Accounting Regime Change on Financial Statements: Ghana

Impact of Accounting Regime Change on Financial Statements: Ghana Switches from GNAS to IFRS (Part I)

By now, you should have been familiar with the fact that Ghana has officially adopted the International Financial Reporting Standards (IFRS) and jettisoned the Ghana National Accounting Standards. (Please see BFT 25^th and 1^st August 2011 editions for introduction). In this edition, I take a step further to examine the financial statement impact following the switch by Ghanaian publicly listed firms from the Ghana National Accounting Standards to IFRS. In last week`s edition, I provided a list of possible differences between the GNAS and IFRS. I indicated that measurement and recognition requirements for certain standards differed greatly between the two standards; hence a switch will mean increases or decreases in certain classification of assets, liabilities, expenses or income.  Some of these major changes include;

·       Presentation of Financial Statements- Eg. Statement of Comprehensive Income

·       Presentation of proposed but not ratified dividend

·       Accounting for intangible assets including goodwill

·       Accounting for Agriculture and Biological Assets

·       Accounting for Income taxes, particularly deferred taxes

·       Accounting for Investment property

·       Accounting for Employee Benefits with particular reference to actuarial gains and losses

·       Accounting for Financial Instruments

To illustrate the practicalities of the above differences, I present excerpts of financial statements from selected companies with such significant movements following the accounting change.

Presentation differs between GNAS and IFRS

In accordance with IAS 1, Presentation of Financial Statements ( its equivalent is GNASB standard 2 Paragraph 18,Information to be disclosed in Financial Statements) , reporting entities are required to present items of income and expense either in a single statement of comprehensive income or in two statements comprising  and income statement and a statement of Other Comprehensive Income. This requirement differs in the case of GNAS as it requires a disclosure of an income statement with an Income Surplus account. This is visible in the excerpts from Cal Bank financial statements for 2007 prior to the accounting change.

EXCERPTS FROM CAL BANK LIMITED ANNUAL REPORT UNDER GNAS
CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST DECEMBER 2007
(in thousands of Ghana Cedis)	2007
Interest Income	24,083
Interest Expense	(12,611)
Net Interest Income	11,472
Commissions and fees	4,415
Other Operating Income	7,241
Operating Income	23,128
Total Operating Expenses	(13,946)
Charge for bad and doubtful debts	-1,115
Operating Profit	8,067
Other Income	242
Profit before income tax	8,309
Taxation	(1,912)
National Reconstruction Levy	-
Profit after tax transferred Income Surplus Account	6,397
INCOME SURPLUS ACCOUNT
FOR THE YEAR ENDED 31ST DECEMBER 2007
Balance at 1st January	5,636
Net Profit Transferred from Profit and Loss Account	6,397
Transfer to Statutory Reserve Fund	(1,505)
Proposed Dividend at GH¢0.0105 per share	(1,721)
Dividend paid in respect of employee  share options exercised	(12)
Balance at 31st December 2007	8,795
Source: CalBank Annual Report 2008, Own Calculations

This differs marginally with the presentation requirements under IFRS as in the case of IFRS, an Income Surplus Account is not required but rather, a disclosure of Other Comprehensive Income. Another difference in the presentation also stands in the fact that in the case of IFRS, changes in fair value remeasurements are not kept in income but rather to the Other Comprehensive Income. Although not directly visible in the statement of recognized Income and Expense of CalBank, some of the items required to be included in the Statement of Comprehensive Income includes, fair value measurements of revalued assets and liabilities, available-for-sale financial instruments, actuarial gains and losses from defined pension plans including their tax components, exchange difference on translating foreign operations and cash flow hedges.

Other difference that stands out is the treatment of actuarial gains and losses relating to defined benefit plans. IFRS 19 requires that remeasurments of defined benefit plans resulting in actuarial gains and losses are recognized in Other Comprehensive Income.  In contrast, GNASB 17 is silent on the recognition criteria of remeasurement of defined benefit plans i.e actuarial gains and losses.

EXCERPTS FROM CAL BANK LIMITED ANNUAL REPORT  UNDER IFRS
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2008
(in thousands of Ghana Cedis )	2008
Interest Income	38,113
Interest Expense	(21,682)
Net Interest Income	16,431
Fees and Commissions Income	6,560
Fees and Commissions Expense	(375)
Net Fees and Commissions	6,185
Net Trading Income	10,199
Other Operating Income	1,744
	11,943
Operating Income	34,559
Impairment Charge on Financial Assets	(2,185)
Net Operating Income	32,374
Staff Costs	(11,449)
Administration and General Expenses	(8,143)
Depreciation and Amortization	(1,586)
Total Operating Expenses	(21,178)
Operating Profit	11,196
Share of Post-tax Profit of Associated Company	267
Profit From Disposal of Non-Current Assets	36
Profit Before Income Tax	11,499
Income Tax Expense	(2,431)
Profit After Tax Attributable to Equity   Holders of the Bank	9,068
Earnings per share (Ghana Cedis per share)
- Basic	0.055
- Diluted	0.0544
CAL BANK LIMITED
CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE FOR  THE YEAR ENDED 31ST DECEMBER 2008
Income and expense recognized directly in equity:
Available for sale reserve:
Net change in fair value	(2,749)
Profit for the period	9,068
Total recognized income and expense for the period	6,319
Attributable to equity holders of the bank	6,319
Source: CalBank Annual Report 2008, Own Calculations

