Introduction of IFRS
International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. The rules to be followed by accountants to maintain books of accounts which is comparable, understandable, reliable and relevant as per the users internal or external.
International Financial Reporting Standards began as an attempt to harmonise accounting across the European Union but the value of harmonisation quickly made the concept attractive around the world. They are sometimes still called by the original name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new International Accounting Standards Board took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards International Financial Reporting Standards (IFRS).
The broad objective of this research is to identify & analyze the IFRS practice of Bangladesh
1. To identify the present condition of economic strategic in Bangladesh
2. To identify the financing report in Bangladesh.
3. To understand the financial statement about overall performance of the organization.
The study has descriptive research design to fulfill the research purpose. The population of this study comprises of all the listed manufacturing companies in Bangladesh. At present (February, 2012) total number of listed manufacturing companies in Bangladesh are ninety three. For this study secondary data have been used for effective research findings. The data has been collected from annual reports of selected manufacturing companies. The annual reports were collected from the library of the Dhaka Stock Exchange (DSE) and websites of the companies. In addition to the above, the data has been collected through study several relevant standards, articles, national and international study materials and other printed materials.
Limitation of the study
The major limitation factor for this report was primarily the reluctance and strict adherence to confidentiality maintenance attitude shown by the officials of those organizations. Most of the calculations had to be made taking some bank organization of the relevant literature and study materials on the banking sector were not updated, and no comprehensive in-depth study on the business industries.
• Due to some restricted to entry office we cannot collect all information properly.
• Others factors is some of information we cannot collect, reason of official formalities.
2. Conceptual Issue
As financial globalization proceeds, international financial reporting and auditing standards are increasingly becoming important instruments of integration. This has been observed in Cannes summit of the G20 leaders in November 2011. The G20 leaders reinforced the influence of International Financial Reporting Standards (IFRS) and in that they called for the a implementation of global accounting standards by 2011. By the end of 2008, there were over 100 countries that had adopted International Financial Reporting Standards. Another parallel summit was the “Business for the Environment Global Summit 2011” which was held in Indonesia on 27-29 April 2011. The Global summit offers collaborative solutions to address the most urgent environmental and climate issues facing the world today. This paper makes a critical appraisal of the contemporary environmental accounting literature, and examines whether Bangladesh Financial Reporting Standards (BFRS) can contribute towards the monitoring and protection of the environment of the country.
A quick glance through the conceptual framework and a number of standalone standards provide useful grounds for monitoring environmental assets, liabilities and expenditures. Furthermore, since accounting is characterized by recognition, measurement and disclosure, mandated accounting for the environment brings accountability to the boardroom. Added to this is the fact that BFRS has legal backing throughout the country, and hence it has a unique advantage of bringing environmental accountability into both financial markets and regulatory frameworks.
This paper uses a conceptual schema to synthesize causes and effects of environmental degradations, and argues that BFRS is necessary for monitoring the environmental behaviour of various firms. Bangladesh financial reporting and auditing standards will be able to discriminate among the beauty contestants in environmental disclosures. The nonfinancial and financial information can be reported through a mandatory separate statement of environmental assets and liabilities. This paper proposes some of the elements of such a statement.
A cluster of research argues that the firm’s environmental disclosure effort is a self serving exercise of obtaining social legitimization. This study searches for a framework in BFRS so that environmental risks (liabilities, litigations, reputation damages, loss of future profits) and assets (endowments, rights and known reserves) of public and private goods can be accounted for. The paper identifies key standards that are relevant to environmental monitoring, and suggests ways of integrating financial and nonfinancial information into the existing financial reporting system.
Figure 1 is drawn following the conventions of structural equation modeling. In order to improve the readability of the figure, certain connectors (associations) between nodes and mathematical notations were omitted or reduced to the minimum. Note that there are five nodes in Figure 1 – emission, production, depletion, projects and urbanization. Each node in turn contains multiple factors.
For instance, the emission node has factors from X11 to X1n, and X11 can represent Co2 or an equivalent element that contributes to emission of pollutants that affect air and water quality. The production node in turn has multiple factors ranging from X21 to X2n. The nodes and the rest of the factors can be identified by carefully reviewing ISO and other industry standards and the emerging literature. ήi is a policy node that is caused by activities (X11 to Xnn) that lead to emission, production, depletion, large projects and urbanization activities. The policy node is further mediated by market and nonmarket forces. Market forces are product, labour and financial markets (including financial intermediaries in carbon securities) while nonmarket forces are state and non-state actors.
