Accounting Regulation Changes in Lithuania: an Assessment

Transcription

1 Accounting Regulation Changes in Lithuania: an Assessment Renata Legenzova Vytautas Magnus University Faculty of Economics and Management Introduction Information and its availability are assumed to be key determinants of efficient resource-allocation decisions in an economy. Therefore possible changes in content, form, reliability, comparability and other characteristics of information are of great concern to researches and practitioners. Globalization processes and integration of financial markets has challenged regulators of different level around the world to work towards the reduction of information asymmetry so as to meet the needs of market participants while maintaining the current high level of investor protection and market integrity. In general, information is gathered and transferred by a number of providers such as governmental institutions, business and other organizations, individuals, information intermediaries, etc. However, information prepared and disclosed by business organizations has been and still remains one of the major sources of information in an economy. Moreover, a significant part of disclosed information consists of entity s mandatory accounting information, although managers may voluntarily decide to disclose additional financial and non-financial information. Previous scientific research (Admati, and Pfleiderer, 2000; Hope, 2003; Rahman, et. al., 2002; Globerman and Singleton, 2001) has demonstrated that differences in characteristics of entity s financial information have been diminishing over the past decade primarily due to the changes in financial accounting regulation and undergoing accounting harmonization processes. In the European Union countries accounting harmonization has raised many issues and discussions, the corporate disclosure being of the great importance among them. However, in Lithuania the level and specifics of accounting harmonization, its influence on the corporate financial disclosure regulation and practice has not been much analyzed. I believe that such a low interest is largely due to the recent emergence of the issue. As it is further discussed in the paper, in Lithuania the major accounting regulations have been passed during the period of and has been started to implement from Therefore, to conduct analytical and empirical research a longer time period is required. In this paper I make efforts to explore changes in Lithuanian accounting regulation in the context of the European Union accounting harmonization processes. The aim of this paper is identify and evaluate undergoing accounting regulation changes in Lithuania. The following tasks have been formulated to reach the aim of this paper: To evaluate the background for accounting regulation changes in Lithuania; To identify de jure accounting regulation changes in Lithuania and to compare them with the same of the European Union. To assess de facto implementation of accounting regulation by Lithuanian companies. The research methods applied in this paper are: comparative analysis, synthesis and evaluation of scientific literature, legal documents and companies information. The research results indicate that over the research period de jure Lithuanian accounting regulation has undergone significant changes. These changes have largely been influenced by the European Union wide accounting harmonization processes; however Lithuanian accounting regulation has national peculiarities, such as mandatory financial accounting and reporting was only introduced in 2001; Lithuanian national Business Accounting Standards are being developed as a simplified version of the IFRS, so Lithuania has avoided double-set accounting standards situation. Analysis of the de facto implementation of accounting regulation reveals that Lithuanian companies have followed different pattern: some have chosen early IFRS adoption while others adopted accounting regulation changes only when they became compulsory. Analysis revealed that de jure Lithuania and its companies have prepared to become more transparent and investors friendly.

2 Background for Analysis of Accounting Regulation Changes in Lithuania Accounting regulation changes in Lithuania are a part of the European Union wide accounting harmonization processes. Incentives for accounting harmonization in the European Union have been discussed by the European Union Commission and the Parliament, different international and national organizations, associations and companies for a period of time. Accounting harmonization was neither a quick nor an easy decision. It was argued that over the last couple of decades the global economic and financial environment has undergone significant transformations; therefore information need of the enlarged and constantly growing European Union has been increasing. The adoption of a single set of high quality international accounting standards was determined as a key element in the creation of the integrated EU financial service market (EU Commision, 2001). It was also aimed to eliminate the differences among the accounting standards used by the European Union member states, as well as to increase transparency, to make disclosed information more mutually comparable, to contribute to a better functioning of the internal markets (Rahman, 2002; Eichhorst, 2002). I also advocate that changes in political climate, especially the enlargement of the European Union as well as the goal of the European Union to become the largest and strongest knowledge-based economy should be singled out as another important incentive influencing accounting harmonization processes in the European Union. The most obvious accounting harmonization process in the European Union is the undergoing harmonization of accounting regulation. Among the major efforts (steps) of this process in the European Union I identify: 1. Requirement for all publicly traded European Union companies to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) starting from The European Union s efforts to extend the requirement of the IFRS adoption to other companies as well as the development of separate set of accounting standards for small business. 3. The efforts to improve the context of information (quality and quantity) of disclosed information, which is accomplished through a detailed revision of the IFRS by the joint efforts of standard setters, professionals, industries representatives and legislators. 