DEVELOPMENTS IN THE ROMANIAN ACCOUNTING SYSTEM ARCHITECTURE DUE TO THE IMPLEMENTATION OF IFRS (I)

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1 Knowledge horizons Volume 5, no. 2/2013 DEVELOPMENTS IN THE ROMANIAN ACCOUNTING SYSTEM ARCHITECTURE DUE TO THE IMPLEMENTATION OF IFRS (I) Professor Gheorghe LEPĂDATU, PhD. Dimitrie Cantemir Christian University Faculty of Financea, Banks and Accounting Abstract: This paper presents the result of a research developed several years concerning the accounting system architecture in Romania. Entry into the European Union required the implementation of an efficient accounting system. Were analyzed compatibilities and incompatibilities between the EU accounting directives and international accounting standards. Romania faces irreversible processes in terms of economic, political, social and cultural implications of accounting, such as: globalization of economies, the development of transnational companies, and the emergence of new financial products. The only solution for these requirements is that the Romanian accounting to be complied with community's acquis and the effective application of International Financial Reporting Standards (IAS/IFRS). Key words: IAS/IFRS, accounting, US-GAAP, convergence, acquis. JEL Classification: M41 1. Introduction Any accounting system is determined by economic, political, legal, financial and cultural environment of the country where is operating. It evolves according to the environmental changes and trends of global accounting. In the Romanian economy, large companies able to enter the accounting focus of globalization have had to adopt an international comprehensible accounting language. In this respect, they call for an accounting based on expert power of the international accounting rules 1. In December 1991 the Law Accounts appeared, followed in 1993 by a judgment that approves the regulations that govern its implementation since 1994, accounting reform having as reference the Fourth Directive of the European Community and the French practice. In , the Romanian normalizers accountants, advised by French experts and academics from the Academy of Economic Studies, have developed and implemented a set of rules and standards that have defined the backbone of the new accounting system, a system that meets the requirements of a transitional economy 2. Such a system was in agreement with the Romanian reality: reliance on a predominantly bank financing, connection between accounting and taxation, which certifies the tax rules interference on accounting 1 Malciu, L., Feleagă N., Al treilea val: contabilitatea din România în faţa unei noi provocări, Economistul nr. 1741/ Duţescu, A., IFRS şi convergenţele legislative europene, Economistul nr. 1742/ Knowledge horizons Volume 5, no. 2/2013

2 structures default the leading role played by the public power for the normalization of the accounting, conservation of the general accounting plan concept as the core of accounting practices, etc. The new system still bears the imprint of past features. Therefore the balance sheet, profit and loss account and annex remained simple vector carrying reporting. Possible financial stability analysis - functional (based on balance sheet) or performances revealed by intermediate balances of management (based on the profit and loss), to which we can add the flow - as a result of drawing a picture of funding based on differential balance sheet, - however were not properly used. The atmosphere around the accounting system remained confusing; there are others who blame accounting for the phenomena of proliferation of the shadow economy or tax evasion, ignoring, however, its limitations in controlling. On the other hand, the development of Romanian accounting system was delayed to leave the ramp, although some processes and the economic reality imposed it. Restatement of accounts under hyperinflation was performed later, after several years of decapitalization of companies. Merger and liquidation of companies have found simplistic accounting settlement. Consolidation of group companies accounts delayed the regulation, the project of general rule not being followed by technical standards to provide methodological solutions. Entry into the European Union required the implementation of an efficient accounting system. They were drawn compatibilities and incompatibilities between the EU accounting directives and international accounting rules in an effort to find the harmony between these standards, European directives and regulations. It is clear that in the Romanian economy, large companies able to enter into the whirlwind of globalization need to adopt an international comprehensible accounting language. In this respect, they call for an accounting based on expert power of the international accounting rules. The appearance of the Ministry Order nr. 3055/2009 approving the Accounting regulations harmonized with the Fourth European Economic Community and the International Accounting Standards 1 (with the translation of international