2.1 International Accounting Standards (IAS)

Scope and Functions of the Accounting and Auditing Standards Monitoring Board Ajith S Ratnayake (Director General, Sri Lanka Accounting and Auditing Standards Monitoring Board)

CONTENTS

1 The need for Accounting Standards

2 How Accounting Standards are Adopted in Sri Lanka

3 Sri Lanka Auditing Standards

Applicability of Sri Lanka Accounting Standards (SLAS), and Sri Lanka 4 Auditing Standards (SLAuS).

5 Duties and Responsibilities Imposed by the Act

6 Monitoring Process

7 Independence of the Board

8 Penalties and other Implications

9 Legal Information and other Clarifications

10 Conclusion

The Need for Accounting Standards

The users of financial accounting statements have both coinciding and conflicting needs for statements of various types. To meet these needs, and to satisfy the fiduciary reporting responsibility of management, accountants prepare a single set of general-purpose financial statements. These statements are expected to present fairly, clearly, and completely the economic facts of the existence and operations of the enterprise. In preparing financial statements, accountants, (like those involved in any communication process) are confronted with the potential dangers of bias, misinterpretations, inexactness, and ambiguity. In order to minimize these dangers and to render financial statements that can be reasonably compared between enterprises and between accounting periods, the accounting profession has attempted to develop a body of theory that is generally accepted and universally practiced. Without this body of theory, each accountant or enterprise would have to develop its own theory, structure, and set of practices, and readers of financial statements, would have to familiarize themselves with each company’s peculiar accounting and reporting practices. As a result, it would be almost impossible to prepare statements that could be compared.

The accounting profession’s efforts to establish a body of theory and practice that acts as a general guide have resulted in the adoption of a common set of standards and procedures called generally accepted accounting principles (GAAP). The term "generally accepted" can mean either that an authoritative accounting rule-making body has established a principle of reporting in a given area or that over time a given practice has been accepted as appropriate because of its universal application. Although principles and practices have provoked both debate and criticism, most accountants and members of the financial community recognize them as the standards and procedures that over time have proven to be most useful.

2. How Accounting Standards are Adopted in Sri Lanka

2.1 International Accounting Standards (IAS)

2.1.1. Introduction

The Accounting Standards Committee in Sri Lanka has decided to keep Sri Lanka Accounting Standards in line with International Accounting Standards. Therefore, it would be pertinent to give the reader an overview of the standard setting process of the International Accounting Standards Committee (IASC), which adopts International Accounting Standards (IAS).

2.1.2. International Accounting Standards Committee

The International Accounting Standards Committee (IASC) is an independent private sector body, with the objective of achieving uniformity in the accounting principles which are used by businesses and other organisations for financial reporting around the world. It was formed in 1973 through an agreement made by professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland and the United States of America. Since 1983, IASC’s members have included all the professional accountancy bodies that are members of the International Federation of Accountants (IFAC). Many other organisations are now involved in the work of IASC and many countries that are not members of IASC make use of International Accounting Standards.

2.1.3. Development of International Accounting Standards

Board Representatives, Member Bodies, members of the Consultative Group, other organisations and individuals and the IASC staff are encouraged to submit suggestions for new topics which might be dealt with in International Accounting Standards.

IASC’s due process ensures that International Accounting Standards are high quality standards that require appropriate accounting practices in particular economic circumstances. The due process also ensures, through consultation with the Consultative Group, IASC’s Member Bodies, standard setting bodies and other interested groups and individuals on a worldwide basis, that International Accounting Standards are acceptable to the users and preparers of financial statements.

The Board sets up a Steering Committee. Each Steering Committee is chaired by a Board Representative and usually includes representatives of the accountancy bodies in at least three other countries. Steering A Committees may also include representatives of other organisations that are represented on the Board or the Consultative Group or that are expert in the particular topic

The Steering Committee identifies and reviews all the accounting issues associated with the topic. The Steering Committee considers the application of IASC’s Framework for the Preparation and Presentation of Financial Statements to those accounting issues. The Steering Committee B also studies national and regional accounting requirements and practice, including the different accounting treatments that may be appropriate in different circumstances. Having considered the issues involved, the Steering Committee may submit a Point Outline to the Board.

After receiving comments from the Board on the Point Outline, if any, the Steering Committee normally prepares and publishes a Draft Statement of Principles or other discussion document. The purpose of this statement is to set out the underlying accounting principles that will form the basis for the preparation of the Exposure Draft. It also describes the C alternative solutions considered and the reasons for recommending their acceptance or rejection. Comments are invited from all interested parties during the exposure period, usually around three months. For revisions to an existing International Accounting Standard, the Board may instruct the Steering Committee to prepare an Exposure Draft without first publishing a Draft Statement of Principles.