4. The efforts aiming towards the convergence of the IFRS and the United States GAAP (Generally Accepted Accounting Principles) and the creation of a single set of globally accepted accounting standards. Financial accounting harmonization and its various aspects has been examined and followed closely by researchers and accounting professionals. One of the important issues addressed in the papers is whether the accounting regulation (or de jure) harmonization leads to the accounting practice (or de facto) harmonization. As it is indicated by A. Rahman et al. (2002), S. Globerman and W. R. Singleton (2001), Hope (2003) some researchers support such a notion, while the others identify a number of micro and macro level factors, which indicate why the variation from the expected de facto harmonization in the level, context and timing of corporate disclosure have occurred. Although the scope of this paper is to analyze accounting regulation harmonization I support the view that de jure accounting harmonization does not necessarily lead to the harmonization de facto and additional factors such as cultural and corporate disclosure traditions, country and company characteristics have to be considered. Analysis of accounting harmonization background requires to note another important issue, which has not been that much analyzed in the accounting harmonization context. A. Rahman et al. (2002) identifies four essential aspects of accounting harmonization: the regulatory and other influences, the process, output and outcome. I enhance this model by the fifth aspect that is the background of a country/company. The European Union counties entered accounting harmonization processes with different economic, financial as well as corporate governance traditions and practices, which subsequently influenced harmonization process and its outcomes. Analysis of legal environment, finance system and corporate governance orientation of the European Union countries revealed (Megginson, 1997; Broomwich 1992; Damodaran, 1997) that most of the European Union countries, except the United Kingdom and Malta, approached the accounting harmonization process with the similar corporate and accounting background: tax oriented accounting system, high corporate ownership concentration therefore low level of

3 transparency and corporate disclosure, and low comparability of financial information among the countries. I believe that old members (such as Germany, France, Italy) with historically developed and relatively stable accounting systems had more difficulties in accepting accounting harmonization than the new members (such as Lithuania) with relatively young market economies and a constantly changing accounting regulation. This issue is further addresses in Lithuanian accounting regulation changes analysis. An Assessment of de jure Accounting Regulation Changes in Lithuania In this part of the paper an analysis of the major accounting regulation changes in Lithuania are presented. Analyzing the incentives for Lithuania to join the European Union wide accounting harmonization processes back in , I believe that as a country candidate Lithuania was bound to follow the overall European Union policies. However, I also support all of the above mentioned the European Union level factors as being important incentives to start accounting harmonization processes in Lithuania as well. To evaluate the changes in Lithuanian de jure accounting regulation and its desired influence on accounting practice disclosure in Lithuania, I take a position similar to the view of S. Globerman and W. Singleton (2001) and O. Hope (2003), who suggest that from a single country s perspective the assessment of accounting regulation (de jure harmonization) should be conducted at two levels: a) A within-country or company level accounting harmonization, which explains whether financial statements of different companies in a single country may be compared; b) An across-country or international level accounting harmonization, which enables to compare financial information among companies in different countries. a) Within-country level analysis of Lithuanian accounting regulation changes Lithuanian within-country level accounting regulation analysis requires identifying, classifying and discussing chronological changes in Lithuanian financial accounting regulation. In Table 1 the major accounting regulation development processes in Lithuania (after the regaining of independence) are summarized. The first period of may be further divided into a few sub-periods more detailed analysis of which is conducted by Žigienė and Maciūtė (2004) To assess within-country de jure accounting harmonization changes in Lithuania during the period of it is important to identify some important aspects: a) In Lithuania financial accounting only became compulsory in 2001, when the law of Financial Accounting had been adopted. Before that time Lithuanian companies had used tax laws to prepare their financial reports. However, some of the larger companies (most often those audited by international audit firms) had applied International Accounting Standards before b) Following the general accounting harmonization trends in the European Union Lithuania made an early decision to adopt laws obligating to transfer to IFRS. Moreover, this requirement was further expanded to all publicly traded companies, irrespective of whether they had been preparing consolidated financial statements or not. c) Lithuanian authorities have made a decision to create a new set of standards (namely Business Accounting Standards) regulating financial accounting of non listed companies. The Business Accounting Standards are being created on the base of IFRS. The adoption and revision of Business Accounting Standards is assigned to a professional body - Lithuanian Institute of Accountants - which has similar rights and obligations as the International Accounting Standards Board. d) All limited liability Lithuanian companies became obliged to disclose their financial statement. It was expected that the level of corporate disclosure should have increased considerably. The assessment of the accounting regulation harmonization processes in Lithuania allows making an important conclusion. The current accounting and corporate disclosure orientation in Lithuania has shifted towards the countries with an open corporate orientation and an Anglo-Saxon accounting model. That is, de jure Lithuania is prepared to become a more transparent, investor-oriented country. I assume that due to the accounting and corporate disclosure harmonization processes Lithuania has established a strong background for better functioning and growth of its financial market.

