THE IMPACT OF THE HARMONIZATION PROCESS ON THE BALANCE SHEET PRESENTATION-THE CASE OF ROMANIA

Elena Staicu
Accounting, auditing and Management Informatics Masters, II, 703

Scientific Coordinator: conf. univ. dr. Nadia Albu ABSTRACT

In this study the process of harmonization is examined through an analysis of the convergence between the OMFP 3055/2009 national regulations and IFRSs from the perspective of de jure harmonization (harmonization of rules). A general analysis of the requirements regarding the presentation of the balance sheet in accordance with IAS 1 and Romanian regulations is performed. Progressive changes to Romanian regulations were observed on items substantially different from traditional practice. Overall, the sources of the Romanian convergence and divergence are pointed out, helping us to understand the progress of the harmonization/convergence efforts in international accounting, but also the difficulties of this process.

KEY WORDS: Accounting harmonization, Accounting reform, Romania, Accounting standard

development

Introduction One of the most important phenomena in international accounting is the harmonization or convergence of accounting rules and practices. Due to high variation of international accounting practices, the major objective of international accounting harmonization is considerably of high importance (Nobes and Parker, 2006 in Musta 2008). 'To harmonize' means 'to reconcile', 'to agree', 'to put in correspondence', 'to match', leading us to the idea that accounting harmonization can be the reconciliation of international accounting regulations or the existing ones in the various national accounting systems (Musta 2008). Harmonization process involves actions of harmonizing or becoming harmonious, to make it to be consistent or be consistent (Romanian Academy, 1998 in Musta 2008), in an attempt to bring order in the reduction of differences, to remove the major obstacles from international comparability. The development of international accounting/ international financial reporting standards by the IASB and their acceptance by various countries is an important mean of diminishing the differences in rules, and this might lead to a higher comparability of practices. In the last years, more and more countries accept under various strategies (adoption, convergence, endorsement etc.) IFRSs generally for listed companies and converge the accounting rules for other entities with IFRSs. Romania is such an example, since it requires the application of IFRSs (as adopted by the European Union) for listed companies, but also underwent a number of reforms which brought the national regulations in line with IFRSs (Albu et al., 2011; Albu and Albu, 2012). However, differences between the national regulations and IFRSs still exist and might cause difficulties for users, preparers (when switching the reporting rules for various purposes), and professionals.

The aim of this paper is to investigate the impact of the harmonization/convergence process of the national regulations and IFRSs on the presentation of the balance sheet. An analysis of regulations is therefore conducted in order to discuss the results of the accounting reforms. Understanding the differences and the converge efforts in the presentation of the information the financial statements is important for users, preparers and auditors (Ding et al., 2007). Literature review The concept of accounting convergence and its importance in international accounting Due to national accounting regulations and the typology of the users categories of financial accounting information between the various countries that may be proposed for consideration at a time, in the financial reporting domain, diversity manifests abundantly. Nobes and Parker (2006 in Musta 2008) argue that differences in the scope of financial reporting are considered normal due to several factors among which: - Accounting regulations character is not very descriptive, and no matter how good the regulations would be elaborated all possible situations cannot be foreseen. - The existence of professional judgment, that really depends on the environment in which accounting professionals operate. - Differences between accounting regulations may differ not only interstate level, but also at intrastate. According to Walton et al (2003 in Mustata 2008) these diferences are based on a number of key factors such as the cultural background, economic and social scientific of every country, the existence of different financial reporting objectives and thus to some different accounting principles. (Musta 2008). However, according to R Musta 2008(pg 56), international accounting harmonization appeared as a need of transparency, accuracy, relevance, reliability, comparability and understandability of the information provided by the economic entities' financial statements, in order to amplify international trade, international economical and/or financial tranzactions, to increase the number of multinational companies and of their subsidiaries, the delocalization of the production process, the liberalisation of the capital markets, increasing the volume of foreign direct investment, increasing the volume of communication etc. There is a significant diversity of views and dimensions regarding the conceptual approach of the accounting harmonization, convergence and standardization processes. Musta (2008) performs a comprehensive literature review in this direction. As such, he cites Walton et al. (2003) who defines accounting harmonization as an international accounting jargon used to describe reporting differences between countries. On the other hand, he shows that Nobes and Parker (2006) consider the accounting harmonization as a process of increasing the compatibility of accounting practices by delimiting a degree of variation. Finally, he takes the differentiation made by Doupnik and Perera (2009) concerning the harmonization of practices (material or de facto) and the harmonization of rules (formal or de jure). For the purpose of this paper, I will focus on the harmonization of rules.