D The Steering Committee reviews the comments on the Draft Statement of Principles and normally agrees a final Statement of Principles, which is submitted to the Board for approval and used as the basis for preparing an Exposure Draft of a proposed International Accounting Standard. The final Statement of Principles is available to the public on request, but is not formally published.

The Steering Committee prepares a draft Exposure Draft for approval by the Board. After revision, and with the approval of at least two-thirds of E the Board, the Exposure Draft is published. Comments are invited from all interested parties during the exposure period, a minimum of one month, and usually at least three months, and

The Steering Committee reviews the comments and prepares a draft International Accounting Standard for review by the Board. After F revision, and with approval of at least three quarters of the Board, the Standard is published.

During this process, the Board may decide that the needs of the subject under consideration warrant additional consultation or would be better served by issuing a Discussion Paper for comment. It may also be necessary to issue more than one Exposure Draft before developing an International Accounting Standard.

2.2 Sri Lanka Accounting Standards (SLAS)

2.2.1. Accounting Standards Committee

Sri Lanka Accounting and Auditing Standards Act No.15 of 1995 has brought into being a committee known as the Accounting Standards Committee. This Committee has the responsibility to make recommendations and otherwise assist the Institute in the adoption of Accounting Standards.

The Committee consists of :

The President of the Institute and five other members of the Institute A nominated by the Council of such Institute.

One member nominated by the Sri Lanka Division of the Chartered B Institute of Management Accountants of the United Kingdom.

C The Registrar of Companies.

The Director General of the Securities and Exchange Commission of Sri D Lanka.

E One member to represent the Central Bank nominated by the Governor of the Central Bank.

One member who shall be a director of a company or person having F extensive experience at senior managerial level in a specified business enterprise, nominated by the Ceylon Chamber of Commerce.

One member who shall be a director of a company or a person having extensive experience at a senior level in a specified business enterprise, G nominated by the Federation of Chambers of Commerce and Industry of Sri Lanka.

2.2.2. Development of SLAS

As stated earlier in paragraph No.2.1.1. the Accounting Standards Committee has decided to keep Sri Lanka Accounting Standards in line with International Accounting Standards.

International Accounting Standards adopted by the IASC are studied by the Accounting Standards Committee with a view to adopting them as Sri Lanka Accounting Standards.

Whilst the Committee tries to keep Sri Lanka Accounting Standards, as much as possible, in line with International Accounting Standards, if it identifies areas in which a standard needs to be modified to suite specific conditions in Sri Lanka, such modification would be done. However, the committee attempts to keep such modifications to a minimum level, so that compliance with SLAS would ensure compliance in all material respects with International Accounting Standards.

The due process followed by the Accounting Standards Committee, to adopt a Sri Lanka Accounting Standard is as follows;

The IAS is sent to parties identified by the Accounting Standards A Committee as those primarily interested in SLAS, calling for comments.

A sub committee is appointed to study the IAS, with a view to adopt it B as a SLAS. The sub-committee is chaired by a member of the Accounting Standards Committee.

The sub committee studies the IAS with a view to adopt it as a SLAS, C taking into account any comments received from other parties.

A draft SLAS is prepared by the sub-committee with necessary D modifications, and presented to the Accounting Standards Committee. A public seminar is held by the Accounting Standards Committee, to E explain the proposed SLAS, and to obtain further comments from the public.

The sub committee reviews the draft SLAS based on the comments F made at the public seminar, and recommends to the SLAS for adoption to the Accounting Standards Committee.

The Accounting Standards Committee discusses the proposed standard with the chairman of the sub committee and decides on the final standard to be recommended to the council for adoption. In order to ensure that consensus is reached by parties represented in the G Accounting Standards Committee, the Accounting Standards Committee has adopted a rule that at least ¾th of its members should vote in favour of a standard, before it decides to recommend the same to the council for adoption.

2.2.3 Adoption of SLAS

Standards recommended by the Accounting Standards Committee are adopted by the Council of the Institute of Chartered Accountants of Sri Lanka. The authority for adoption of standards is vested in the Institute by section 2 of the Sri Lanka Accounting and Auditing Standards Act No.15 of 1995.

The standards so adopted are required to be published in the gazette. They shall become effective from the date of such publication or such later date as may be specified therein.