accounting standards) is the evidence that the Romanian legislature impose to the big Romanian companies to align with international accounting practices. Thus, Romania has received compliance 1 OMFP nr. 3055/2009 with EU legislation in the field of accounting, but also by the fact that businesses in the country have started to use a global accounting framework based on the concept of fair and true picture a much awaited introduction by the entire business community. From this point on is the question of the existence of two streams in accounting theory and practice: freedom or compliance in adopting IFRS? International Accounting Standards Committee IASC 2 includes professional accounting bodies worldwide (over 140 from a total of over 100 countries). These institutions are determined to make every effort to convince those who develop national standards that are necessary to ensure compliance of the formal financial statements with the IAS sites, are also determined to contribute to the acceptance of the IAS by the companies, auditors and the factors governing the operation of stock exchanges. The function of making rules is undertaken by a Council comprising representative of 13 countries, as well of the International Coordinating Committee of Financial Analysts' Association, Federation of Swiss Industrial Holding Companies and International Association of Financial Executives Institutes. The Council comprises a number of observer members, such as the IOSCO - International Organization of Securities Commissions, the FASB - Financial Accounting Standards Board and the European Commission. Council's current activity is coordinated by a General Secretary, assisted by a Technical Director and technical and administrative staff. Secretariat headquarters is in London. Being a truly international organization, the Council held its meetings in various parts of the world. IASC conceptual framework was published in Its purpose is to provide guidance to the Council members to work on rules, of supporting those who prepare and audit financial statements in interpreting the rules or solving problems that are not referred to in rules. Although the IASC is an organism that is not legally empowered to impose directly laws or to apply those rules, due to the coherent conceptual framework was able to enforce the rules as a valuable element that was recognized by the international business community. A key feature of the Framework is that it considers that the objective of financial statements is to provide information for making economic decisions, not to (for example) to be used in calculating taxable income. The framework defines the notions of 2 Knowledge horizons Volume 5, no. 2/

3 active and passive, and then establishes the connection between them and other elements (eg, expenses). 2. IFRS and the Romanian accounting system. References We say very often "the Romanian accounting", though almost always accounting system practiced in our country, no matter that it was a consequence of historical fractures or not, was and is a product of import, although in Romania was a Romanian School of accounting and functioned independent bodies of normalization. The road towards becoming international and European for Romania passes accrual through the assimilation of the convergence between the two self-referential global accounting (IFRS/IAS and US-GAAP) 1. It is intended, therefore, to develop accounting legislation in Romania, for a better integration into the European Union and the need for close approach to the international capital markets. Together with specialists from the Ministry of Finance has prepared a diagnostic study to compare the Romanian law and accounting law with 2 : The 4 th UE Directive concerning Companies Law (regarding the accounts), to determine what further measures should be taken to complete the implementation in Romania; The 7 th UE Directive concerning Companies Law (on consolidated accounts); The 8 th UE Directive concerning Companies Law (regulation of auditors) to determine if some of the provisions were implemented; International Accounting Rules to determine which of they have already referred to so far in Romania. We have found many common points with IAS and the implementation level of the provisions of the 4 th Directive was considered relatively good. However, it proved impossible to implement more complicated aspects of the 4 th Directive and IAS since they were not very widely spread in Romania. Accounting rules are applied in conjunction with the Accounting Law No. 82/1991 republished, and international accounting rules and establish basic accounting principles and rules, form and content of annual financial statements, with full assimilation of the general purpose of the 4 th UE Directive and continued compliance with 1 Malciu, L., Feleagă, N. (2004). Reglementare şi practici de consolidare a conturilor. Din orele astrale ale Europei contabile, Editura CECCAR, Bucureşti, pag International Accounting Rules. They concern the preparation, submission, approval