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Financial Reporting Developments in a Middle East Context
Jun 17, 2015



 

David Chitty, International Accounting & Audit Director of Crowe Horwath International spoke at the Crowe Horwath Annual CFO Dinner in Dubai, UAE on 9 June 2015. This article is based on David's speech.

 

There has been rapid progress in the adoption of both International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISAs) in the Middle East.

 

The emergence of regulation in the region has clearly had an important influence on the adoption of international standards. This trend will continue, as throughout the region there are initiatives in progress that will further enhance regulation and oversight. For example, the GCC member states are working with ICAEW, the Institute of Chartered Accountants in England & Wales, to implement a region wide approach to monitoring the quality of audit firms.

 

Looking beyond regulation, possibly a more important influence has been the increasing expectations of stakeholders, whether national, regional or international. Stakeholders such as banks and investors seek reliable audited financial information. I have been visiting the Middle East regularly since 2009 and the demands and expectations of stakeholders have clearly changed. As a result of the influence of stakeholders the quality of financial information and audit has improved significantly, and is continuing to improve. Arguably, market expectation has raised quality, and this change would have happened even if there had been no development in regulation.

 

IFRS are the "world's standards" for financial reporting. Crowe Horwath International is proud to be a supporter of the International Accounting Standards Board (IASB) and we have been delighted to have presentations from the IASB at our meetings. The Kingdom of Saudi Arabia is working with the IASB to find solutions that will enable the standards to work with Sharia Law. Implement of IFRS in the Kingdom will mean that nineteen out of the G20 countries will have adopted the standards. The remaining country is the United States, an important partner of the Region. Whilst we could say that formal adoption of IFRS by the US is unlikely in our lifetimes, in practice this is a high degree of convergence between IFRS and US standards. This means that in practice there are often few material differences between financial information when the two systems are compared.

 

Commenting briefly on recent developments in IFRS, last year IFRS 15 a very important new standard was issued. The subject of IFRS 15 is revenue recognition, an area where existing accounting standards are dated, thin in content and guidance, and really no longer fit for purpose. IFRS 15 will significantly improve the transparency of revenue recognition. CFOs should be working with their advisers to assess the impact of the adoption of IFRS 15 on their business. Revenue recognition policy has company wide implications and those colleagues who are involved in negotiating contracts now have to understand the implications of IFRS 15. Contract terms that are negotiated now will have financial reporting consequences for many years to come. The IASB are proposing to delay the implementation of IFRS 15 by one year, until 2018. The aim of the delay is to help business with the transition. Remember that IFRS 15 will apply retrospectively, so CFOs should take advantage of having an extra year of transition.

 

IFRS 9, the comprehensive standard on accounting for financial instruments, has taken many years to complete. There have been controversies and delays during the development of the standard. A major concern has been whether the EU would endorse IFRS 9 for use in its Member States. The EU endorsement programme has begun, which is a major step for the global credibility of IFRS 9. This standard is also effective from 2018. CFOs should be working now with their advisers on the their transition and adoption of this standard.

 

A problem with IFRS has been the sheer number of disclosures required by the IASB's standards. Currently, the standards contain some 4,000 specific disclosure requirements. This has caused practical difficulties for companies and their auditors in determining how to apply the disclosure requirements, and particularly those that appear to have more marginal relevance. The IASB has instituted a Disclosure Project whose outcome will help with the application of principles of materiality to the disclosure requirements, and guide decisions about their application. The result will be notes to financial statements that are shorter, more relevant, more focused on material information, and generally easier to understand.

 

Finally, auditing standards on audit reports have recently changed. These changes introduce "extended auditors' reports" that contain more information about the conduct of the audit and the issues arising from the audit. This development is significant for the transparency of the audit and the audit process, and should give stakeholders greater confidence in the opinion given by the auditors.

 

A common theme to all the developments that I have spoken about is transparency and confidence in financial statements. Reliable financial information is essential for stakeholder confidence. In the context of the Middle East, quality audit financial statements prepared and audited using global standards are vital to help support the continued growth and diversification of the Region's economy.