Another important question is it necessary to delineate the trans-boundary causes of environmental degradation from the non-trans-boundary causes? The interesting question for this paper is the extent to which accounting policy makers can influence the policy node, ήi and make accountancy as an instrument of good local and international environmental governance.
As noted earlier, a number of existing standards and interpretations directly and indirectly deal with environmental issues. In this respect, BFRS 6 (implementation January 2007) for example directly deals with extractive industries and IFRIC 5 provides the guidance for decommissioning, rehabilitation and restoration of environment related expenditure. IFRIC 3 (still under discussion) and BAS 38 (intangibles) deal with government allocated emission rights, trades in these rights and the impairment of the emission allowances. Furthermore, it is important to note that a number of other standards provide an indirect support for the recognition, measurement and disclosure of environmental assets and liabilities. BAS 37 (provisions for contingent liabilities and assets) can be linked to environmental liabilities. BFRS3, BAS 27, BAS 28, BAS 31, BAS 24 and BFRS 8 respectively deal with business combinations, investments in joint ventures and associates, related party disclosures, and specify the reportable segments of a geographically dispersed global company. Listed local manufacturing companies, subject to certain exemptions, are expected to comply with BFRS. An environment perspective to financial reporting standards therefore provides a new insight; an insight that is useful for monitoring and protecting the environment.
Paragraph 11 of BFRS 6 states the following:
“In accordance with BAS 37 Provisions, continent liabilities and contingent assets, an entity recognizes any obligations for removal and restoration that are incurred during a particular period as a consequence of having undertaken the exploration for and evaluation of mineral resources”.
Furthermore, paragraph 3 of BAS 37 defines provisions as “liabilities of uncertain timing or amount”; and contingent liability is defined as “a liability that arises from past events, [italics added] and its existence will be confirmed only by the occurrence and non-occurrence of one or more of uncertain future events that are not wholly within the control of the entity.”
Paragraph 14 of BAS 37 requires that provision should be recognized when (a) An entity has a present obligation (legal or constructive) as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations; and (c) a reliable estimate can be made of the amount of the obligation. Paragraph 17 further defines an“ obligating event” as a past event that leads to present obligation. It states that for an event to be an “obligating event”, it is necessary that the entity has no realistic alternative to settling the obligation created by the event. Finally, paragraph 27 of BAS 37 deals with the disclosure conditions for contingent liabilities. If the liability is not expected to lead to an outflow of resources and where an entity is jointly and severally liable for an obligation, that part of the obligation that is expected to be met by other parties is treated as contingent liability. The standard therefore leaves the application to the management, audit committee and external auditors. In other words, even though the two standards do not define the time limit or the size (amount) of the event or what construes a “constructive” obligating event, they provide the technical ground for the recognition of environmental liabilities that arise from past events (activities) that lead to, for example, the deterioration of air and water quality.
Rights (allowances) to emit pollutant continue to be treated as intangible assets to be accounted for according to BAS 38 (Intangible Assets). When the rights are allocated by government department for amounts less than its fair value, the difference is recognized as deferred income (liability) in the statement of financial position. When the firm starts polluting, it records provisions according to BAS 37. The original draft did not raise issues about past events.
In its November 2009 meeting of IASB the technicalities of defining an “obligating event” and the timing of recognition of liability at cost or market value and recording of initial government allocation right (at cost of market) and provisions, whether it should be treated as intangible asset and face impairment annual test are finalized. However, the lesson from this IFRIC is that a number of standards BAS 38 (Impairments), BAS 20 (Government Grant), BAS 37 (Provisions, contingent liabilities and contingent assets) and the standards that relate to financial instruments (BAS 32, BFRS 7 and BAS 39) will be affected, and require amendments.
IFRIC 5 (decommissioning, restoration, rehabilitation and similar liabilities) deals with accounting for trust funds set aside for the environment. Paragraph 1 of IFRIC 5 defines the purpose of the fund as “to segregate assets to fund some or all of the costs of decommissioning plants (such as a nuclear plant) or certain equipment (such as cars) or in undertaking environmental rehabilitation (such as rectifying pollution of water or resorting mined land), together referred to as “decommissioning”.