and publication of financial statements of entities. There are currently issued and in force a number of 31 IAS (on a discontinuous list from 1 to 41, issued, replaced and/or modified by the IASC in April 2001) and 7 IFRS (issued by the new IASB after April 2001). These standards cover by rules and regulations all aspects of the main, background, global accounting. National norm people (ministries of finance or professional bodies) or regional (such as the European Union for Romania) circumstantiates the application of the provisions of international standards in time and by type of business, with various exemptions. The difficulty that the international accounting standards and interpretations to them try to overcome, is given by the duality between the need for uniform accounting methodology, to generate global comparability and diversity of macro- and micro-economic reality in different areas and countries of the world (traditions, level of development, level of inflation, yet harmonized legal regulations etc.), which requires flexibility, adaptability and compliance. IASC Board (IASB) recognizes that Governments may establish different and particular requirements for his own purposes, without affecting the financial statements disclosed, to satisfy the interests of users, to the extent that meet their needs 3. Between the two accounting referential world, there is a continuous process of convergence between the respective international reference based on IAS/IFRS and American reference based on US- GAAP. It is the most complex process from start of accounting reform after 1990s. International accounting framework architecture components, including the project for the reform of this framework, standard by standard, principle after principle, rule after rule, accounting policies for the recognition, measurement and disclosure of accounts - all supported by relevant case studies, will constitute an incandescent matter of a financial revolution that we expected in the years to come Applicable accounting principles In terms of accounting principles, reporting on another level and given the broad field of 3 Lepădatu, Gh., (2012), Raportarea financiară în secolul XXI, Editura Pro Universitaria, Bucureşti, pag Feleagă, L., Feleagă, N. (2000) Comparative accounting system III, Editura Economică, Bucureşti 28 Knowledge horizons Volume 5, no. 2/2013

4 accounting knowledge, you can make the following distinction between different levels of knowledge 1, intellectual approach to the accounting: Meta-theoretical level, represented by accounting epistemology: this is the philosophical and axiological level, representing a philosophical reflection on the object, values, axioms, principles, methods, theories and scientific truth in accounting, in other words, the general human attitude towards the problem of conceptualization and modeling of real world through accounting; Theoretical level, consisting of accounting theories: we say theories because there is no single generally accepted accounting theory. Thus, regarding the subject matter of accounting, there are differences in approach between continental European schools (especially French and German, which focuses on the normative and prescriptive nature, argues for monism sheet, choose the object property using a formalist-legal conception and considers the balance as the most important financial reporting) and Anglo-Saxon school (represented in the U.S.A., Britain and its former colonies, where the emphasis is on freedom of interpretation, on substantive economic issues, being supporters of dualism of accounting, having as the goal the financial position and as the main financial reporting the profit and loss), between the different accounting schools, including differences in the conceptualization of accounting principles; Operational and practical level, consisting of rules and accounting practices is made up of legal, technical, operational aspects, such as: specific processes method of accounting, chart of accounts, accounting documents format, methodology of performance records, etc. At this level, national and international professional bodies and the largest financial services firms and tax accounting in the world (The Big Four: Price Waterhouse Coopers, KPMG, Deloitte & Touche Tohmatsu and Ernst & Young) is campaigning for the dissemination, development, knowledge and application of the best professional and ethical practices, listed in industry guides. Accounting rules and practices are directly influenced by the accounting principles adopted. Globalization is a process that takes place today, before our eyes, is a phenomenon that includes three global trends 2. 