Bangkok Post : Implications from international reporting standards

BY INVITATION

A recent topic of conversation within accounting and financial circles in Thailand has been the roadmap to International Financial Reporting Standard (IFRS) conversion, as drawn up by the local Federation of Accounting Professionals (FAP), the Stock Exchange of Thailand and the Securities and Exchange Commission (SEC). Although it may appear a long road at first - SET50 companies will not be required to comply until Dec 31, 2011 at the earliest - the first balances required to be stated under IFRS are those as at Jan 1, 2010, which is only a few months away. Suddenly, there is a lot more reason for listed companies to start acting now.

IFRS will not just affect those companies listed on the SET. Indeed, it is already a reality for many companies here. The local operations of European, Singaporean and Australian listed companies already are required to report to their parent companies under IFRS. IFRS adoption in Thailand will mean that it is no longer necessary to prepare two separate sets of accounts, one for local reporting and one for the group. The results in Thailand will be the same as those reported to the head office. Conversely, Thai companies with operations overseas will be able to bring those results into the group's reporting without any further adjustment. In both cases, this should save time, resources and money.

For potential investors into Thailand, this is positive. For example, a European bank looking to acquire a stake in a Thai bank will be better and more easily able to calculate the implications for its own financial position of any investment. Furthermore, the integration of the newly acquired company into the organisation's global accounting system will be smoother.

A key concept of IFRS is "fair value" accounting, which involves the valuation of assets and liabilities at an amount that would be paid between two independent parties on an arm's length basis. The reality is not so simple. How do you value a brand acquired through an investment or financial instruments with no market price? Companies may have to resort to appointing external experts for such valuations.

All this places additional pressure on finance departments and audit firms as they bring their staff up to speed with a new set of accounting standards and rules. Auditors have a key role to play in the convergence to IFRS as they must ensure that their clients are fully compliant. But Thailand is in the fortunate position of being able to call upon the experience of its neighbours, Singapore and Hong Kong, who have already gone through this difficult process.

The issues created by converting to IFRS are not always immediately obvious. For example, human resources departments may need to amend employment contracts or revise KPIs if, as a result of IFRS, the criteria for the timing of the recognition of income and expense change. Indeed, some profits may never be realised under IFRS.

Another example would be where IFRS obliges a company to renegotiate its financing agreements because the change in asset and liability recognition would lead to a breach in existing financing covenants. Under IFRS, certain types of equity may be reclassified as a liability or additional liabilities need to be recognised. Some financial instruments may never have been accounted for previously.

It is not only the companies that are converting that will be thinking about the impact of IFRS. Analysts and investors also will need to be educated on the concepts and new issues raised. Equally importantly, regulators must consider how their own requirements will be affected. This can be illustrated by considering the impact on one regulator here in Thailand, the Bank of Thailand, for whom capital adequacy ratios would need to be reconsidered in light of a balance sheet prepared under IFRS.

For Thailand, it is reasonable to expect short-term pain during the conversion process for all those involved. But this can be tempered by drawing on the experiences of those countries that already use IFRS. The future for high-quality financial reporting in Thailand is definitely bright.

Jonathan Fryer is a UK Chartered Accountant working for Mazars Thailand. Contact ifrs@mazars.co.th