Verslo žinios
August 22nd, 2006


Due to differences between international and local accounting standards, in 2005 Alna Group incurred losses of LTL 1.5 million and earned profit of LTL 360 000 at the same time.

Lithuanian companies working in foreign markets have to prepare financial statements both in accordance with Lithuanian and international accounting standards. This causes additional operation costs and intricacy when trying reading financial results.        

For Paper’s Sake Only

“It is difficult to avoid intricacies when preparing a financial statement according to both standards. The Center of Registers gets one set of figures reflecting our activity results, whereas our foreign business partners get another set of figures, which are calculated according to international accounting standards. Evidently, this raises ambiguity for those people who are interested in our business,” says Ms. Justina Milaknyte, Head of the Management Board.
Alna Group companies operate not only in Lithuania but also in Lithuania, Latvia, Estonia, and Poland.
According to Ms. Milaknyte, the company could not obviate the ambiguity when it was preparing Alna and Alna Group financial statements in accordance with local Business Accounting Standards (BAS) and International Financial Reporting Standards (IFRS). As Alna company applies two kinds of financial accounting standards, it has to prepare 4 sets of financial statements: two sets for Alna and another two – for the Alna Group.companies.

Differences Showing up

The main differences between the two financial statements showed up when Article 5 and 12 of the Business Accounting Standard No. 15 Investment to Associated Companies were applied.
Article 5 of the BAS No. 15 provides that investment assets of primary (patronizing) company must be calculated based on ownership method, which is not used in International Financial Reporting Standards. This ownership method provides that primary company (mother company) in its financial statement must show its part of the profit or loss of its subsidiaries.
However, according to IFRS, the investment value is calculated and adjusted based on the forecast of future business activity.
Alna specialists are of the opinion that IFRS allows investment accounting based on different method i.e. on the cost method, which allows to better reflect the status of subsidiary companies.
“It often happens that newly established subsidiaries are not profitable due to investment in the said subsidiaries as well as product development, however, the prospects are good. Therefore, it is logical that primary company assesses the value of its subsidiary based on future profit and not based on losses of the current period,” – says Ms. Milaknyte.
The truth is that from March 28, 2006 the corresponding Business Accounting Standards chapter was changed and now it allows selective use of the cost or ownership method; consequently, there should be fewer differences between the two balance-sheets calculated pursuant to these two methods.
                                                        
Article to Remain Unchanged

However, final results of activity in different financial statements will not be the same. The other important difference is caused by Article 12 of the Business Accounting Standard No. 15, following which, acquired goodwill must be amortized.
Goodwill is an amount paid by buyer, exceeding the value of company net assets.
Goodwill amortization is not calculated according to the International Financial Reporting Standards; its value is also calculated based on the future forecast of subsidiary company activities. This Chapter serves as the main reason why both Alna and Alna Group companies’ financial statements prepared according to BAS and IFRS differ.
According to IFRS, in 2005, the net profit of Alna Group totaled LTL 360 000, whereas the financial reporting prepared in accordance with local BAS shows the loss of LTL 1,6 million due to goodwill amortization.
“Unfortunately, this chapter has not been changed, so the most important profit and loss differences that we see in financial statements are here to stay,”- says Ms. Milaknyte.

Jonas Akelis, partner of Ernst & Young Baltic, UAB: “Both international and our national accounting standards will grow in number.”

Companies preparing their financial statements according to the International Financial Reporting Standards must also prepare another type of financial statement based on Business Accounting Standards for the sole purpose of submitting it to the Center of Registers.
Today, local and international accounting standards often compete within Lithuanian companies.  Subsequent to harmonization of Lithuanian laws with the EU directives, the companies included into stock exchange list were ordered to apply International Financial Reporting Standards and the rest of companies – local Business Accounting Standards. Neighboring Estonia has chosen a more liberal way – their business entities are free to choose any of the two standards – local standards or IFRS, the standards applied in the EU.
Some of our clients say that Lithuanian legislator’s stricter choice hampers their work because some of these clients waste time and resources producing financial statements based on local BAS just to submit these statements to the Center of Registers, whereas in their business the clients use only IFRS financial statements. Unlike Estonian laws, the laws of Lithuania do not allow companies to choose freely.
It would be a mistake to say that one of the standards is superior. The Business Accounting Standards that we create do not regulate all the spheres of accounting, however, they are simpler and easier to use at companies with less sophisticated organizational structure, whereas the International Financial Reporting Standards are often used by the companies which have business interests behind domestic borders of Lithuania, after all, they have to speak to their partners the same financial language.  Both standards are approximately 80% compatible.
International Accounting Standards Board (IASB), which is made of professionals, creates and implements International Financial Reporting Standards. Up to this day, the IASB issued approximately 40 standards regulating different spheres of accounting.  Just for comparison, from 2004, Lithuania created 31 business accounting standards.

Both IFRS and BAS to Grow in Numbers.

Currently, International Financial Reporting Standards are well known to global financial markets, however, in some places they have to compete with US GAAP standard used in the United States.  Some Lithuanian companies have their business interests on the other side of the Atlantic and have to prepare their financial statements according to these standards too.
Presently, there are discussions going on among the two standards designers concerning their unification.  It is likely that in the future the provisions of IFRS may become more similar to those of the American GAAP.