Financial Reporting in Romania February 2009

Aprilie 2009

CAMELIA HORLACI - Country Managing Partner ERNST & YOUNG S.R.L.

The main legislation currently regulating the accounting and financial reporting environment comprises the Accounting Law 82/1991 (Accounting Law), republished in 2008 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: (i) MoF Order 2001/2006; (ii) 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)

[¹ MoF Order 2001/2006 and MoF Order 2374/2007 are clarifying points already in MoF Order 1752/2005 and are not substantially changing the accounting and financialreporting requirements as indicated in MoF Oder 1752/2005.]

 

Sources of accounting principles

Accounting in Romania is regulated by the provisions of Law 82/1991, republished in 2008.

In accordance with the Accounting Law, it is mandatory for all legal entities and authorized 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 4th Directive of the European Economic Communities (AR4) and
• Accounting regulations for compliance with the 7th 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 in accordance with the provisions indicated in MoF Order 1752/2005.
• 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: (i) Only profits made at the balance sheet date are to be included. (ii) 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. (iii) 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) and that revaluations of tangible assets can only occur for assets existing as of the year end.

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).

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