4 Accounting Regulation Development Processes in Lithuania Table 1 Period Description of the period The period of financial accounting development * Transition to the accrual principle of accounting Regulation of the content of financial statements Rules of tax exemption in financial accounting An obligation to disclose financial statements of publicly traded companies is approved and later enforced The period of de jure harmonization of financial accounting and corporate disclosure Adoption of the Financial Accounting law and Financial Reporting law. Establishment of an obligation for all publicly traded Lithuanian companies to prepare their financial statements in accordance with IFRS (starting year 2005). National Business Accounting Standards (BAS) are introduced. An obligation for all other limited liability companies to prepare their financial statements in accordance with Business Accounting Standards starting from 2004 is approved. An obligation for all limited liability companies to disclose their financial statements is adopted. Since 2004 The period of de facto harmonization of financial accounting 2004 Financial statements of limited liability companies are the first time mandatory disclosed (for the year 2003) Financial statements (for the year 2004) prepared in accordance with Business Accounting Standards are disclosed for the first time Financial statements (for the year 2005) prepared in accordance with IFRS are disclosed for the first time. * for a more detailed analysis of this period refer to Žigienė and Maciūtė (2004) b) Across-country level analysis of Lithuanian accounting regulation changes Comparison of the accounting regulation changes in Lithuania and the other European Union countries have revealed some major differences, which might be important to take into consideration when the de facto analysis of accounting practice will be conducted. The decision of mandatory use of IFRS to prepare consolidated financial statements of all publicly traded European Union companies has improved de jure accounting harmonization and corporate disclosure by large European corporations, irrespective of what type of corporate and accounting orientation was predominant in a particular country. From the across-country s or international level s perspective accounting harmonization processes are more favorable for multinational corporations, international level investors and creditors as they simplify information flows and increase the overall level and comparability of corporate financial disclosure in the European Union. However, from the within-country s or companylevel s perspective such a decision may be treated as an introduction of the second-set of accounting standards. Thus a publicly traded parent company and a closely held subsidiary company or smaller independent company, all operating in the same industry of a single country, are obligated to use separate accounting standards and therefore to disclose in most cases different in level and type non-comparable financial information. Such a threat is particularly evident in close corporate orientation countries such as Germany, France, and Italy. From this perspective the European Union s effort to extend the requirement of IFRS adoption to the other companies gains extra arguments. I suggest, that in Lithuania this problem is basically non present. Lithuania accepted the European Union s recommendation to extend further the scope of accounting harmonization to all companies in the country by creating new, Business Accounting Standards that are basically a simplified version of IFRS. I view this situation as an important and wise decision made by Lithuanian authorities. This decision ensured that financial disclosure of Lithuanian companies would be comparable at both - national and international - levels. Moreover, if now the governing bodies of the European Union made a decision to extend the mandatory application of IFRS for

5 all companies, the transition from Business Accounting Standards to International Financial Reporting Standards would not be difficult. Analysis of de facto Implementation of Accounting Regulation Changes by Lithuanian Companies To assess how accounting regulation changes have been implemented by Lithuanian companies, an analysis of financial statements of Lithuanian corporations, listed in Vilnius Stock Exchange has been conducted. Scope of the research consists of 32 companies, which were listed in Vilnius stock Exchange during the research period of (excluding banks and other financial institutions). The aim of the research was to identify, that set of accounting standards Lithuanian companies have used to prepare their financial statements. Findings of the research are presented in Table 2. As it is indicated in the table, three different patters of financial accounting regulation changes in Lithuania may be outlined. First group represents the companies