Implementation of IAS/IFRS in the Slovak Republic (doc. Ing. Jozef Škultéty, PhD.)
Anläßlich der 15. Europäischen Bilanzbuchhalter und Controller Fachtagung vom 03. bis 05. Juni 2005 in Ceský Krumlov, Tschechische Republik, hat der Präsident des slowakischen Verbandes der Bilanzbuchhalter einen Fachvortrag zu IFRS gehalten:
Since 1 January 2005, all companies with their securities listed at regulated European Union markets are obliged to prepare their financial statements under IAS/IFRS. There are approximately 7,000 such companies. According to the Slovak Act on Accounting, since 1 January 2005, all consolidated financial statements shall be prepared under IAS/IFRS; whereas the approximate number of consolidated financial statements is 150 – 200. Since 2006, individual financial statements of selected accounting units shall be prepared under IAS/IFRS. These will be companies the securities of which are allowed to be traded on regulated markets in any of the EU member countries, companies which in two subsequent accounting periods met two out of three size criteria (turnover exceeding SKK 5 billion, assets exceeding SKK 5 billion, or employees exceeding 2,000), banks, entities trading in securities, insurance and assurance companies, the Slovak Insurers’ Bureau, pension fund management companies, the stock exchange, the National Bank of Slovakia and others. Together, the overall number of such individual financial statements is approximately 150.
IAS/IFRS require that there is at least one comparative period. This means that for the 2005 financial statements the comparative period would be year 2004. It is important to notice that IAS/IFRS do not regulate the manner for keeping the books of accounts, they only apply to the financial statements. Currently, these standards apply to all kinds and sizes of enterprises from all industries.
It is expected that the implementation of IAS/IFRS will have impacts on the assets, equity and profit/(loss) of Slovak enterprises. Assets (and consequently also the equity) will usually be higher under IAS/IFRS than under the Slovak national regulations mainly owing to the fact that so far IAS/IFRS prefer to measure assets at the (higher) fair value rather than the (lower) book value; almost all items (except for inventories and deferred taxes) need to be measured at fair value including tangible non-current assets.
In certain cases, the standards allow selecting one of two alternative solutions to one and the same problem; these alternatives are equal and enterprises may choose either of them. On the other hand, if there are issues that are not addressed by any standard, management shall adopt its own judgement; standards – to a certain extent – allow free hand. Enterprises preparing their financial statements under IAS/IFRS should already now (before the preparation of the financial statements) make an analysis of the differences between the Slovak regulations and IAS/IFRS in order to be aware of the impact which the adoption of IAS/IFRS would have on their assets, equity and profit/(loss) so that they can select a preferable alternative and avoid surprises which the adoption of IAS/IFRS might bring about.
The use of IAS/IFRS is associated with positives but also a number of negative aspects. The positive consequences include e.g. global comparability of financial statements prepared by Slovak accounting units, easier communication with business partners, simpler access of investors to Slovakia, transparency, credibility and reliability of financial statements, independence from tax regulations, the same base used for both external and internal reporting, etc. A fundamental negative of using IAS/IFRS is a limited possibility to compare financial indicators calculated on the basis of data stated in the financial statements, as IAS/IFRS do not prescribe a detailed, but only a minimum structure of the financial statements. Secondary negative aspects, mainly in the first years after the implementation of IAS/IFRS, could include an imperfect translation of the standards, problematic determination of the fair value of assets and liabilities, struggling to manage the standards, insufficient training of accountants and an overall change in the traditional way of thinking of accountants.
