Implications of the Revised Banking Chart of Accounts for the West African Financial System

Reforms to an accounting system that has been in force for nearly 20 years will help to increase the security and robustness of the West African financial system, while improving the quality of financial reporting.

The Revised Banking Chart of Accounts has been adopted by the monetary authorities in the course of convergence towards Basel standards and IFRS and will enter into force on 1 January 2018 for personal accounts and on 1 January 2019 for consolidated accounts, combined accounts and financial statements prepared in accordance with IFRS. The reforms are accompanied by a new prudential framework applicable to banks and credit institutions in the West African Economic and Monetary Union (WAEMU) also set to come into force on 1 January 2018.

As well as security and improvement, the reforms will ensure consistency with common law, in particular the Organisation for the Harmonisation of Business Law in Africa (OHADA) accounting law, recently revised with the publication of the new OHADA Uniform Act on Accounting Law and Financial Reporting (UAAFR).

The amendments to the structure and contents of audit reports recommended by international standard-setters and the issues at stake in the draft reform of local taxes represent major change. For example, some accounting changes will have a significant impact on the opening shareholders’ equity, calling for a forward-looking approach in order to avoid surprises that might undermine respect for the regulatory requirements, in particular those relating to equity.

A move to a conceptual framework

Further major change includes the introduction of a conceptual framework, rather than the existing general framework.

The new conceptual framework, essentially based on the IFRS model, clarifies the fundamental concepts underpinning the preparation and presentation of financial statements and develops appropriate responses to concerns about the purposes, addressees and nature of financial reporting in Article 2.

Thus, the definition of key assumptions (going concern and accrual basis of accounting), the strengthening of accounting principles, the adoption of the concept of fair value and the definition of the conditions of recognition for the components of assets and liabilities, income and expense, represent significant changes that help to achieve high-quality financial reporting.

A hybrid approach has been adopted to the measurement of the constituent components of the financial statements. This is because, although the concept of fair value is adopted, historical cost remains the main valuation convention.

Strengthening accounting principles by introducing the primacy of economic substance over legal appearance is also a major advance in the presentation of financial statements. This principle is particularly relevant to the treatment of leasing operations and repurchasing agreements. In the case of leasing, institutions that conducted finance lease operations still continued to maintain the goods concerned in their capital assets. In terms of the conditions for recognition as a capital asset, goods subject to a finance lease are reclassified in loan accounts and the rules for outstanding liabilities in the event of non-payment apply.

This new provision is justified by the fact that a good under a finance lease no longer meets the conditions for recognition as a capital asset.

Taking account of change

Accounting attributes overall have been reviewed with the aim of adapting them to the new prudential framework, the rules for preparing monetary statistics and the balance of payments.

In addition, the guidelines of the new prudential framework entail an in-depth reform of risk management and cover for outstanding commitments. The changes are strictly in line with the new framework and simultaneously clarify certain measures that were ambiguous in the existing regulation 94-05 (provisioning of restructured debts and the contagion effect).

Elsewhere, a new accounting classification has been adopted for portfolios of performing debts, restructured debts and bad or doubtful debts, including the elimination of the concept of illiquid debt, and the reclassification of loans unpaid at a maximum of 90 days from performing loans.

The sharp rise in securitisation operations, repurchase agreements, options to repurchase and securities lending by credit institutions in recent years has also been taken into account and common rules and principles applied.

With the new rules for the recognition and measurement of securities held by credit institutions, the new accounting systems focuses on management intentions (control or resale). Credit institutions must keep documentation setting out the strategic options underlying the acquisition of securities and the institution’s intentions in terms of holding these securities in its assets.

This documentation will justify the classification and measurement approach (on acquisition and in the annual accounts) to securities, in particular, short and long-term investment securities, held-for-sale securities, portfolio securities, equity investments, shares in affiliated entities, or other shares held long-term.

The common law has recently been amended with the introduction of the revised SYSCOA (the West African accounting system) and of the new OHADA Uniform Act on Accounting Law and Financial Reporting (UAAFR), which comes into effect on the same date as the revised banking chart of accounts, 1 January 2018.

Changes to the presentation of financial statements and clear analysis required

The new format for the presentation of financial statements set out in the revised banking chart of accounts provides more transparency about the financial situation and performance of credit institutions. Institutions required to publish consolidated accounts are obliged to comply with the revised rule, which sets out what elements must be included in the consolidated financial statements. The main change is the requirement for a statement of changes in equity and a cash flow statement.

The scope is also extended to defined financial entities, which are also required to present half-yearly and annual consolidated financial statements certified by an auditor. To cope with these changes, the institutions concerned must analyse the impact of the new framework on their existing accounting procedures.

The objective of this reform is to improve the quality of financial reporting primarily intended for shareholders and the regulator, and are a fundamental resource for assessing entities’ financial situation and performance and, of course, of interest to investors. The convergence of accounting practices with those accepted internationally should facilitate access to external finance.

Credit institutions will be obliged to undertake some large-scale projects to cope with reform including, a review of the reporting and management system which, configured on the basis of the existing system, will need revision to take account of the new accounting requirements.

In general terms, given the critical nature of the extensive work resulting from the adoption of these reforms, it is important for every entity to grasp the issues, the implications, the gaps to be filled, the systems and organisational changes to be introduced, and the impacts on its financial situation. The approach must be structured and shared with the auditors who will ultimately be responsible for certifying the financial reporting.

The reform of the banking chart of accounts is a complex project, demanding rigorous and minute planning. The adoption of a consistent and detailed action plan that identifies the critical tasks and the control and validation points will help to manage the forthcoming changes and provide adequate human resources and assistance to implement these projects successfully.