The first set of standards so published appeared in gazette extraordinary No.1056/19 of 02 December 1998. These standards will be effective from financial statements commencing on or after 1st January 1999.

3. Sri Lanka Auditing Standards (SLAuS)

Adoption of SLAuS follows a similar process as for the adoption of SLAS. Sri Lanka Auditing Standards are based on International Standards on Auditing (ISA) published by the International Auditing Practices Committee of the International Federation of Accountants (IFAC).

4. Applicability of SLAS and SLAuS

SLAS and SLAuS adopted by the Institute, and published in the gazette are applicable to all business enterprises specified in the schedule to the Act. These enterprises are known as specified business enterprises. These Enterprises are

1 Companies licensed under the Banking Act, No. 30 of 1988.

Companies authorised under the Control of Insurance Act, No. 25 of 1962, to carry on 2 insurance business.

3 Companies carrying on leasing business.

4 Factoring companies.

5 Companies registered under the Finance Companies Act, No. 78 of 1988.

Companies licensed under the Securities and Exchange Commission Act, No. 36 of 1987, 6 to operate unit trust.

7 Fund Management Companies.

Companies licensed under the Securities and Exchange Commission Act, No.36 of 1987, 8 to carry on business as stockbrokers or stock dealers.

Companies licensed under the Securities and Exchange Commission Act, No. 36 of 1987, 9 to operate a Stock Exchange.

Companies listed in a stock Exchange licensed under the Securities and Exchange 10 Commission Act, No.36 of 1987.

11 Other Companies.

1 Which have a turnover in excess of Rupees of 500 Million.

Which at the end of the previous financial year, had shareholders equity in excess 2 of Rupees 100 Million.

Which at the end of the previous financial year, had gross assets in excess of 3 Rupees 300 Million.

Which at the end of the previous year had liabilities to banks and other financial 4 institutions in excess of Rupees 100 Million.

5 Which have a staff in excess of 1000 employees.

12 Public Corporations engaged in the sale of goods or the provision of services.

13 A group of companies, any one of which falls within any of the above categories. For this purpose, a group of companies" means a holding company and its subsidiaries, the accounts of which have to be consolidated under section 147 of the Companies Act, No.17 of 1982.

5. Duties and Responsibilities Imposed by the Act 5.1. Duties of Specified Business Enterprises Every Specified Business Enterprise is Required to:

Prepare its financial statements in compliance with Sri Lanka Accounting Standards, and take all necessary measures to ensure that the financial 1 statements are audited in accordance with Sri Lanka Auditing Standards with the object of presenting a true and fair view of the financial performance and financial position of such enterprise.

To have the financial statements audited by members of the Institute of 2 Chartered Accountants of Sri Lanka holding a certificate to practice, issued by the Institute.

Submit a copy of the annual financial statements of the enterprise to the Sri Lanka Accounting and Auditing Standards Monitoring Board, to enable the 3 Board to determine whether the financial statements have been prepared in compliance with Sri Lanka Accounting Standards, and

To furnish to the Board or to any person authorised by the Board any information pertaining to its financial statements as may be required by the 4 Board or any person authorised by the Board within such time, as may be specified in a notice issued by the Board or any person authorised by it.

5.2. Duties of Directors, Managers, Secretaries and other Officers

It is the duty of all directors, managers, secretaries and other similar officers of a company or a Public Corporation to exercise all such diligence to prevent the commission of an offence under the Act as he/she ought to exercise having regard to the nature of his/her functions and the circumstances of the case.

Please refer to the paragraph No.7 "Penalties and other implications" for further details.

5.3. Duties of Auditors

The financial statements of every specified business enterprise shall be audited by a member of the Institute of Chartered Accountants of Sri Lanka holding a certificate to practice issued by the institute.

The Act requires the auditors to certify in their audit report that the audit has been conducted in accordance with Sri Lanka Auditing Standards and that the financial statements have been prepared and presented in accordance with Sri Lanka Accounting Standards. Monitoring Process

6.1. The Sri Lanka Accounting and Auditing Standards Monitoring Board

The Sri Lanka Accounting and Auditing Standards Monitoring Board was established by the Act No.15 of 1995. All members of the Board are either ex-officio members by virtue of the holding of a specified public office, or are members appointed out of persons nominated by specified institutions. Therefore, the Board is free of political appointments.

The Board consists of the following members,

1. Three members (hereinafter referred to as "ex officio members") who shall be the persons holding office as

1. the Registrar of Companies; 2 the Commissioner General of Inland Revenue; and 3. the Director General of the Securities and Exchange Commission of Sri Lanka

Ten members appointed by the Minister (hereinafter referred to as "appointed members") and consisting of 1. An officer of the Central Bank nominated by the Governor of the Central Bank.