1 Ionaşcu, Ion: Dinamica doctrinelor contabilităţii contemporane, Editura Economică, Bucureşti, 2003, p Feleagă, N.; Malciu, L., Provocările contabilităţii internaţionale la cumpăna dintre milenii modele de evaluare şi investiţii imateriale, Ed. Economică, Bucureşti, 2004, p. 28. First, liberalization of goods, currencies and assets trade - which appeared in 1980 and undermined the foundations of the old system of national economies and national states. Globalization of markets and multinational companies present a new problem based on territorial politics. Secondly, technological revolutions have reduced transportation and telecommunications costs so much that the process of creating wealth is distributed among several continents. Internet, World Wide Web has become a symbol for the abolition of borders. Thirdly, fueled by these two trends, a new international division of labor has revealed a fundamental change in the geographical pattern of world economy. Emerging markets, particularly in Southeast Asian countries, China and more recently India, are not just providing raw materials and semi-agricultural products, but have also developed own high-level technology and have created global brands being a magnet for foreign investors. 4. The influence of globalization on the accounting Information technology, communications and transport, although there are factors that have contributed strongly to globalization, are however, simply neutral tools that make possible globalization and are useful for various purposes. Major players generate globalization while developing and exploiting technology to its own advantage. Among these actors, multinational companies play a dominant role. The reason of gain pushes them forward. Their main purpose is to maximize profit. Policies favored by the expansion of market are subordinated to that purpose. In their search for securities and high profits, the capitals cross the world to secure favorable conditions for trading. In this process, capital has been supported by state policy of nations that provide subsidies, an appropriate social infrastructure, property rights, legal military and political system which promote permissiveness of private accumulation of wealth and power. As a result, some of the largest economic entities in the world are a multinational company, which often overshadows the GDP of many countries. For example, the five largest companies in the world have higher turnover than the combined total income of the poorest 46 countries in the world. Corporate power has increased by the emergence and development of micro-states or Knowledge horizons Volume 5, no. 2/

5 offshore financial centers (tax havens), which provides safety, more permissive legislation to facilitate capital mobilization. Big companies are now the architects of the new global economic system in which nation states compete to attract capital. In these circumstances the accounts, which was defined at the country level, could not remain unchanged, the global economic boom has caused important changes in the national accounts, state boundaries should be overcome in this area, especially because the large multinational companies have increasingly tentacles. At the international level during the last three decades of last century a new current accounts appeared in the accounting the harmonization 1. In terms of accounting, transnational companies are the first and most important actor on international accounting standards which are reflecting all the consequences. The property of these corporations is the subject of international accounting operations and is reflected in financial statements which they draw on specialized firms, they audit, and which consumers use to guide their decision and whose content is shaped and governed by the national and international accounting norms Conclusions Romania has received compliance with EU legislation in the field of accounting, but also by the fact that businesses in the country have started to use a global accounting framework based on the concept of fair and true picture a much awaited introduction by the entire business community. From this point on is the question of the existence of two streams in accounting theory and practice: freedom or compliance in adopting IFRS? In our opinion, IFRS should be applied subject specific recommendations of international standard, leaving the liberty to the professional specialty organizations to adjust their applications to specific conditions in the business environment with the granting of priority provisions of the Tax Code. Although various national traditions and different circumstances, such as legal system, the 1 Feleagă, N.; Malciu, L., Provocările contabilităţii internaţionale la cumpăna dintre milenii modele de evaluare şi investiţii imateriale, Ed. Economică, Bucureşti, 2004, p Lepădatu, Gh., (2012), Raportarea financiară în secolul XXI, Editura Pro Universitaria, Bucureşti, pag. 125 instability of prices, national fiscal policies have contributed to the development of a variety of financial reporting standards, increased emphasis placed on international trade and capital inflows in the last 30 years leads to the need global accounting standards. Development known by multinational companies in recent years, affecting almost every country, government and individual, business management complexity across national boundaries (in terms of financial reporting) is a significant change both for individual accountants and professional authorities to establish and auditing accounting rules. Diversity of accounting practices, auditing, tax rules and regulations may have a negative impact on firms' abilities to provide accurate financial information necessary to inform creditors and investors, as well as analysis of future investment opportunities, which are vital for economic growth 3. The number of differences between accounting practices in recent years has decreased among the most important reasons behind this decline we find: 1. the adoption of International Accounting Standards by the European Union since which would eliminate much of the remaining options; 2. the main practices that remain are the American standards (U.S. GAAP), UK standards (UK GAAP) and international standards (IAS/IFRS), named the Big 3 sets of accounting standards; 3. convergence between IAS/IFRS and UK GAAP, which is expected to produce likely soon. The hope is to eliminate in the next 10 years the differences between U.S. GAAP and IAS, but both bodies must draw up their wish for this convergence. It now seems that the focus has gone from a simple approximation to the current convergence of the various national accounting standards and IAS, which also have changed the name in the new International Financial Reporting Standards (IFRS). Many countries have embraced the International Accounting Standards as their own standards, with or without some amendments or some minor omissions or additions. Advantages of application of IFRS in Romania are multiple. By switching to application of IFRS, the companies have adopted a global financial reporting language very well perceived by the users, regardless of their origin. Thus, companies have found that adopting IFRS have access to 3 Conform 30 Knowledge horizons Volume 5, no. 2/2013

6 international capital markets, can trade on international markets, with specific spending reductions of these activities. Communicating in a unique financial reporting language ensures a high level of confidence in the annual financial statements, with the possibility of access to the capital market. Quality reporting to management is ensured by the implementation of IFRS and the privileged users (shareholders, partners, investors) will appreciate the relevance of the information. Another advantage is the comparability of the company's performance with competitors in the global economy. A single accounting language is a challenge for the entire universe of accounting world and beyond, they are attracted to most countries, the national professional accounting bodies, regional and international governments, businesses, academic staff and not least the users of accounting information. Economic and financial events, economic crises, accounting scandals in recent years have contributed to the current trend of accounting and showed that the world requires an accounting and financial statements relevant, reliable and transparent decision-making to serve investors, creditors and authorities. The paradigm harmonization/convergence of accounting concerns a global economic environment in which there are no borders, the accounting information is comparable between countries and can be used as such by international users. The Romanian accounting system architecture has another configuration after IFRS application because the financial reporting - understood by all users offers business opportunities or additional capital. BILBLIOGRAFIE 1. N.Feleagă, Politici şi opţiuni contabile, L.Malciu Ed.Economică, Bucureşti, M.Ristea Bază şi alternativ în contabilitatea întreprinderii, Ed.Tribuna economică, 3. N.Feleagă, I.Ionaşcu Bucureşti, 2003 Tratat de contabilitate financiară, Ed.Economică, Bucureşti, Gheorghe Drept contabil, Editura Lepădatu şi Tribuna Economica, colab. Bucuresti, Gheorghe Contabilitate Financiară, V.Lepădatu Editura ProUniversitaria, Bucuresti, 2012; 6. Gheorghe V.Lepădatu Standarde, Teorii şi Sisteme de Conducere a Contabilităţii pe Plan Mondial, editie revazuta si adaugita, Editura ProUniversitaria, Bucuresti, 2012; 7. Gheorghe Contabilitatea Activităţii de V.Lepădatu Comerţ Exterior, Editura ProUniversitaria, Bucuresti, *** Standarde Internaţionale de Raportare Financiară (IFRS TM S ) incluzând Standardele Internaţionale de Contabilitate (IAS TM S ) şi interpretările lor la 01.I.2007, Ed. CECCAR, Bucureşti, 2010; 12. *** Legea contabilităţii nr. 82/1991 republicată în Monitorul Oficial al României, partea I, nr. 48/ ; 13. *** O.M.F. Publice nr. 907/27 iunie 2005, privind aprobarea categoriilor de persoane juridice care aplică reglementările contabile conforme cu Standardele Internaţionale de Raportare Financiară, respectiv reglementări contabile conforme cu Directivele europene, publicat în Monitorul Oficial al României, partea I, nr. 597/11.VII.2005; 14. *** O.M.F. Publice nr.3055/2009 pentru aplicarea reglementărilor contabile conforme cu directivele europene; Knowledge horizons Volume 5, no. 2/