IAS/IFRS are standards appropriate mainly for big international companies with the main source of funding being the capital market, and usually operating internationally. However, under the circumstances of continuous globalisation and harmonisation, the question arises which standards should be applied by small and medium enterprises with major difference from international companies being that small and medium enterprises are not capital market players and their funding is limited. Usually, such firms operate only in one country. Their responsibility towards investors is not the same, as their main funding comes from banks and other financial investments. In many cases it is hard to determine the fair value of production equipment that is usually fully written off; typically there is one owner who is also the manager and due to the fact that it is a family business, the main interest is a positive cash-flow. Such enterprises have a limited circuit of information users; these are owners, the management and financial institutions providing the funding. For these reasons a necessity arose to develop high-quality, clearly understandable and enforceable standards appropriate for small and medium size enterprises. Such standards should make sure that financial statements of small and medium size enterprises be understandable, complete, relevant, and – most of all – comparable, at least within the European Union. The development of such standards started in July 2003 at a meeting of the International Accounting Standards Board (hereinafter referred to as the „Board“). The Board adopted a resolution on the following:
develop appropriate standards for small and medium size enterprises;
describe the characteristics of enterprises to whom the standards apply;
standards should be based on fundamental IFRS principles and any modifications of these principles shall be based on the needs of users of financial statements prepared by small and medium size enterprises;
in cases when a specific issue is not addressed by the SME version of the standards, enterprises shall be allowed to move back to IFRSs;
reduce the burden of small and medium enterprises resulting from single global financial reporting.
It is important to notice that the characteristics delimiting small and medium size enterprises shall be determined by qualitative indicators such as public interest.
In June 2004, the Board published a document including the comments on draft standards for small and medium size enterprises; the majority of respondents supported the proposal made by the Board that in cases where the standards for small and medium size enterprises do not address a specific accounting issue these enterprises may transfer back to IFRSs. However, opinions differed on the issue concerning the publishing of standards and on whether the standards should be published separately or as part of IFRSs.
In April 2005, IASB issued a staff questionnaire on possible modifications of the recognition and measurement principles for the use by small and medium size enterprises (SME). The questionnaire included two questions:
1. What are the areas for possible simplification of recognition and measurement principles for SMEs?
2. From your experience, please indicate which topics addressed in IFRSs might be omitted from SME standards because they are unlikely to occur in an SME context. If they occur, the standards would require the SME to determine its appropriate accounting policy by looking to the applicable IFRSs.
The questionnaire also included topics of possible simplifications or omission of some IAS/IFRS such as e.g. measuring the costs of inventories under IAS 2, use of the percentage of completion method for contracts under IAS 11 and for service revenue under IAS 18, deferred income tax accounting under IAS 12, lease accounting under IAS 17. According to the current state of the IASB agenda the issue of standards for SMEs may only be expected in 2006.
Nowadays, the development in economy is so fast that it is not sufficient to stay with the knowledge obtained in school. Therefore, it is appropriate to talk about a lifelong education system.
Students at business academies and similar economic secondary schools obtain basic knowledge of IAS/IFRS during their studies. According to the curriculum for the subject „Accounting“ as approved by the Slovak Ministry of Education in May 2004, the issue of international harmonisation of accounting is taught in the 4th (graduation) year.
Graduates from secondary schools – business academies – in practice typically work as accountants (make entries in the books of accounts).
Universities have a wider focus, more on theory and methodology, but, surely, they educate their students for the needs of practice. In practice, the IAS/IFRS issues appear to be a new and relatively complicated phenomenon.
Students of the University of Economy in Bratislava need first pass general economy subjects (many come from grammar schools), they need to study e.g. the general theory of economy, finance, corporate economy, and only afterwards they study accounting. Problem is also education of teachers teaching accounting. These teachers usually study on their own.
I believe that the third problem in education is training or maybe even retraining of accounting staff who already have a traditional way of thinking in accordance with legal regulations which exactly define accounting procedures and procedures for the preparation of financial statements, and they lack any creativity in this area.
IAS/IFRS are a way of thinking in which the management takes the responsibility towards owners of the capital for any decisions taken.
This is the time we learn how to use these accounting principles and accounting methods. In Slovakia, this shall be something that not only accountants but also managers should learn, and it might be good if the issues are understood also by owners. Therefore lifelong education is necessary for everybody working in the field of economy.
June 2005