that have chosen early IFRS adoption and therefore they may be viewed as more investors oriented and more transparent companies (however more detail research is required). It also may be noted that most of these companies started using IFRS to prepare their financial reports in 1998 or earlier and such decision was strongly influenced by international audit firms. The second group represents companies that have adopted accounting regulation changes only when they became compulsory. These companies may be treated as less transparent and less investors oriented as they used less eternal users friendly accounting standards and laws. These findings allow making an important conclusion that de jure accounting regulation is not the only factor influencing de facto accounting standards choices by Lithuanian companies. Some other factors, such as managers preferences, might be essential. This aspect is nor further developed in the paper and may be a topic of future research. Table 2 De facto implementation of accounting regulation changes by Lithuanian publicly traded companies Grouping of companies Number of companies De facto applied accounting standards* (names of companies) Group I Companies, that have applied IFRS during all research period Group I Companies, that have adopted accounting regulation changes only when it became compulsory Group III Companies with other patters for accounting regulation changes adoption. TOTAL = 11 companies (Rokiškio sūris; Žemaitijos pienas; Anykščių vynas; Klaipėdos baldai; Utenos trikotažas; Vilniaus vingis; Snaigė; Sanitas; TEO LT; Klaipėdos nafta; Vilniaus degtinė.) IFRS IFRS IFRS IFRS IFRS TOTAL = 14 companies (Alita; Grigiškės; Vilniaus baldai; Alytaus tekstilė; Linas; PST; Lietuvos jūrų laivininkystė; DFDS Lisco; Limarko laivininkystės TL TL BAS IFRS IFRS kompanija; Klaipedos jūrų krovinių kompanija; Lietuvos elektrinė; Mažeikių elektrinė; VST; Stumbras ) AB Lietuvos energija" TL IFRS IFRS IFRS IFRS AB "Lifosa" TL IFRS IFRS IFRS IFRS AB "Pieno žvaigždės" TL IFRS IFRS IFRS IFRS AB Dvarčionių keramika" IFRS IFRS BAS IFRS IFRS AB "Rytu skirstomieji tinklai" IFRS IFRS BAS IFRS IFRS AB "Apranga" TL TL IFRS IFRS IFRS AB Lietuvos dujos TL IFRS BAS IFRS IFRS *Abbreviations: IFRS International Financial Reporting Standards, BAS Business Accounting Standards, TL pre-accounting harmonization tax laws.

6 Analysis of de facto accounting standards used by Lithuanian companies to prepare their financial statements revealed another interesting issue. In when tax laws were compulsory to apply, a few companies (Vilniaus degtinė, Rytų skirstomieji tinklai, Dvarčionių keramika, Snaigė, Klaipėdos baldai, Anykščių vynas) had prepared two sets of financial reports: one according to tax laws and another according to IFRS. Both of these reports are publicly available and present different numbers for the same categories. In come cases these differences are material, so it may be confusing for information users which financial reports to analyze and compare between financial periods or among other companies. However, such a difference is temporarily and had disappeared in 2005 when IFRS became compulsory to use. The conducted analysis of de facto implementation of accounting regulation changes revealed the patters followed by Lithuanian publicly traded companies (To whom adoption of IFRS was compulsory). However, number of Lithuanian companies, currently using IFRS to prepare their financial statements is much greater. First of all, application of IFRS is compulsory to all the banks operating in Lithuania (a requirement of the Bank of Lithuania from 1998). Moreover, for consolidation purposes IFRS based financial statements have to be prepared by subsidiaries and associate companies operating in Lithuania. Although exact number is not known, it is estimated that in 2006 more that 300 Lithuanian companies have prepared their IFRS based financial statements. Therefore, further analysis of this issue might be a topic of further scientific research. Conclusions Corporate financial information, its availability and comparability are among the key determinants for making efficient of resource-allocation decisions in an economy. Therefore possible changes in content, level, reliability, comparability and other parameters of financial information disclosed by entities is of great concern to researches, investors, creditors and other external users of financial information. One of the major factors influencing corporate disclosure and its characteristics is accounting regulation, which changes in Lithuania are the research object of this paper. The analysis of background for accounting regulation changes in Lithuania indicated some important issues. First, accounting regulation changes in Lithuania were linked with the European Union wide harmonization processes and were aimed to create an integrated European Union financial market, to eliminate