Initial reflections on the new Act on Annual Standalone and Consolidated Accounts

29 August 2016

The new Act on Annual Accounts applies to periods starting on or after 1 January 2016. One of the key drivers beneath it is reduction of administrative burden imposed on businesses. As the magnitude of changes is substantial, the compilation of accounts and audit thereof, at least initially, will be challenging both to accountants and auditors. Whilst we still continue forming the view about the new set of requirements, there are some issues that we would like to highlight.

What changes do we find positive?

  • If recognition criteria have been met, R&D expenses can be capitalised. Recognition criteria are the same as defined under IFRS. The new regulation should help producing more meaningful accounts for companies with significant R&D budget.
  • Accounting for grants now applies to funds received both from public and private entities and it is in line with IFRS. The key benefit thereof is that recognition of grants is no longer pending physical receipt of funds.
  • Financial instruments can be recognised, measured and disclosed in line with IFRS. Many companies in practice already use IFRS as the base for accounting certain financial instruments. For example, loans and borrowings often are measured at amortised cost. Now this has full regulatory support. The new regulation is flexible – even though financial instruments can be measured under IFRS, it is our understanding that this does not automatically mean producing full disclosures under IFRS.
  • As we see it, recognition of deferred tax is now optional. We like this approach because often enough we have heard that clients consider deferred tax as unnecessary complexity.
  • Now there is clear regulation for compilation of interim accounts. This, for example, will remove all uncertainties as to what entities should disclose in their accounts prepared within reorganisation processes.

What changes do we find bungled?

  • Medium and large size entities must disclose in their accounts information about significant dealings, which do not have immediate effect onto the balance sheet and profit and loss. The problem is that current regulation is far too vague and hence we have reservations, as to what extent and how meaningfully such information will be disclosed in accounts.
  • Accountants are now required to sign statutory accounts together with management. It seems that in lawmaker’s view this will result in better quality accounts. At the same time it is management that is responsible for the accounts. To that end we find the new requirement rather declarative and lacking genuine transformational potential.
  • Whilst statutory audit threshold has been raised, it is insignificant. Further, new audit criteria have been introduced. Hence we feel that many businesses will not be able to enjoy reduction of administrative burden insofar it relates to audit of accounts. Whilst the new regulations for us as auditors are beneficial, we do not support artificial raise of demand for audit services.
  • Some small size companies will be subject to mandatory review of accounts. Within review engagements auditors separately will have to report on corporate income tax computations. The latter is phenomena of Latvia and for the time being there are open questions as to how this will affect the auditor’s scope of work and level of remuneration.
  • Auditors will have to check whether information provided by clients in EDS (system for electronic reporting of taxes and accounts) agrees with audited accounts. The regulations do not define deadlines thereof hence auditors and clients will have to agree on this. As an additional activity, auditors will seek additional remuneration. Finally, information subject to disclosure within EDS is broader than the one within standard set of accounts. This may attract implications.