One of the most important manifestations of accounting convergence is the project between the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) aiming at reducing the differences between the standards issued (Musta 2008). Another form of convergence is the evolution toward a single set of standards, which nowadays is IFRSs (Delesalle and Delesalle, 2003 and Walton et al., 2003 cited in Musta, 2008). Since more and more countries adopt IFRSs and these standards impacted on the case of Romania, this paper investigates the convergence as an attempt to reduce the differences between national regulations and IFRSs.

Accounting reforms in Romania and IFRSs as a model After the fall of communism, Romania needed to adopt an accounting model more suited to the needs of a market economy in order to succeed in its further economic development. The first stage of the Romanian accounting reform (1991-1998) was based on the French model. This meant that the accounting principles, the general chart of accounts, and the layouts of financial statements were inspired from the French accounting model. (Albu et al. 2011) There were some reasons for this choice. Romania had to choose a model that complied with European Directives because of its major objective to gain EU membership. The French model was favored because of Romanias historical and cultural ties with France, Frances interest in expanding its influence in the region, and some important characteristics of the French accounting model: it is rule-based, and it acknowledges the needs of the State and the banking system.(Albu & Albu, 2012) Romanias accounting regulation was issued by the Ministry of Finance, the Accounting Law was passed in 1991 and the regulations were implemented in 1993. The system allowed an efficient control of the legality of commercial transactions and of the fulfilling of the fiscal obligations (Ministry of Finance, 1991 in Ionacu et al.2007). The French accounting model adopted by Romania was considered compatible with the Fourth European Directive (Ionacu et al. 2007 in Albu & Albu, 2012) but international organizations, some academics, European experts and big auditing firms soon began to support embracing an Anglo-Saxon accounting model (Delesalle and Delesalle 2000 in Albu & Albu, 2012), which would have meant a second stage of reform (Albu & Albu, 2012). This stage was oriented toward the international standards, since implementing international standards in emerging markets attracts new investments opportunities from advanced economies by providing them a more favorable environment to invest into (Albu et al., 2011)

The main purposes for the adoption of IAS/IFRS in Romania were a faster access to a market economy and attracting foreign investment by developing credible and transparent accounting system good accounting information for decision making to the users, including managers (King et al. 2001 in Albu & Albu). Since the fall of communism in 1989, until the period when it became a member of the European Union (EU) on 1 January 2007, Romania has experienced major economic and structural change regarding adopting IFRS. (Albu & Albu) According to Albu & Albu accountings role, during the communist period, was limited to bookkeeping and fulfilling the needs of the State. Accounting practices lacked transparency, there was a strong preference for detailed rules and taxation rules were dominant.

This led to the implementation of the Romanian Accountancy Development Program, established in 1996, initiated by the Ministry of Finance, with the assistance of the British government under a Know-How Fund banner, and with The Institute of Chartered Accountants of Scotland (ICAS) as consultant. (Albu & Albu, 2012). This development reflected a political shift, a desire to advance more rapidly to a market economy, and an immediate necessity to secure foreign investment. In order to respond to these requirements, the development team took into account implementing the EU Directives and harmonizing with IAS. (King et al.2001 in Albu & Albu, 2012). The objectives of the Romanian Accountancy Development Program were in accordance with the requirements of the international financial institutions. Both the World Bank and the International Monetary Fund (IMF) have been impressive forces behind the expansion of IAS, in Romania, as in other emerging economies (Annisette 2004; Mir and Rahaman 2005 in Albu & Albu, 2012). The Ministry of Finance issued a national regulation where were included IAS translated into Romanian. The regulation was issued in two versions, first one in 1999 and the second one in 2001 as an improved version of the first one. The regulation was consisted of harmonisation with the Fourth European Directive and provided the legitimacy of the regulator for the World Bank and IMF. The new resulting regulation OMFP 94/2001, the improved version of OMF 403/1999, comprised the general principles and rules, a uniform chart of accounts (the French-based one with some adjustments), principles of Anglo-Saxon origins such as substance over form and materiality, the IASCs conceptual framework, which was considered a mixture of AngloSaxon and French philosophies (Roberts 2001) and a possible source of confusion in practice (Albu & Albu, 2012), accounting policies and definitions taken from IAS. The regulation issued by the Ministry of Finance was to be applied by all large entities, progressively according to diminishing size criteria.(Albu & Albu, 2012)

During 1999-2001 Romania complied more than necessary with the expectations of the EU at that time (Ionacu et al., 2007) because the EU decided later that IFRSs should be applied by listed entities. Also, Romania changed the national rules in line with IFRSs, which might be analyzed as a process of convergence.

