Financial Reporting in Romania

CAMELIA HORLACI - Country Managing Partner ERNST & YOUNG

The main legislation currently regulating the accounting and financial reporting environment comprises the Accounting Law 82/1991 (Accounting Law), republished in 2005 and modified by Law 259/2007, and Minister of Public Finance Order 1752/2005 (MoF Order 1752) including subsequent modifications and related legislation. The Accounting Law indicates the requirements for the general accounting framework for Romanian entities and MoF Order 1752 covers financial reporting and related accounting requirements. The provisions of MoF Order 1752 have been prepared to reflect relevant European Directives in force, namely Directive IV for stand-alone financial statements and Directive VII for consolidated financial statements.

In this article we focus on the following financial reporting legislation:

• approval of Accounting Regulations to comply with European Directives – Minister of Finance Order 1752/2005 (MoF Order 1752/2005), subsequently modified¹ by:
  • MoF Order 2001/2006
  • MoF Order 2374/2007
• conformity of Accounting Regulations with International Financial Reporting Standards and respecting conformity of accounting regulations with European Directives – Minister of Finance Order 907/2005 (MoF Order 907/2005);
• application of International Financial Reporting Standards – Minister of Finance Order 1121/2006 (MoF Order 1121/2006).

 

Sources of accounting principles

Accounting in Romania is regulated by the provisions of Law 82/1991, republished in January 2005 (Accounting Law) and modified by Law 259/2007.

In accordance with the Accounting Law, it is mandatory for all legal entities and authorised individuals to keep accounting records in Romanian language and the national currency. For internal information purposes, entities may choose to draw up statements in another currency.

Legal entities or individuals have to keep written evidence of all transactions and record these transactions in their accounting books. The records required by the Accounting Law include: Journal Registers, Stock Register (based on an annual inventory of assets and liabilities), and Nominal Ledger (based on analysis of the accounting information posted from source documents or Journal Registers). The books and the accounting records may be hand-written or in an electronic format and can be used as evidence in court and are subject to review by Romanian fiscal and judicial authorities. Accountants should prepare a trial balance from the nominal ledger on an annual basis and this trial balance is the basis for preparation of periodic financial statements.

Accounting regulations issued require a specific chart of accounts and specific reporting disclosure contents and formats for entities. From 1 January 2006, MoF Order 1752/2005 provides the applicable base to be followed in two accompanying regulations:

• accounting regulations for compliance with the 4^th Directive of the European Economic Communities (AR4); and
• accounting regulations for compliance with the 7^th Directive of the European Economic Communities (AR7).

MoF Order 1752/2005, applicable from 1 January 2006, in conjunction with the accompanying accounting regulations issued and subsequently issued regulations, provides: prescribed layout and content of the annual financial statements, accounting principles and valuation rules, rules on the preparation, approval, auditing and publication of the annual financial statements.

 

Fundamental concepts

MoF Order 1752/2005 looks to cover in one piece of legislation the financial reporting applicable to entities of all sizes, with differing level of disclosure relating to size and public interest consideration.

MoF Order 1752/2005 stipulates that the following general principles apply:

• Accruals basis – Transactions and other events are recognised when they arise and are entered in the accounting records and reported in the financial statements for the related period.
• True and fair view – Annual financial statements are to be prepared to give a true and fair view of the assets, liabilities, financial position and period results of an entity.
• Comparative figures are to be disclosed for all statements prepared.
• Going concern – The entity is presumed to be carrying on its business as a going concern. If this principle is not appropriate and the Administrator(s) are aware of this, there is a doubt on the ability of an entity to continue its activities. This should then be disclosed in the explanatory notes.
• Consistency – There should be an application of valuation rules on a consistent basis from year to year.
• Prudence – In particular:
  • Only profits made at the balance sheet date are to be included.
  • Includes all liabilities relating to financial year or previous years, even if such liabilities become apparent or become known between the balance sheet date and the date of completion of preparation.
  • All depreciation (value adjustments) is to be included irrespective of whether the result for the financial year is a loss or a profit.
• Independence – Income and charges relating to the financial year are recorded irrespective of the date of receipt or payment.
• Separation – Components of asset and liability items are valued separately.
• Intangibility – Opening balance sheet for each financial year must correspond to the closing balance sheet for the previous financial year.
• No offset – Offset between asset and liability items in the period end balance sheet is not allowed.
• Economic substance and reality of events – Carrying values and transactions should be considered and not only the legal form and/or substance.

Any departures from the above principles are seen as being exceptional and would require disclosure in the explanatory notes indicating reason for not applying and the effect on the disclosure of assets and liabilities carrying value, the financial position and period results.

 

Valuation principles and accounting policies

Valuation in general is based on purchase price or production cost. In specific situations, contribution value and fair value (including revaluations) may be used. MoF Order 1752/2005 mentions that assets and liabilities will be valued according to the contents of this Order and to norms issued by the Ministry of Finance.

Accounting principles are meant to reflect cost values, but “fair value” should also be considered for carrying values for annual financial statement preparation. This includes revaluations of tangible assets. It is indicated that valuations should be completed by a professional valuator (i.e. a member of a relevant professional body with national or international recognition).

MoF Order 1752/2005 includes guidance on valuation methods and accounting principles to be considered in the maintenance of financial records and in the preparation of annual financial statements.

There is no direct mention of International Financial Reporting Standards (IFRS) in MoF Order 1752/2005 or the accompanying accounting regulations (AR4 and AR7).

There is, as far as AR4 and AR7 are concerned, a consistency in many areas with IFRS, and it can be assumed (although there is no definitive guidance), that where further guidance is required, IFRS could be referred to for applicable accounting policy disclosures required in the notes to the financial statements. In many areas, IFRS will provide further guidance on valuation methods and accounting policies.