BAS 8 deals with selecting and applying accounting policy. The scope of BAS 8 covers fundamental errors, retrospective adjustments of financial statements (as far back as practicable, per paragraph 26), and when and how material omissions or wrong statements should be practically treated, and corrected. The only unsettled matter is whether the retrospective restatement of financial statements for environmental costs and liabilities is impractical and indeterminate (paragraph 5 of BAS 8).
23 and paragraph 33 are silent about segment risks and rewards arising from engaging in environmentally sensitive activities in each of the geographical areas that the company is operating. When BFRS 8 is examined in conjunction with BAS 27 (consolidation) and the above mentioned standards the implication for global companies operating in environmentally sensitive industries becomes serious.
BAS 32, BFRS 7 and BAS 39 respectively deal with presentation, disclosure, and recognition and measurement of financial instruments. Hedge accounting (cash flow hedge, fair value hedge and hedge of net investment in foreign operations – paragraph 86 and 87 of BAS 39) require that gains and losses, and effective and non effective hedges are to be reported in the comprehensive statement of income. Given the rise of carbon related financial instruments, and increases in pending lawsuits against companies the combined impacts of BAS 27, BAS 37, BFRS 6, IFRIC 5, BAS 8 and standards that deal with derivative instruments are to strengthen the political costs (Watts and Zimmerman, 1986) for global companies that are operating in environmentally sensitive industries.
Information and the Efficiency of the Capital Markets
II. Mispricing Created by the Arrival of Information
One answer to these questions is provided by looking at how market participants react to news that is suddenly revealed to the public. Major corporate events can immediately change expected future cash flows. For instance, a major disaster such as the Bophol chemical spill immediately drove down the Union Carbide stock price. In fact, prices react within a matter of minutes to such news, and the reaction is over within the day! In empirical “event studies” which focus on corporate news releases, there is little evidence that you can make money by investing on yesterday’s news. This means, for instance, that when you read in the Wall Street Journal that a company announced the discovery of a new cure for the common cold at a news conference yesterday, arbitrageurs have already bought the shares, and driven the price up.
Often there is major news about the discount rate used to discount the future cash flows in valuation. For instance, when the Federal Reserve cuts the discount rate, we expect the net present value of corporate securities to increase — that is stocks should jump. When discount rate changes are announced, stock prices react that day, and not the next day. This empirical evidence strongly indicates that, at least in the highly liquid, open-information economy of the U.S. capital markets, stock prices are Efficient.
IV. Benefits of an Efficient Market
So far, arbitrageurs sound like vultures waiting to swoop in for the kill. They take risks to exploit new information at the expense of the less informed. The costs seem to be rewarding opportunism at the expense of other investors. Are there any benefits to having a market operate efficiently? Arguments in favor of efficient capital markets are: (1) the market price will not stray too far from the true economic price if you allow arbitrageurs to exploit deviations. This will avoid sudden, nasty crashes in the future. (2) An efficient market increases liquidity, because people believe the price incorporates all public information, and thus they are less concerned about paying way too much. If only the market for television sets were as efficient as the market for stocks! A lot less comparison shopping would be needed. (3) Arbitrageurs provide liquidity to investors who need to sell or buy securities for purposes other than “betting” on changes in expected returns.
Finding of the study
The findings of the study are consistent with observations of Freedman and Jaggi (2006) and Bebbington et al (2008). In the analysis it is revealed that the phenomena under which the social responsibility and sustainability reports are prepared, who prepares them and whether the reports are subjected to audits remained unclear. More specifically, the annual reports rarely contained nonfinancial quantitative data.
The financial statement section of the annual report is also not very different from the nonfinancial information section. The 2010-11 annual reports of the 65 companies (Appendix-1) were inspected in respect of BFRS 6 (for early adoption), IFRIC 5, BAS 37, BAS 8, BAS 32, BFRS 7 and BAS 39. The findings are as follows –
(1) All the annual reports state that the financial statements were prepared in accordance with BFRS (BFRS 1 and BAS 1). The audit report also states that the financial statements were audited in accordance with Bangladesh Auditing Standards.
(2) With regard to BAS 32, BFRS 7 and BAS 39, there is little or no disclosure in the financial statements of the sixty five companies about emission rights and/or carbon derivatives. As regards BFRS 8 and BAS 27, all the companies (for which applicable) are preparing their consolidated financial statements and mention the regions in which they are operating. However, it was not always clear how many segments were consolidated.