2. Three members of the Institute selected from among persons nominated by the Institute.

3. A member of the Chartered Institute of Management Accountants of the United Kingdom selected from among three members nominated by the Sri Lanka Division of the Institute.

4. One senior lawyer selected from among three senior lawyers nominated by the Bar Association of Sri Lanka.

5. Two company directors or other persons with extensive managerial experience at senior level in a specified business enterprise one of whom shall be selected from a panel of three names submitted by the Ceylon Chamber of Commerce, and the other from a panel of three names submitted by the Federation of Chambers of Commerce and Industry of Sri Lanka.

6. One Senior Banker selected from a panel of three bankers nominated by the Sri Lanka Banks’ Association, and

7. One person selected from a panel of three persons nominated by the University Grants Commission established by the Universities Act No.16 of 1978, to represent the Departments Faculties and Postgraduate Institutes of Accounts or Business Management or Business Administration in Universities coming within its purview.

6.2. Investigative Powers of the Board

The Board or any person duly authorised by the Board may

1. By notice in writing require a specified business enterprise or its auditors to furnish to the Board or to a person authorised by the Board, within such time, as shall be specified in the notice, any information pertaining to its financial statements and it shall be the duty of such specified business enterprise or its auditors, as the case may be, to comply with such requirement within the time specified in the notice;

2. To summon and question any director, officer or auditor of any specified business enterprise on any matter pertaining to the preparation or presentation of its financial statements; and

3. Carry out such investigations or hold such inquiries as it may by notice in writing consider necessary or expedient for the performance of its duties under this Act, and for such purpose may summon and call upon any director, officer or auditor of any specified business enterprise to appear before it at any such investigation or inquiry or to produce any such books or documents in the possession or control of such director, officer or auditor as are required for the purpose of such investigation or inquiry.

Note: A notice described in (1) above has to be issued not later than one year after the specified business enterprises has submitted the relevant financial statements to the Board. There is no time limit to exercise the other powers.

6.3. Procedure Adopted by the Board

6.3.1. Chart of Action

6.3.2. Origination

6.3.2.1. Regular Review

The SBEs are required to submit their annual accounts to the Board. The Board would carry out a review of the accounts to find out any apparent of non-compliance with SLAS.

The Board would welcome public complaints. However, the Board would act with care and caution to ensure that SBE are not unduly harassed due to frivolous complaints.

6.3.2.2. Public Complaints The Board would welcome public complaints. However, the Board would act with care and caution to ensure that SBE are not unduly harassed due to frivolous complaints.

6.3.2.3. Media Comments The Board would peruse information published in the media with a view to detect a need to carryout an investigation. Here too, the Board would act with caution to ensure that SBEs are not unduly harassed. 6.3.3. Clarification

Clarification referred to in the chart of action refers to clarifications the Board would seek to obtain from the SBE without undertaking a complete investigation.

6.3.4. Investigation (SLAS)

Investigations would be undertaken when there is a doubt that need to be cleared by the Board. A doubt may arise based on paragraph 6.3.2. above. The nature of the investigation would depend on the ircumstances.

6.3.5. Investigation (SLAuS)

Based on the circumstances of the case an investigation into non compliance with SLAS by the SBE could lead to an investigation into non-compliance with SLAuS.

6.3.6. Conclusion

The matter coming to the attention of the Board may be concluded by any of the following ways.

Concluded without any further action:

1. Agreement 2. Direction issued by the Board 3. Legal action

This would mean any or a combination of the following,

1. Compliance with a requirement in accounts prepared in the future. 2. Correction and re-distribution of the published accounts. 3. Compounding a fine by the Board. 4. A fine imposed by the courts. 5. A term of imprisonment imposed by the courts. 6. Other implications (Please refer Para 8)

7. Independence of the Board

The Board has decided to take the following measures to ensure its own independence,

1. Each member of the Board shall give a list of SBEs to which he or a firm of which he is a partner of, or a company of which he or his partner is a director of has a connection with either as an auditor, accountant, director or professional advisor, to the secretariat of the Board.

Portions of the Board papers relating to the relevant SBEs shall be omitted from the 2. papers sent to the relevant Board members.

Board members concerned shall not participate in discussions and decisions relating to 3. the relevant SBEs, and shall withdraw from the meeting when such issues are taken up.