differences among the accounting standards used by the EU countries, to increase transparency, to make disclosed information more mutually comparable. Second, the European Union countries entered accounting harmonization processes with different legal and corporate governance background; therefore their process and outcome of the accounting harmonization may vary. To conduct the accounting regulation changes analysis, de jure and de facto processes were separated. Analysis revealed that years may be identified as the period of major de jure accounting regulation changes in Lithuania. Moreover, in 2001 Lithuanian financial accounting and reporting was only established by laws. In general, de jure accounting regulation changes in Lithuania comply with the overall European Union accounting harmonization processes: all publicly traded companies have to prepare their financial statement in accordance with IFRS; corporate disclosure is mandatory for all limited liability companies. In addition, I argue that Lithuania moved one step forward if compared to most other EU countries as we adopted IFRS based Business Accounting Standards for nonpublic companies. To evaluate changes of accounting regulation in Lithuania and EU countries I questioned how these changes and their possible outcome might be compared: 1) among companies in different European Union countries, and 2) among companies in a single country. Conclusions were made that in across-country level financial disclosure of multinational corporations has become more comparable and transparent, but in many EU countries adoption of IFRS has created two-set accounting standards situation and from a within-country perspective comparability of information has even worsened. At the same time, by adopting national accounting standards that conceptually and practically are analogous international accounting standards Lithuania has created de jure situation were corporate disclosure transparency and comparability of the information is similar in both national and international levels. To evaluate de facto adoption of accounting regulation changes in Lithuania an analysis of accounting standards choices of Lithuanian companies traded in Vilnius stock exchange was conducted. The research revealed that three different patters of financial accounting regulation changes in Lithuania

7 may be outlined. First group represents the companies that have chosen early IFRS adoption and therefore they may be viewed as more investors oriented and more transparent companies. The second group of companies accounting regulation changes have adopted only when they became compulsory. These companies may be treated as less transparent and less investors oriented. The third group joins all remaining companies with the varying accounting regulation changes adoption. The findings of the research lead to conclusions that de jure accounting regulation changes is just one factor which influences de facto changes in accounting standards choices of companies. The other factors, such as managers incentives and preferences, are also important and may be a subject of further research. I would also be interesting to investigate whether accounting regulation changes has led to accounting information quantity and quality changes. References 1. Admati, A., Pfleiderer P. (2000) Forcing firms to talk: Financial Disclosure regulation and Externalities. The Review of Financial Studies. Vol. 13, No Broomwich, M. (1992) Financial Reporting, information and Capital Markets. London: Pitman Publishing. 3. Damodaran, A. (1997) Corporate Finance. Theory and Practice. John Wiley&Sons, Inc. 4. Eichhorst, P. et al. (2002) IAS 2005 Preparing your Enterprise for New International Financial Reporting Standards. CAP Gemini/Ernst&Young. 5. Hope, O. K. (2003) Disclosure Practices, Enforcement of Accounting Standards and Analysts Forecast Accuracy. An International Study. Journal of Accounting Research. Vol. 41, No Globerman, S., Singleton, W. R. (2001). Harmonization of Voluntary Disclosure Practices by Japanese Companies [Accessed: April 26, 2007] Access through Internet 7. Hope, O. K. (2003) Disclosure Practices, Enforcement of Accounting Standards, and Analyst s Forecast Accuracy: An International Study. Journal of Accounting Research. Vol. 41 No EU Commission Proposes Requirement for Listed Companies to use IAS by 2005 (2001) European Commission, 2001 February 16. [Accessed: April 4, 2006] Access through Internet 9. Megginson, W. (1997) Corporate Finance Theory. Addison-Wesley Educational Publishers Inc. 10. Rahman, A., Perrera, H., Ganesh, Sh. (2002) Accounting Practice Harmony, Accounting Regulation and Firm Characteristics // ABACUS, Vol. 38 No Žigienė, G., Maciūtė, G. (2004) Changes of the Accounting System in Lithuania during the Transition Period and their Impact on the Results of Company s Financial Evaluation // Organizacijų vadyba: sisteminiai tyrimai. No.30