(3) None of the companies separately disclosed the amount of normal provisions or provisions set aside for contingent liabilities in respect of the environment.
(4) They do not classify the expenditure [incurred for the improvement of the environmental performance] capital and operating nature. They treat the whole expenditure as operating expenditure.
(5) All the companies prepare their accounts according to the traditional accounting system i.e., there is no determination and classification of environmental expenditures.
(6) The companies disclose only qualitative and descriptive information without any attempts at quantification.
(7) Most of the companies only show positive environmental information and there is no negative information.
(8) The environmental information can only be found either in the Chairman’s statement or Director’s report. Most of the companies only show their environmental issues regarding protection of the environment, pollution control, planting of trees and other matters. They do not show any information regarding waste generation, conservation of energy, water wastage and recycling of waste, noise nuisance and so on.
(9) Except Summit Power Limited (reported environmental & compliance cost under general and administrative expenses) none of the companies disclose any exact quantitative facts on expenditure incurred and targets set and achieved.
(10) The companies do not maintain any approaches [either physical or monetary approaches] of environmental accounting.
The overall conclusion from the aforesaid financial statements can be summarized as follows. First, from a compliance perspective, it is impossible to conclude that the companies are indeed meeting the requirements of BFRS. Second, the companies did not produce a separate statement on the environment.
This observation might be explained by DiMaggio and Powell’s (1983) institutional isomorphism imposed by the profession, which puts constraint and pressure on a reporting firm to imitate others and find legitimacy. Finally, from an earnings quality perspective, the implications of the non recognition, non disclosure and inadequacy of provisions for past and present environmental responsibilities points to one direction the inflation of earnings and the intrinsic (fundamental) values of equities.
The above discussion leads to two financial reporting policy alternatives that the ICAB might wish to consider. The first option is a mandated separate statement that focuses on the environment. The second option is to require the disclosure of certain elements of information within the existing reporting framework and strengthening the offsetting rule. As the world continues to be preoccupied by issues of environmental degradation, trans-boundary issues get confused with non-trans-boundary issues. The production of a separate statement on the environment would be a preferred policy to decouple trans-boundary issues from non-trans-boundary issues in the context of segment (geographical) reporting. Table-3 contains some of the elements of the proposed separate statement for the environment.
This paper examined whether financial reporting standards can be used as a device for monitoring the environmental behavior of environment sensitive companies. The paper reviewed the literature in economics, finance, environmental accounting, and examined the voluntary-mandatory mechanisms of corporate disclosure.
The researchers surmise that the proprietary cost (Verrecchia, 1983) and voluntary disclosure mechanism is infeasible for monitoring public goods such as the environment. Mandated environmental public information therefore cannot be discounted on the grounds of voluntary disclosure and Country’s beauty contest. Second, a careful examination of the existing ICAB standards provided useful avenues for improving the current set of financial statements, and the production of mandated separate statement of environmental assets and liabilities.
Furthermore, using qualitative and case research methodology the paper examined the annual reports of sixty five local companies that are listed on Dhaka stock exchanges. The researchers find that the social and sustainability reports that were studied do not have standard formats, and the GRI guidelines appear to be inadequate. The financial statements though claim to comply with BFRS they did not enable firms to disclose key environmental information. Consequently, the paper proposed two policy options of either requiring a separate statement of environmental assets and liabilities, or requiring the disclosure of minimum set of environmental information through the existing set of comprehensive financial statements.
The separate statement on the environment that is prepared in accordance with BFRS has a number of advantages, including the decoupling of reputation management efforts of environmentally sensitive firms from their genuine information disclosure efforts. The separate statement emerged from the analysis of the multifactor model in Figure 1, and the analysis of existing financial reporting standards. The proposed statement is consistent with the REA (resource, event, and agent) accounting concept, and certain information can be aggregated for planning and monitoring at sector, macro, regional and global levels. The information can be used by both market and nonmarket (State and pressure groups) actors. Furthermore, since companies are already producing lengthy social and environmental reports the incremental cost of preparing the separate statement outweighs the ramifications of climate change and lawsuits on the part of the firms.
There are number of avenues for future research. Replication of this research on other environmentally sensitive sectors might provide corroboration for the conclusions of this paper. Examining the form of association between nonfinancial information and financial information that purports to serve the environment is another avenue. Expanding the taxonomy of environmental accounting in the context of REA, BFRS and other local standards requires a shared database environment. This is another direction for future research.
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