By Ravishanka Withanachchi
The application of the new Sri Lanka Financial Reporting Standards (SLFRS), which will be mandatory for all listed entities preparing financial statements from January 1, 2012, would hit the reported profitability of such companies at least temporarily, according to senior partners at some of the leading audit firms. The new set of accounting standards will require numerous amendments and adjustments to be made in the financial statements and these changes will lead to a reduction in the profits until the market gets used to it, say experts.
“The adoption of the SLFRS means that companies need to make some compulsory adjustments such as fair value adjustment of the assets and liabilities represented in the balance sheet to reflect the real business value. Therefore, these changes will cause a dip in profitability by the companies,” said Shamura Hadgie, a partner at the Price Waterhouse Coopers (PWC) Sri Lanka branch. She further added that the companies need to incur costs on capturing the data from the very outset of transactions and this exercise will demand the developments of sophisticated IT systems to gather data and information and training the staff on these areas and related maintenance costs of such systems. She says that although the new reporting standards will improve the transparency and reliability of financial information, it will inevitably lead to broadening the costs associated with the financial reporting.
“The extent of the impact on the profitability of a company will depend very much upon the nature and the complexity of the company’s systems and processes,” said Manil Jayasinghe a partner at the Ernst and Young Colombo office.
He also noted that it will be impossible to estimate the financial impact on the company in the event of transition from the existing accounting standards to new SLFRS but the experiences in other countries have shown that this could range as high as 10 percent drop in the profitability. He, however, pointed out such consequences would be short term and once the companies apply the new standards over time it will become a normal practice.
Meanwhile Riyaz Mihular, partner of the KPMG Colombo told that although there will be temporary difficulties associated with the conversion to SLFRS it is imperative to go ahead with the new standards if Sri Lanka to attract foreign investors because they demand the financial information in compliance with the international financial reporting standards (IFRS).
The new SLFRSes will become mandatory for the companies for the preparation of the financial statements from 2012.
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