At the same time, there are some IFRS that are not applied or have only limited comment in AR4, such as:

• Deferred taxation, while applying under previous legislation (MoF Order 94/2001), is not mentioned in MoF Order 1752/2005, except to the extent of indicating how to treat opening balances arising from previous year application of IAS 12 “Income taxes”. Although not specifically stated, based on the requirements of MoF Order 1752/2005 it is considered appropriate to reverse in full any pre-MoF Order 1752/2005 deferred tax balances and not to apply deferred tax for subsequent periods.
• For “financial instruments”² there is some mention of treatment, but it is very limited and certainly includes little of what is included in IAS 32 “Financial Instruments – Disclosure and Presentation”, IAS 39 “Financial Instruments – Recognition and Measurement” and IFRS 7 “Financial Instruments – Disclosure”.
• IAS 17 “Leases”, there are definitions included in MoF Order 2001/2006 of a “finance lease” and an “operating lease”, as well as the accounting treatment to be applied for these items, but there is more limited disclosure requirements than IAS 17. The wording of MoF Order 2001/2006 is consistent with treatment and definitions as indicated in IAS 17. MoF Order 2374/2007 provides guidance on sale and leaseback arrangements treatment.
• In addition matters covered in a number of IFRS standards are only touched on to a limited extent or not at all, such as: IFRS 2 “Share-based Payment”; IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”; IFRS 6 “Exploration for and Evaluation of Mineral Resources”; IAS 11 “Construction contracts”; IAS 14 “Segment Reporting”; IAS 19 “Employee Benefits”; IAS 40 “Investment Property”; and IAS 41 “Agriculture”.
• For intangible assets, there are some specific treatments prescribed that are not in all cases consistent with IAS 38 “Intangibles”. This includes treatment for depreciation of goodwill arising from acquisition.
• Corrections arising from adoption of MoF Order 1752/2005 are included as a current year retained earnings adjustment.
• Errors from previous periods are included as a current year retained earnings adjustment or in current year period result, with appropriate disclosure and a requirement that any loss generated is to be covered by current year profit before any profit distribution from the current year is made. Comparatives are not adjusted for any prior period item. IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” requires adjustments to be made to previous year comparatives for certain accounting policy changes and previous period errors.
• For the preparation of consolidated financial statements (see further comments below) there are some differences compared to IFRS 3 “Business Combinations” including:
  • Treatment of amortization of the goodwill arising on acquisition over 5 years; IFRS carry at full value less impairment assessment.
  • Negative goodwill on acquisition is recognised in the income statement only to the extent that certain criteria are met; IFRS 3 requires immediate expensing through the income statement.
  • If on acquisition values cannot be determined, then value on first date of first time period end carrying values can be used for consolidation and for determination of goodwill on acquisition.
• Decommissioning provision and inclusion in the value of an item of property, plant and equipment is not allowed under MoF Order 1752/2005.
• IAS 2 “Inventories” allows FIFO, weighted average and in specific cases, by item identification basis and retail price method. MoF Order 1752/2005 in addition to the cost determination basis indicated above allows that a LIFO³ method can be used.
• The extent of specific disclosure requirements under MoF Order 1752/2005 is more limited than IFRS requirements, however to reflect a “true and fair view” as indicated in MoF Order 1752/2005, there is an argument for extensive disclosure.
• IFRS provides far more guidance on accounting policies and principles in specific areas and for specific industries.

In order to clarify certain accounting treatments and give more clear definitions, the Ministry of Finance issued order 2001/2006. This document includes:

• the definition of finance and operating leasing and their accounting treatment;
• definitions for revenues and expenses;
• definitions of related parties;
• disclosure of significant guarantees in the financial statements is mandatory.

In MoF 2374/2007 there is further clarification, amongst other points, on:

• Where IFRS consolidated financial statements are prepared there is no requirement to also have MoF 1752/2005 consolidated financial statements.
• Treatment of prior period errors and no adjustment is to be made to comparative figures.
• Sale and leaseback transaction treatment.
• Treatment and costs for construction activities.
• Revaluation of tangible assets.
• Provisions, including the involvement of an expert for determination of pension provisions and introduction of “constructive obligation” concept for consideration of recognition of reorganization provisions.
• What should be recorded in the individual chart of account categories. This is included as an Annex to the order.

In relation to accounting policies, AR4 indicates that:

• specific principles and policies adopted by the entity in preparing, drafting and completing its annual financial statements;
• the management of each entity shall set the accounting policies for the operations carried out, to reflect the specific activity of the entity;
• in establishing accounting policies, an entity needs to ensure that the general accounting principles (“fundamental concepts”) as included in AR4 are observed;
• accounting policies should be:
  • relevant for the needs of the users in the decisionmaking process;
  • “credible” – present a “true and fair” situation, be neutral, be prudent and be complete in all significant aspects;
  • only be changed if required by law or to present more relevant or “credible” information.

A limitation with MoF Order 1752/2005 is the extent to which entities have flexibility in choosing accounting policies to be applied, meaning that there may not be consistency in reporting under MoF Order 1752/2005 between similar entities (in terms of industry, type of business and size of operations).

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Legal updates

30 August 2010 Human Capital Alert: Deadline for submission of insurance declarations 26 August 2010 Legislative Summary - July 2010 20 August 2010 Tax Alert no. 30 - Norms regarding the deduction of Research and Development expenses 12 Iulie 2010 ROI procedure 12 Iulie 2010 Amendments to accounting legislation 2 Iulie 2010 Changes brought to the Fiscal Code 30 Iunie 2010 Changes brought to the Fiscal Code 30 Iunie 2010 Anti-evasion measures

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