Application of IAS was difficult and usually incompletely performed and needed assistance form the auditors, especially Big 5 (at that time). Big auditing companies often provided consultancy services and/or training in implementation of IAS. The current Big 4 accounting firms play a great role in the expansion of accounting and represent the normative constraints that alter organizations and the decisions they make in accordance to their reporting and practices implemented. The auditors, having wide knowledge, particularly the ones in the Big 4, are considered to confer an exhaustive application of the adequate accounting treatments (Albu et al. 2011). According to Albu et al. (2011), this second stage of accounting reform had an minor effect on transparency of financial information, the quality of accounting information and the use of professional judgement, far from the Anglo-Saxon accounting models requirements. In many cases fiscal rules predominate over IAS requirements (Paunescu, 2006 in Albu et al.2011). In 2005 the Ministry of Finance issued new accounting regulations, to be applied from 2006, in order to prepare for the EU membership. The 2005 Conformity Regulation divided enterprises into two separate categories: some applying accounting regulations conforming to European Directives and others applying supplementary accounting regulations conforming to full IAS/IFRS (Ionacu et al. 2007). According to the Conformity Regulations, for the year 2006, all the entities were supposed to prepare their financial statements conforming to European Directives, while credit institutions also prepared IFRS financial statements and other public interest entities prepared IFRS financial statements only if they have implementation capacity. However, much of the OMFP 1752 issued in 2005 is in line with the previous orders, thus maintaining the IFRSs influence (at least in the definitions for the elements of financial statements, and in some accounting policies and options).

Financial statements Financial statements are prepared by companies worldwide as part of the financial reporting process. However, prior research suggests the existence of differences caused by the influence of social, economic, legal or requirements of various users. The information presented in the financial statements is based on accounting policies included in standards. However, even if companies apply the same accounting policies, differences might exist for two reasons: the national features, and the lack of a standardized layout in the presentation of financial statements.

According to IAS 1, the objective of general purpose financial statements is to provide information
about the financial position, financial performance, and cash flows of an entity that is useful to users in making economic decisions. A complete set of financial statements includes:

a statement of financial position (balance sheet) at the end of the period; a statement of profit or loss and other comprehensive income for the period (presented as a single statement, or by presenting the profit or loss section in a separate statement of profit or loss, immediately followed by a statement presenting comprehensive income beginning with profit or loss); a statement of changes in equity for the period; a statement of cash flows for the period; notes, comprising a summary of significant accounting policies and other explanatory notes; comparative information prescribed by the standard.

Research method This paper investigates the level of convergence between the national regulations and IFRSs regarding the presentation of the balance sheet. In this respect, a general analysis of the requirements regarding the presentation of the balance sheet in accordance with IAS 1 and Romanian regulations will be performed. Secondly, I will adapt the methodology used in other studies investigating convergence (such as Peng and van der Laan Smith, 2010) in order to develop measures of convergence. Given the history of the Romanian accounting system, meaning a first phase derived from the French system (group of European Continental accounting system) and a second phase influenced by the IASs and British experts (influence from Anglo-Saxon accounting systems), I will employ two measures: a measure of convergence reflecting to what extent the international regulations were similar to those included in the national regulations; a measure of divergence reflecting the persistence in the national rules of influences opposed to the Anglo-Saxon model (derived from the French influence). Therefore, the study is based on the analysis of the layouts and requirements related to balance sheet presentation included in IAS 1 and all Romanian regulations after the fall of communism.

Research analysis

The analysis of requirements suggests that Romanian regulations are very prescriptive in what concerns the presentation of the balance sheet, while IAS 1 requires a number of lines to be presented. Munteanu et al. (2011) interpret this as a flexibility and opportunity for professional judgment under IAS 1 as opposed to the rigidity of the Romanian format. As previously mentioned, after the fall of communism the reform was based on the French model. Therefore the balance sheet included in the regulation nr.704 of 22 December 1993 of application of the Accounting Law No.82/1991 had many French influences, such as: the use of passive for the total of liabilities and equity and the use of the table format. Also, in addressing the legal, the balance sheet presented the status of the company situation at some point, meaning that the rights and obligations of property (monetary quantifiable) of the company, the rights representing the asset and the heritage obligations representing the passive. The balance sheet economic equation also called balance sheet equality ASSETS = PASSIVE', with the adoption of the Anglo-Saxon system, became 'ASSETS ='EQUITY+ LIABILITIES. The convergence with IAS is shown by the replacement of the Passive element with Equity+ Liabilities.

