Accounting standard revision brings change to financial reporting environment
Suphamit Techamontrikul clarifies the expected updates to Thai accounting standards and their impact on financial reporting.
What changes would you expect to see in financial statements for the first quarter of 2013?
Several accounting standards have been recently revised and will become effective this year, including those related to income tax, operating segments, foreign-currency translation and government grants. Each of these changes has both quantitative and qualitative implications for financial statements. Let's look at each of them separately.
Income tax is recorded using accounting income before tax to calculate income tax, with the difference between accounting and taxable income tax being recorded as a deferred income tax asset or a deferred income tax liability.
The financial-statement impact of this accounting-standard change is mainly on both net income and total assets or total liabilities. Generally, it is more likely that Thai companies will have deferred tax assets and a higher net income than deferred tax liabilities and lower net income.
This is because under current Thai tax laws, accounting expenses are not tax-deductible and will be tax-deductible only when such expenses are incurred in subsequent years. Take for example the allowance for doubtful accounts or other provisions that are expensed under the accounting basis, but which are not taxable expenses until such accounts receivable are proved to be impaired or the provision is paid in subsequent years.
For financial institutions like commercial banks, there will be less of a tax and accounting difference than in other industries.
This is because the allowance for doubtful accounts of those financial institutions can be considered tax-deductible under special tax regulation.
Permanent tax difference will also not have any impact on the financial statements because there will not be any deferred tax associated with them.
Regarding operating segments, a company must disclose its financial performance, assets and liabilities for each of its strategic business units, enabling users of its financial statements to view the company's financial performance at the business unit level, just like a chief operating officer or any other decision-maker in the company.
Investors or financial analysts can clearly analyse the company in depth and understand its operation well.
However, in terms of preparation, some management teams view the new disclosures as a competitive disadvantage, especially when compared with non-listed competitors, which are not required to disclose operating segment at the segmented level.
Foreign-currency translation will have less impact on most listed companies. An organisation with primary operations in a foreign country may denominate its functional currency in a currency other than baht. In such cases, there will not be a forex gain/loss on each transaction incurred during the year.
However, there will be a forex gain/loss on the translation of the foreign-currency balance at year-end only. We saw companies opting for early adoption of this standard last year. There will be some more companies that will be affected by the standard in the first quarter of 2013.
Finally, the government-grant standard would mainly affect those companies receiving government grants. For example, the government has a programme subsidising those companies impacted by the flood [of late 2011] with low-interest loans. Financial institutions participating in such programmes will need to disclose this in their financial statements.
What is the timeline for implementing International Financial Reporting Standards (IFRS) in Thailand?
The Federation of Accounting Professions has recently proposed that our Thai Financial Reporting Standards should be revised and become effective within two years of the IFRS coming into effect.
Currently, in 2013, Thai Financial Reporting Standards match the 2009 version of the IFRS.
Only financial-instrument and agriculture standards have not been adopted, because of problems related to implementation.
The accounting standard committee is now working to revise this current version to the IFRS 2012 version, which must come into effect in 2014.
The major problems for adopting the IFRS as our primary accounting standard include language issues and developing a deep understanding of the standards to match with the Thai environment.
In conclusion, we can expect to see more changes this year with regards to accounting standards in an effort to better align Thai standards with international standards.
Investors, preparers and auditors need to be updated on these changes to understand how to benefit from them.
Suphamit Techamontrikul is an audit partner at Deloitte.