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KPMG Survey of the Use of IFRS compared with Romanian Accounting Standards in Romanian Banks and Non-Banking Financial Institutions

KPMG in Romania has published a second edition of its study comparing International Financial Reporting Standards (IFRS) with Romanian Generally Accepted Accounting Principles (GAAP) for Romanian credit institutions.

Our study revealed that the impact on banks of the differences between Romanian GAAP and IFRS increased in 2008 and continued to do so in 2009, mainly due to lower IFRS impairment provisions for loan portfolios as compared to Romanian GAAP (e.g. approximately 38% difference in terms of 2008's profits and increasing at a higher pace in 2009).

Romanian banking and non banking financial institutions use Romanian GAAP for fiscal and prudential purposes. IFRS is mandatory for the preparation of Romanian credit institutions' consolidated financial statements. In practice, many Romanian banks and other financial institutions use IFRS for reporting to other stakeholders (shareholders; international financial institutions; and capital markets).

As Serban Toader, Senior Partner at KPMG in Romania says "This year, more than in previous years, banks' annual reports have made front page news. What in the past seemed only to interest investors and analysts is now hotly discussed by a much wider public. During the current difficult economic conditions transparency is essential for trust to be rebuilt between financial institutions and their clients as this is crucial for lending activity to pick up. IFRS is an excellent tool for achieving this as the international business community understands it better than our Romanian specific local accounting rules.

As Cezar Furtuna, Partner in KPMG in Romania's Financial Services Audit Department explains: "The aim of this study is to highlight again the differences between IFRS and Romanian GAAP in the banking and financial sector. In recent years, the two systems have moved closer together on certain conceptual frameworks. There are fewer significant differences, but their impact has recently increased, as this publication seeks to highlight and explain.

The major impact of these differences relates mainly to loan impairment - a direct consequence of the deteriorating financial performance of the banks' customers. The loan impairment differences increased from below 5% on 2007's profits, to almost 40% on 2008's profits and to an alarming six-fold difference for the accumulated results posted by the banks in our sample for the first six months of 2009. The effects of the loan impairment differences on equity are smaller - i.e. approximately 12-13% on banks' equity in 2008. This proves a good capitalisation of Romanian banks but the concern is there - banks' solvency ratios can differ significantly when using IFRS instead of Romanian GAAP.

The same trend can be noted for non-banking financial institutions (leasing, consumer finance, mortgage companies, etc.) as the difference on loan impairment between Romanian GAAP and IFRS stood at approximately 18% of these entities' accumulated results."

Serban Toader continues: "The difference between banks' profits under IFRS versus Romanian Accounting Standards increased, mainly due to the different assessment of the quality of the loans portfolios under the two accounting frameworks. Romanian GAAP, unlike IFRS, did not incorporate as at 31 December 2008 and for most of 2009, the effects of the recoverable amount of the guarantees and collateral received by the banks for their worst performing loans, thus leading to greater provisions for loan impairment assessment and lower profits under Romanian GAAP. The difference in the two provisioning methodologies is the most pressing issue from the perspective of the Romanian banking community that needs to be solved in order to add clarity to financial reporting.

We also analysed the magnitude of differences for the number of entities in our sample - how many of them exceeded 5% in magnitude - and found that the only difference that constantly exceeded this level in the analysed periods for the majority of entities was again represented by the impairment of loans to customers."

The research was carried out by a team of professionals from KPMG in Romania and covers 15 Romanian banks (large, medium and small) that report under both IFRS and Romanian GAAP including 6 banks from the top 10 in terms of total assets. We also analysed the data obtained from 18 non-banking financial institutions for the year ended 31 December 2008.

As Serban Toader concludes "KPMG in Romania has professionals who have worked on audits of banks and non banking financial institutions under both IFRS and Romanian GAAP. We have a dedicated banking audit and advisory team, with detailed knowledge of the Romanian financial services sector. We understand the differences between the two systems and can use our skills to assist banks and financial institutions with their reporting requirements under both IFRS and Romanian accounting standards as well as with other services such as tax aspects or restructuring."

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 140 countries and have 135,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG in Romania operates from six offices located in Bucharest, Cluj-Napoca, Constanta, Iasi, Timisoara and Chişinău. We currently employ more than 600 partners and staff, both Romanian and expatriates.

Sursa: http://www.actmedia.eu

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