IFRS in the African Continent: A look at Ghana

As at today, about 120 countries worldwide have adopted the international accounting standards. There are projections that by the year 2014 and beyond, nearly 200 countries around the world would have adopted, plan to converge or adapt IFRS after the world’s largest capital markets- thus the United States of America which has announced convergence plans for listed firms by the year 2014. Already, the US stock market regulator, i.e. the Securities and Exchange Commission has lifted the reconciliation requirement by foreign firms currently using IFRS and seeking capital in the US, to reconcile their financial statements to that of US GAAP. It has long been argued that IFRS is not suitable for every economy. Whereas proponents of IFRS argue in favor of enhanced firm comparability, transparency in financial reporting and corporate governance, better regulation in financial markets, reduced cost of capital, better management of overseas operations and the list goes on.. , skeptics on the other hand argue that what shapes financial reporting is not accounting standards but rather, the institutional arrangements in a particular economy. There is evidence to suggest that, IFRS provides better information quality than that of Local Generally Acceptable Accounting Standards. While this might seem very convincing, it is also documented that IFRS is not suitable for developing economies which are struggling to cope with issues of poverty.

In this article, I intend to extend this debate further in the case of Ghana. I write this article with practitioners, investors, managers and students in mind . In the year 2007 the ministry of Finance and Economic Planning announced that all listed companies, banks, and insurance firms in Ghana are mandated to apply IFRS in the preparation of their financial statements for the financial year end 31st December 2007. However, due to technical challenges, companies could not fully comply and therefore many firms issued their maiden financial statements prepared in accordance with IFRS in 2008. Before I continue, first, a bit of history up to where we are today on IFRS in Ghana. In the year 2005, The Institute of Chartered Accountants Ghana which is the country`s Accounting Standard Setter became a member of the International Federation of Accountants (IFAC). As members, IFAC issued a regulation advising its member countries to adopt IFRS. This was preceded by an earlier study by the World Bank on the Observance of Standards and Codes in Ghana. In that report, the World Bank recommended accounting reforms in order to boost investor confidence in line with the global trends of business. These two events largely triggered the adoption of IFRS in Ghana. However, what still remains unclear is why Ghana adopted IFRS wholesomely and in a rather hastened manner. Given her relatively small size and fewer resources to design its own Accounting Standards, it was prudent at the time, to wholly adopt IFRS without further waste of time. Unfortunately, this came rather too quick as compared to larger emerging economies like Brazil, Russia, Nigeria, India, Canada who are all still considering the possibility of IFRS adoption and or convergence with intense consultation and research on the suitability of IFRS to their economies

At present Ghana is among 15 countries in Africa in the likes of Botswana, Egypt, Ethiopia, Kenya, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Sierra Leone, South Africa, Tanzania Zimbabwe, Swaziland, and Uganda to have adopted or converged to IFRS. However, within the West African Sub region, Ghana is the only country to have adopted IFRS although Nigeria is currently making plans and consultations to adopt in 2012.Without any hesitation; this is a positive movement toward good financial management practices.

However, a recent annual report from the International Accounting Standards Board point to the fact that the pace of development of a country’s stock market is unrelated to whether or not a country adopts IFRS. At this point, it is intriguing to ask a question of convenience, that why do we not see all countries adopting IFRS particularly in Africa? Francophone countries north of the Sahara in Africa tend to retain their culture of sticking with French domestic accounting rules. This group of countries includes but not limited to Togo, Benin, Chad, Ivory Coast, Burkina Faso, Niger Libya, Cameroon, Gabon, Democratic Republic of Congo, Morocco, Senegal, Guinea Conakry, Sudan, Madagascar, Niger, Burundi, Cape Verde, Republic of Congo, Comoros, Tunisia, and Central African Republic. In line with critics’ argument that IFRS is no relevant to third world countries, Perera (1989) states that a direct transfer of, and transplantation of skills, technologies from Anglo-American countries may not work because they are culturally irrelevant or dysfunctional in the receiving country’s context. Then again, I pose the question; do we believe that IFRS adoption in Ghana wholesomely without a thorough accounting reform programme will enhance accounting quality in Ghana?