Board members concerned shall not represent the relevant SBEs or the auditors of the relevant SBEs when representatives of the SBEs are invited by the Board for a discussion.

4. However, if the auditor of an SBE practices his profession as a sole proprietor, and has been invited to a discussion by the Board in his capacity as the auditor of such SBE, he may present himself for the discussion with the Board, even though he is a member of the Board.

Board members concerned shall not communicate with the Chairman of the Board or the secretariat of the Board on issues relating to any matter on which the Board or the secretariat of the Board is inquiring into, in relation to a relevant SBE, or the audit of the 5. financial statements of a relevant SBE, except where he is the auditor of the relevant SBE practising as a sole proprietor, and the Board or the secretariat of the Board has invited a communication from him.

When a Board member is a partner of a firm which are the auditors of a relevant SBE, but is unable to communicate with the Board or the secretariat of the Board on a matter on 6. which the Board or the secretariat of the Board is inquiring into, in relation to the SBE, in view of paragraph 10.5, he shall nominate a partner or an employee of his firm to communicate with the Board or the secretariat of the Board on his behalf.

Board members concerned shall not refer to inquiries and investigations conducted by the Board or the secretariat of the Board in relation to a relevant SBE or the audit of the 7. financial statements of a relevant SBE in discussions of the Board or in discussion with other members of the Board, or the staff of the Board.

In this paragraph member of the Board" or "Board member" includes an invitee who 8. attends meetings of the Board as an observer.

8. Penalties and Other Implications

The Following penalties and other implications may arise due to a violation of the provisions of the Act,

Every person who fails to comply with the requirements of the Act shall be guilty of an offence under this Act, and shall on conviction after a summary trial before a magistrate be liable to a fine not exceeding five hundred thousand rupees.

Where a person is convicted of an offence under this Act and the court holds that the act constituting such offence was done with intention of misleading the shareholders of a specified business enterprise or any financial institution dealing with such specified business enterprise or the Inland Revenue Department or where a licensed commercial bank is convicted of an offence under this Act and the court holds that the act constituting the offence was done with the intention of misleading the depositors of such bank the court may sentence the offender to imprisonment of either description for a term not exceeding five years.

Where an offence under this Act, is committed by a body corporate, any person who is at the time of the commission of the offence, a director, manager, secretary or other similar officer of that body corporate shall be deemed to be guilty of that offence unless he proves that the offence was committed without his knowledge or connivance and that he exercised all such diligence to prevent the commission of that offence as he ought to have exercised having regard to the nature of his functions and all the circumstances of the case.

Where any accountant of any specified business enterprise violates any provision of this Act, it shall be the duty of the Board to bring such violation to the notice of any professional body of which such accountant is a member for the purpose of enabling such body to take appropriate action against such accountant.

Where any specified business enterprise has failed to act in compliance with provisions of this Act, it shall be the duty of the Board to bring such fact to the notice :

1. Of any authority which is empowered by law to regulate or supervise the activities of such specified business enterprise; and

2. Of the Inland Revenue Department if the Board considers that such non- compliance has resulted in a substantial reduction of the tax liabilities of such specified business enterprises.

9. Legal Information and Other Clarifications

9.1. Legal Information This paper is not intended to cover all requirements under the Sri Lanka Accounting and Auditing Standards Act No.15 of 1995 and implications of non-compliance. For a more complete understanding of the legal implications you are advised to refer to the provisions of the Sri Lanka Accounting and Auditing Standards Act No.15 of 1995, Gazette Extraordinary No.1,056/19 of 2nd December 1998, Gazette Extraordinary No. 1,072/06 of 24th March 1999, Gazette Extraordinary No.1074/7 of 7th April 1999 and any other Gazette notifications that may be published under the Act in the future.

9.2. Further Clarifications Further information and clarifications could be obtained from Mr. Sunil Dahanayake, Technical Manager (Tel. No. 301214) or from the paper writer on Tel.No.301212.

The address of the Board is: Sri Lanka Accounting and Auditing Standards Monitoring Board 3rd Floor 293 Galle Road Colombo 3.

10. Conclusion

Sri Lanka Accounting Standards and Sri Lanka Auditing Standards will be legally enforceable in respect of all specified business enterprises for financial periods commencing on or after 1st January 1999. Sri Lanka Accounting and Auditing Standards Monitoring Board will monitor compliance with these standards in the manner described in this paper. This process will ensure uniformity in accounting treatment across enterprises which have a significant impact on stakeholders who are not involved in the management of those enterprises. It is hoped that this will result in a major improvement in investor and lender confidence in Sri Lanka.