American Chamber of Commerce in Romania

KPMG Survey of Romanian financial institutions’ use of International Financial Reporting Standards (“IFRS”) compared with Romanian Generally Accepted Accounting Principles (GAAP) KPMG

KPMG in Romania has published the fourth and latest edition of its annual survey that compares the results reported by Romanian banks under the local GAAP to those reported under IFRS. As of 1 January 2012, banks will switch from Romanian accounting and convert to IFRS as their basis of accounting and sole financial reporting framework. Thus, the banking sector is the first sector in Romania to fully align to internationally accepted accounting and financial reporting principles. The National Bank of Romania has set in place over the past two years the legal framework necessary for conversion, with the latest details regarding prudential and tax implications currently being discussed between the main parties involved in the process – the Romanian Banking Association (“ARB”), the National Bank of Romania (“BNR”) and the Ministry of Public Finance (“MFP”).

The survey conducted by KPMG in Romania was based on financial reports for the year ended 31 December 2010, updated for 30 June 2011 where available, and covered 22 Romanian banks. As Cezar Furtuna, Partner in KPMG in Romania’s Financial Services Department points out, “Although we are fast approaching 1 January 2012, the differences between Romanian GAAP and IFRS still remain important and create volatility in the interpretation of results of Romanian banks”. The survey revealed that the differences between IFRS and Romanian GAAP as a percentage of total profit or total equity continued the ascending trend observed in the previous periods, due mainly to the difference in impairment loss adjustments for loan portfolios under the two reporting frameworks.

Thus, the difference in loan loss adjustments as a percentage of statutory equity increased from 19% in 2009 to 24% in 2010. Although starting 2012 this difference will be fully absorbed into the financial reports of banks, which will include the loan loss adjustment estimated according to IFRS rules, statutory loan loss adjustment will still influence the prudential and tax positions of credit institutions, as indicated by the current status of discussions between ARB, NBR and MFP. Thus, the capital adequacy ratio will be calculated based on “prudential” loan loss adjustments that will carry forward the current methodology applied for statutory reporting, and according to the proposed changes to the Fiscal Code these “prudential” adjustments would also be deductible for tax purposes.

This approach, which has been intensely debated over the past several months, is intended to ensure stability and continuity in the banks’ prudential and tax positions. As Serban Toader, Senior Partner at KPMG in Romania points out, “One of the most challenging tasks of a bank’s management is to balance the capital position so as to meet the capital adequacy requirements as assessed both by shareholders and by the regulators, considering the implications of prudential and fiscal requirements both at a local level and in the country of origin”. Although the global economic crisis highlighted vulnerabilities and affected the financial services industry, the Romanian banking sector has managed to maintain a sound capital adequacy ratio of approximately 13.5% at September 2011, showing however a decrease compared to 15.02% at December 2010.

Other differences between Romanian GAAP and IFRS, such as measurement of financial instruments at amortised cost using the effective interest rate, measurement of financial instruments at fair value and hyperinflation adjustments have had a low impact (below 5%) on both profit and equity at 31 December 2010 and are not expected to create significant influences at the date of transition to IFRS as the basis of accounting.

The challenges faced by Romanian banks in adopting IFRS do not stop at 1 January 2012. “Romanian banks need also to understand that the IFRS methodology is continuously changing” says Cezar Furtuna. “The International Accounting Standards Board (IASB) is constantly developing new projects that directly impact banks and consider the potential accounting implications of regulatory requirements”. KPMG’s publication summarises the expected changes in standards that are most likely to affect banks in the coming years.

“KPMG in Romanian has a dedicated banking team, with detailed knowledge of the Romanian financial services sector. KPMG people are always keen to keep abreast of latest developments and to anticipate what changes are likely to happen in the future. This is a particularly interesting time for banks as well as for the auditing profession, which both have a critical role in the global economy. We like to think that we can play a part in strengthening standards and in promoting wider use of IFRS, which allows easier comparison between audits carried out in different countries , hence aiding transparency”, concludes Serban Toader.

About KPMG

KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 150 countries and have 138,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

KPMG in Romania and Moldova operates from six offices located in Bucharest, Cluj-Napoca, Constanta, Iasi, Timisoara and Chiºinãu. We currently employ more than 600 partners and staff; Romanians and Moldovans as well as expatriates.