Presentation of Proposed Dividend

A further important area of distinction in the presentation of financial statements between GNAS and IFRS is the presentation requirement of proposed dividends not yet ratified by shareholders. In line with IFRS, proposed dividends are not accounted for in income until they have been ratified by shareholders. To be clearer, IFRS requires that dividend liability should only be created when dividend is declared and not when it is proposed as these may or may not be ratified. However differently, GNAS allows dividend declared pending ratification at Annual General Meeting to be recognized as appropriation of retained earnings and forms a component of liabilities in the statement of financial position. Notice from the Income surplus account under GNAS that Calbank recognized proposed dividend of Gh¢ 1,721, 000 when indeed these have not yet been ratified. In 2008, when complying with IFRS, only a disclosure in the note in respect of proposed dividends was made by the bank.

Accounting Change Impacts Intangible Assets

Until the adoption of IFRS, GNAS did not have a substantive standard dealing with how to account for intangible assets. However, GNAS 20 Accounting for Business Combinations provided guidance on the recognition and measurement of goodwill as intangible assets. According to GNAS standard 2 reporting entities should disclose as part of assets, intangible assets comprising patents, trademarks and similar assets. Except for Goodwill, the standard did not provide a basis for the measurement and recognition of intangibles. IAS 38 sets forth the criteria for measuring intangible assets. This led to a material step up in the recognition of intangibles following the switch from GNAS to IFRS. Gross intangible assets grew by 79% whilst net intangible assets after amortization grew by 34%. I show in the table below a summary of intangible assets for a selection of Ghanaian listed companies with material movements in Intangible assets particularly between 2007 and 2008 following the switch to IFRS.

Development of Intangible Assets (2005-2009) All in thousand Gh¢
Company Name	2005 GNAS	2006 GNAS	2007 GNAS	2008 IFRS	2009 IFRS
CAL BANK LIMITED	0	0	0	703	1060
ECOBANK GHANA LIMITED	0	0	0	2351	5221
SG-SSB LTD.	0	0	2057	3890	2570
STANDARD CHARTERED BANK, GHANA	0	0	3008	3008	378
GUINNESS GHANA BREWERIES LTD.	0	6573	6574	6795	10612
UT FINANCIAL SERVICES LTD	0	0	0	356	434
FAN MILK LIMITED	0	0	1694	1910	1911
SIC INSURANCE COMPANY LIMITED	0	0	63	461	511
TOTAL PETROLEUM GHANA	369	14210	0	0	0
UNILEVER GHANA LIMITED	4703	4703	0	4281	4265
Total- Gross Intangibles	5072	25486	13396	23951	27118
	2005	2006	2007	2008	2009
CAL BANK LIMITED	0	0	0	506	541
ECOBANK GHANA LIMITED	0	0	0	2190	3630
SG-SSB LTD.	0	0	414	1910	438
STANDARD CHARTERED BANK, GHANA	0	0	99	20	0
GUINNESS GHANA BREWERIES LTD.	4676	6573	5994	6299	9104
UT FINANCIAL SERVICES LTD	0	0	0	100	42
FAN MILK LIMITED	0	0	1540	1701	1647
MECHANICAL LLOYD COMPANY LTD.	0	0	0	420	420
SIC INSURANCE COMPANY LIMITED	0	0	37	282	166
TOTAL PETROLEUM GHANA	280	14082	13225	15981	13620
UNILEVER GHANA LIMITED	3974	3739	4210	4265	4247
AYRTON DRUGS MANUFACTURING COMPANY	0	0	0	274	244
CAMELOT GHANA LIMITED	0	0	0	43	43
Total Net Intangibles	8930	24394	25519	34091	34203
Sources: Thomson Datastream, Own calculations

Understanding the Impact of Intangibles in Equity Analysis

A key question to ask investors and users is that, what is the impact of growth in intangible assets on financial statements? I believe that a growth in intangible assets results in an increased expectation of future competitive advantage and hence a driver of returns, cash flow and value. I compare the materiality of intangibles in 2007 and 2008 of top seven gainers in intangibles following the accounting change. I find that, in some instances, the value of intangible exceeds one half of market capitalization. In an exceptional case, Total Ghana recorded intangible assets six times more than its market value following the merger with Mobil Ghana resulting in large goodwill recognition. In 2008 in line with the adoption of IFRS, intangibles of the company increased by nearly GH¢1000, 000 triggered by the recognition of software licensing costs. I provide the chart below illustrating comparability of Intangible assets and market capitalization.

Intangibles as a whole provide a rich source of information to investors and analysts in estimating enterprise value of the firm. However, a segregation of intangibles to various components such as brands, trademarks, patents and software licenses will provide more valuable information to different users than a mere aggregation. A clear guidance on their recognition and measurement under IFRS is an improvement to providing users with such information for better decision making and I should applaud the ICA Ghana for the effort to switch to IFRS.

To summarize this edition, I believe that analyzing the impact of the switch from GNAS to IFRS provides clear visibility in understanding financial performances of companies. I argue that, the impact of Ghana`s Accounting Change was perhaps underestimated. Nevertheless, what matters most now is the understanding and application of IFRS accounting in the financial reports of entities. In the forthcoming edition, I will deal with the impact of accounting change on Biological assets, Investment property, Income taxes particularly accounting for deferred taxes and increasingly important, accounting for financial instruments.