A more recent publication by the IASB show that Africa as a continent is gradually embracing the idea of IFRS. In this report, Zubaidur Rahman a World Bank expert stated that there is no more resistance to IFRS around the world. What he falls short of mentioning is whether or not, IFRS`s are relevant for the African Continent. With the Exception of South Africa that has demonstrated strong commitment to IFRS adoption, most African countries that adopted IFRS have not managed to document clear benefits following the adoption of IFRS. Even for South Africa, the idea of adopting IFRS was strongly resisted leading the convergence of the South African Accounting Standards to IFRS. Till date, it explains why South Africa continuous to represent the whole of the African continent on the IASB board and remains the only country with the financial capacity to contribute to the funding of the IASB. In the 2010 annual report, South Africa contributed £45,112 to the annual funding of the IASB.

I took the liberty to examine stock market factors as a driver to IFRS adoption. The Ghana Stock Exchange is among the best performing stock markets in Africa. Recent data from the World Bank Group puts GSE in a middle class one.

Figure 1: Source: Based on World Bank Data Base

Although with a strong market performance, the GSE can still not be compared to other larger stock markets in Africa. I group Africa’s top five Stock Markets to illustrate the need for quality accounting information in these markets. In the first chart, it is evident that Kenya, Mauritius, and Cote D Ìvoire stock markets are larger than the GSE.

In the Chart above, all countries have already adopted or converged to IFRS and at least permits or mandates the use of IFRS. Evidence from Kenya suggests that by far, and following closely from South Africa, is the country with stronger IFRS compliance rate. Tunisia and Morocco although with a large stock market, does not permit, mandate or currently has any plans of adopting IFRS. There is mixed application evidence from the Egyptian stock market regarding the benefits of IFRS after the country adopted IFRS nearly a decade ago. Till date, accounting researchers are still struggling to come to terms with the fact that, the process of IFRS around the world is a rather political process than the accounting information needs of particular country.

Figure 2: Source: based on World Bank Data Base

Ghana at an Glance.

As mentioned earlier, effective January 2007, IFRS became mandatory for all listed firm, Bank and Insurance companies. This excluded Rural Banks and Investment advisory firms in Ghana. However, it became clear that companies could not meet this implementation deadline of December 31st 2007 and therefore many firms reported their first financial statements in IFRS at December 31st 2008. I am not aware of any firm which resisted IFRS in Ghana as it came to be mandatory rather than voluntary exercise. However, I have to mention that, long before its mandatory adoption, IFRS was practiced by a selection of Ghanaian listed firms owning to the fact that their parent companies were reporting using IFRS.

An analysis of profit numbers of four selected banks indicates that apart from Ghana Commercial bank, nearly all banks in my sample recorded a reduction in profit numbers in both operating profit and profit after taxes. One reason makes this very apparent. The treatment of commitment fees was quiet arbitrary in the case of Ghana National Accounting Standards. In the old standard, banks merely credited the income statement of any loan commitment fees received regardless of the duration of the loan. This created a front end loaded profit for which the bank had no idea of whether the loan granted will be realized or not. For example, supposed the A bank grants a loan of Gh¢ 10,000 with an interest rate of 10% over a five year period. The commission fees on this loan is Gh¢ 1,000 which is then recognized in the income statement irrespective of whether the client will repay the loan or not over the five year period. Contrary to IFRS, banks are supposed to spread these commitment fees over the life of the loan facility. In this case, an amount of GH¢200 per annum is released into the income statement as commitment fees. In some cases, the standard requires a review of interest rates to ensure that provision for defaults are well accounted for. A lot of banks then had to take huge write downs in commitment fees in the year IFRS was introduced in the Ghana. See the chart below.

Figure 3: Source, Own calculations based on company statements

The net effect was reflected in return on equity over the same period of the accounting change. However, we need to be careful as a higher returns number does not necessarily mean a higher accounting quality.

Figure 4: Source: Own calculations Based on Company statements

Going forward, a huge problem for many financial institutions in properly implementing IFRS in Ghana is the use of fair values.(please look out for my next article on fair value accounting).

There appear to be a struggle in determining fair values particularly in measuring Government securities. A key recommendation will be, for the Securities and Exchange Commission together with the accounting regulator to provide clear guidance on the determination of fair values.

Conclusively, it is still premature to say that IFRS will benefit our nation Ghana as we are rather confronted with so many trivial issues shaping our accounting environment which undoubtedly will shape the quality of our financial reporting system. A critical review of the Ghana’s companies code, a strengthening corporate of governance issues, empowerment of the Ghana commercial courts and above all a revamp of accounting education will do us some good.

Written by: Solomon George Zori.

Mr. Zori is currently a Doctoral fellow in the Area of Accounting and Taxation