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IFRS places Middle East at the centre of global trade
Gavin Aspden, ICAEW director of qualifications, discusses how the region is adopting high global financial reporting standards
March 25, 2014 12:03 by kippreport
I have just completed a trip to the Middle East region to provide updates on the latest developments in International Financial Reporting Standards (IFRS), which Saudi Arabia is currently adopting. Banks and insurance companies in the kingdom are already required by the Saudi Arabian Monetary Authority (SAMA) to report using IFRS – the Saudi Organisation for Certified Public Accountants (SOCPA) sets the standards for all other companies. In 2012, SOCPA approved a convergence plan that would see all other listed companies use IFRS by 2017.
This is an excellent milestone for the largest economy in the Middle East region. For some time now economists have talked about the region becoming a global crossroads for trade, logistics and finance, since it is excellently placed geographically, at the junction of the traditional markets of the West, the tiger economies of the East and the emerging economies in Africa. It is estimated that a third of the world’s population lives within a three-hour flight of the Middle East region. So, why is adopting IFRS an important step?
In the 21st century, markets, trade and capital flows are global. Many companies look to trade, invest or expand overseas, and as all business is based on trust, this means that there must be some way of maintaining international confidence in business. One solution is to underpin cross-border trade and investment with widely recognised, high-quality financial reporting standards so that companies’ financial reports are transparent and comparable. This is what IFRS set out to achieve, and while it has been a long road – and the journey is by no means complete – standards have come a long way. More than two thirds of G20 nations either allow or require listed companies to use IFRS or national standards based upon them, and more are joining every year.
Moreover, the International Accounting Standards Board (IASB), which sets IFRS, has managed to revise some of the key standards to better meet modern requirements and the finalised standard for revenue recognition – one of the most central financial reporting standards – is expected imminently. As a cornerstone of financial reports, agreeing how and when companies recognise income as revenue is critical to international trade, and this new standard will affect companies of all sizes across the globe. What is particularly heartening is that the new standard is a converged one, between IFRS and the standards in the US (US GAAP). Agreeing on common ways of accounting is not the case in all areas, however, the long-awaited standard on financial instruments (IFRS 9) has seen a lot of delay – partly owing to long political and operational challenges over whether it could be converged with the US.
The entire GCC region following the same financial reporting standards is a demonstration of its increasingly outward-looking international focus. Research reveals that IFRS adoption should lower accounting costs, increase market efficiency and reduce the cost of raising capital – a tremendous benefit for a region that is diversifying economically, especially into financial services. Most importantly, at a time when market shares and influence are shifting across the world, it places the Middle East region firmly at the centre of global trade.