The second model derived from the Anglo-Saxon influence included both British influence (such as the list layout) and IASs (such as the definition of elements). The model developed in 1999/2001 (Order 403/1999, 94/2001) was maintained (with a limited number of changes) until nowadays (Order 1752/2005, 3055/2009). In order to analyze the convergence, the starting point is the list of lines required by IAS 1: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) property, plant and equipment investment property intangible assets financial assets (excluding amounts shown under (e), (h), and (i)) investments accounted for using the equity method biological assets inventories trade and other receivables cash and cash equivalents assets held for sale trade and other payables provisions

(m) financial liabilities (excluding amounts shown under (k) and (l)) (n) current tax liabilities and current tax assets, as defined in IAS 12 (o) deferred tax liabilities and deferred tax assets, as defined in IAS 12 (p) liabilities included in disposal groups (q) non-controlling interests, presented within equity (r) issued capital and reserves attributable to owners of the parent.

If the Romanian regulations require a specific item, 1 was assigned, and 0 otherwise. The analysis for the first (1993) model suggests a level of convergence of 33%., while the analysis of the second model (after 2001) suggests a level of convergence of 55%. The main sources for the lack of convergence come from the following elements: biological assets, assets held for sale, and deferred taxes. In order to measure divergence, a list of items specific to the French accounting system was compiled: establishment costs, prepayments and accrued income, conversion differences (assets), conversion differences (liabilities), premium on redemption of bonds (as assets), government grants as a part of shareholders equity etc. The presence of these items in the Romanian layout suggests a high level of divergence from the IAS 1. The level of divergence is of 85% for the 1993 model and of 75% for the model employed after 2001.

Conclusions:

The harmonization process of Romanian national regulations and IFRSs arose from the need of development, in an attempt to diminish the differences in the accounting regulations, in order to attract new investments opportunities from advanced economies by providing them a more favorable environment to invest into. Nevertheless differences between the national regulations and IFRSs still exist. The investigation of these differences is of interest for practitioners, auditing firms, and users.
This paper is aimed at investigating the impact of the harmonization/convergence process of the

national regulations and IFRSs on the presentation of the balance sheet. To achieve this, an analysis of regulations was conducted in order to discuss the results of the accounting reforms at balance sheet level. The purpose of the analysis was to measure the level of the convergence and divergence between the Romanian balance sheet and IFRS balance sheet.

Convergence measurement was made by the analysis of the balance sheet items listed in IAS 1 compared with the existing balance sheet items in OMFP 3055/2009. Divergence measurement is made by analysis of the French balance sheet model compared to the balance sheet model under IAS 1. An increase of convergence and a decrease divergence in time can be noticed. The level of convergence between Romanian regulations and IAS 1 increased form 33% to 55%, reflecting that Romanian balance sheet regulations are harmonized with more than half with the international balance sheet regulations. The level of divergence between the Romanian balance sheet model and IAS 1 decreased from 85% to 75%, reflecting the differences between Romanian regulations (since the adoption of the French accounting model) and the Anglo-Saxon regulations. The convergence is also reflected by the vertical form of the balance sheet, the replacement of the passive element with the Equity+ Debts. The divergence is reflected by items that are mandatory under IAS 1 and that do not appear in the Romanian balance sheet. This category includes: fixed assets held for sale (IFRS 5), assets or liabilities included in groups of assets held for sale (IFRS 5), investment property (IAS 40), biological assets (IAS 41), claims or liabilities of Deferred tax (IAS 12). This study points to the sources of convergence and divergence between the Romanian regulations and IAS1 and helps us understand the progress of the harmonization/convergence efforts in international accounting, but also the difficulties of this process.

REFERENCES

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Musta, R. (2008), Sisteme de msurare a armonizrii i diversitii contabile ntre necesitate i spontaneitate, Editura Casa Crii de tiin, Cluj-Napoca Sonlang, P. & Joyce, v.d. L.S., (2010), Chinese GAAP and IFRS: An analysis of the convergence process, Journal of International Accounting, Auditing and Taxation 19 (2010) 1634

Accounting regulations in compliace with European directives, approved by OMFP 3055/2009, OG. No. 796/10.11.2009, available on-line at: http://static.anaf.ro/static/10/Anaf/legislatie/OMFP_3055_2009.pdf Accounting regulations in compliace with IFRS, available on-line at: http://www.iasplus.com/en/standards/other/framework Accounting Law No.82/1991, available on-line at: http://www.dreptonline.ro/legislatie/legea_contabilitatii.php Accounting the regulation nr.704 of 22 December 1993 of application of the Accounting Law No.82/1991, available on-line at: http://www.cdep.ro/pls/legis/legis_pck.htp_act_text?idt=14161