a limited technical exercise of exchange of one set of accounting standards to another; it goes way beyond that. The European entities had to implement valuation and monitoring derivative instruments, acquire information systems that could carry double accounting and control records for tax and financial purposes in accordance with the IFRS requirements. These examples imply a situation that per se could affect the different organization areas and structures and also their internal control.

Some of the most relevant impacts the conversion to IFRS could bring about, are:

  • The information and financial accounting systems shall be capable of generating consistent and robust information to present the financial information under international standards. They also generate information on the depreciation of assets in compliance with IFRS and capture new information for the disclosures required, such as information by segments, fair values of the financial instruments and transactions with related parties. The notes to the consolidated financial statements under IFRS shall reassess their existing systems and processes to guarantee that they can provide all the information required under the IFRS.
  • The adoption of international standards could have a significant impact on the financial statements and therefore in the tax obligations. It is essential to carefully review the existing tax planning strategies to verify that they are still meeting their objectives with the changes undertaken by IFRS.
  • IFRS may generate significant changes in the profits reported and in performance indicators. Therefore it is necessary to manage the markets’ expectations and to make analysts aware. Managers must understand the differences that could arise in the way performance is perceived both internally and also in the market and agree on the key messages that will be conveyed to investors and other stakeholders. The profits reported may defer the performance perceived due to the growing use of reasonable values and new restrictions in the existing practices. Consequently, it is necessary to report the appropriate information to adequately assess the performance of the business.
  • By adopting IFRS, it could be necessary to renegotiate the contracts that refer to the figures reported, and some of them are the indicators and covenants agree upon with banks which at that time were determined under Mexican standards and that now would have to refer to the figures determined under international standards.
  • When adoption is finished, there could be a net effect on the amount of the undistributed earnings, which could represent an increase or decrease in the distributable earnings in subsequent years in view of the new equity available. On the other hand, it is necessary to consider that IFRS are oriented to fair value, and frequently this results in unrealized profits or losses. It should be analyzed if these effects may be considered to calculate the distributable earnings, in order to guarantee that, at the end, the distribution of these earnings does not cause a disinvestment of the company.

Regardless of the impacts mentioned, any conversion project to international standards should start with an impact evaluation, diagnosis activities and an exercise on the possible scope. This will allow management to visualize the extent and complexity of the conversion and thus make better decisions on how to plan, structure and provide the resources for the project and determine the steps to be followed; also, how to decide what accounting policies are going to be adopted and what disclosures have to be made so that users can make their own decisions.

The guide to be followed by the Mexican entities is the International Standard IFRS 1, “Adoption for the first time of the IFRSs”, that establishes as a fundamental principle that the entity that adopts for the first time these standards should prepare its financial statements “as if it had always used IFRS”; that is, that it shall retrospectively apply all the international standards in effect on the closing date of the balance sheet of the first financial statements issued under international standards. In the first place, this implies a tremendous amount of work of gathering all the historical information of the Company, starting with the date the company was incorporated. But fortunately for these entities, this is not really that true because the IFRS 1 establishes some exceptions and exemptions to this fundamental principle in order for the adoption not to represent an onerous, long and almost impossible process.

The exceptions are mandatory. This means that the IFRS 1 prohibits its retrospective application. The exemptions are voluntary, this means that IFRS 1 allows the entity that is adopting for the first time IFRS 1 to determine whether to retrospectively apply one or more of the 16 exemptions established both in Appendix C as well as D of that Standard. It is broadly recommended that the entities carefully analyze the exemptions that IFRS 1 allows, since with their election benefits or damages could be generated.

Lastly, the entities should consider the fact that IFRS 1 binds them to submit three balance sheets, two income statements, two statements of comprehensive income and two cash flow statements, prepared under IFRS, and also a letter clearly specifying all the accounting policies adopted, all the effects of those policies and also the reconciliation between the figures obtained under Mexican standards and those obtained under the international standards. This note should be sufficiently clear, detailed and broad so that users may compare, analyze and make decisions with this information..?

Bibliography

Comisión Nacional Bancaria y de Valores. (12 de noviembre de 2008). “Boletín de Prensa 056/2008″. www.cnbv.gob.mx. Recuperado el 3 de junio de 2010, de http://www.cnbv.gob.mx/recursos/056_Adopcion_IFRS.pdf

IASB. (3 de junio de 2010). “International Financial Reporting Standard No. 1″. www.iasb.org. Recuperado el 3 de junio de 2010 de http://www.iasb.org/IFRSs/IFRS.htm

UNCTAD. (Agosto 2008). www.unctad.org. “Practical implementation of international financial reporting standards. Lessons Learned”. Recuperado el 3 de junio de 2010, de http://www.unctad.org/templates/webflyer.asp?docid=10754&intItemID=1397&lang=1&mode=downloads

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