Roadmap to full compliance in Rwanda

To ensure success in any major undertaking, you need to anticipate potential hurdles and incorporate mitigating measures in your implementation strategy.

It is no different as Rwanda moves from a national accounting framework to IFRS. Such hurdles could be cross-cutting and others could be at the individual entity level.

At the individual entity level, it is important for all stakeholders to understand that conversion to IFRS is much more than an accounting exercise.

It affects many aspects of a company’s operations, from information technology systems, internal reporting and tax compliance, some of which will need to redesigned substantively.

When considering cross-cutting issues, a number of tax rules, as currently legislated, come to mind. As an example, the current tax legislation does not take into consideration the unique characteristics of life insurance business for an insurer reporting under IFRS.

There is no specific legislation dealing with taxation of life insurance business.

Depending on the contractual characteristics of a company’s life insurance products, recognition of income under IFRS can be complex and in some cases, not all receipts from a customer are recorded as income.

A simple computation of profit for taxation purposes is therefore not appropriate.

For taxation purposes, life assurance business should, in effect, be regarded as an investment business. The insurer is deemed to accept savings from the public, and return them later together with a share of the income from investments.

The tax legislation should recognise that the life insurance fund belongs to the investing public and not the shareholders of the insurance company.

Consequently, amounts received from policyholders have to be supplemented year by year from investment income in order to meet contractual payments to policyholders and to provide the necessary reserves, adequately determined under IFRS, to meet future liabilities to them.

Under the current tax rules, there is a real and present risk that Rwanda’s life insurers are depleting policyholders’ funds through payment of taxes without considering the unique nature of accounting for life insurance business.

Secondly, a number of IFRS rules require measurement of assets at market values, which results in capital gains or losses. In practice, where the gains are reported in the income statement, they tend to be subjected to tax while a loss is treated as tax deductible.

If an entity were to adopt IFRS and has to record certain capital gains through the income statement, like in the case of investment properties, it will lead to actual tax cash outflows even though the gains are not realised or the entity has no intention of ever realising the gains through sale of the asset.

An area specific to the banking industry is the impairment provision recorded against loans and which IFRS requires to be determined in a certain way.

The recent issue of instructions from the National Bank of Rwanda (BNR) allowing the alternative of using the IFRS method in computing loan losses and a prescribed treatment of the difference between these losses and the loan losses computed in accordance with regulatory rules is a good example of aligning regulations to IFRS.

Following the BNR initiative, tax legislation should then consider whether for tax purposes, the IFRS provision is allowable as a basis for computing tax.
The above examples are by no means exhaustive.

But they do illustrate the need to identify the cross-cutting hurdles to full IFRS compliance in Rwanda and the need for the relevant stakeholders to initiate actions to mitigate them. This will inevitably include a re-look of some legislative requirements with an aim of aligning them with an IFRS reporting framework.

Samuel Kariuki is a Manager with PwC Rwanda.
Contact:  samuel.g.kariuki@rw.pwc.com