As businesses become more international, it becomes increasingly necessary for financial results to be understood across national boundaries.

Lithuania must be proactive in adopting internationally recognised standards on financial reporting, to enable the Stock Exchange and economy as a whole to flourish.

Historically, accounting rules have been derived from company law and from pronouncements issued by national standard setters. However, the demand by investors for international stocks, and the desire of multinational companies for non-domestic capital, means that stock exchange regulators have a strong incentive towards global accounting harmonisation. Indeed, many consider that there should be one accounting framework for what might become a truly integrated global capital market.

Many countries already use International Accounting Standards as a benchmark set of standards or as a basis for national accounting requirements. In addition a number of stock exchanges require or permit foreign issuers to present financial statements in accordance with these standards. As a result there is a trend for companies seeking funds outside their domestic market to produce financial statements which conform with International Accounting Standards.

What are International Accounting Standards?

The International Accounting Standards Committee (IASC) was established in 1973 as an autonomous body to develop and publish authoritative International Accounting Standards (IAS). It has a membership of over 100 organisations from more than 80 countries.

Its activities are supported by the International Federation of Accountants (IFAC) and the International Organisation of Securities Commissions (IOSCO) as well as business communities and stock exchanges around the world.

IAS deal with topics that are important internationally. They aim to be sufficiently detailed and comprehensive that they can be interpreted in the same way in different countries.

The IASC seeks to achieve these objectives by ensuring that the standards: set out broad principles, avoid overly detailed rules, and deal with the substance of transactions.

The objectives of IAS.

In their own words, the objectives of the IASC are to:

Prior to the formation of the IASC there were frequently differences of form and content between the published accounting standards of most countries. One of the objectives of the IASC is to harmonise as far as possible the diverse accounting standards and accounting policies of different countries.

In doing this the IASC concentrates on the essentials, and avoids making any standard too complex, so that it may be applied effectively on a worldwide basis. IAS issued by the IASC are constantly reviewed to take into account the current position and need for updating.

IAS do not however override the local regulations governing the issue of financial statements in a particular country.

Differences between IAS and current Lithuanian accounting legislation

From our own experience at Price Waterhouse we have noted the following differences between accounting in accordance with IAS and accounting in accordance with current Lithuanian accounting regulations. This is by no means a complete list, but highlights some of the main and most distinct differences.

1. IAS requires that the financial statements disclose much more detailed information to support and provide explanations to the picture presented in the primary statements, which are the balance sheet, profit and loss account and cashflow statement. For example, these notes would provide a detailed breakdown of the assets and liabilities in the balance sheet, or segmental information supplementing the turnover figure shown in the profit and loss account by product and/or geographical location.

These disclosures also provide additional information which is not at all provided by the primary financial statements. For example, details of related party transactions, or contingent liabilities - that is, any risks or uncertainties affecting the enterprise and obligations which are not recognised in the balance sheet.

2. We have further noted that the fundamental concept of prudence is not applied in as strict a way as it is under IAS. Prudence is the inclusion of a degree of caution in the exercise of judgements needed in making the estimates required under conditions of uncertainty.

For example, under Lithuanian accounting legislation, bad or doubtful receivables can be kept in the balance sheet for up to three years before write-off is required. IAS requires that a provision is established, or write-off is performed, as soon as the recoverability is in doubt.

3. We have found several examples where the bases for the accounting policies a company chooses to adopt are removed from the bases generally accepted under IAS.

For example, in relation to accounting for depreciation, we have seen several companies allocate an estimated useful life to their buildings of up to 100 years, whereas IAS suggest that best practice would be to impose an upper limit of 40 years.

4. There are numerous instances relating to the accounting of, and laws governing, tax For example the treatment of deferred tax.

The benefits of applying IAS

Current Lithuanian accounting requirements largely satisfy the need for reporting for tax purposes alone. Beyond this, the reporting forms have limited use to other readers since they do not provide adequate information for all potential users of financial statements. There is an increasing need for accounting standards which can be compared across national boundaries. Lithuania is experiencing this need now with the rapid expansion of its Stock Exchange, and the increasing interest in companies shown by foreign enterprises.

Over and above this, the application of IAS will add credibility to the figures presented by an enterprise in the eyes of users within Lithuania, but also, and potentially more significantly, to international users and potential investors. The international audit will also improve the presentation and reliability of the information.

The way forward

It is becoming increasingly important for companies with international ambitions to recognise that the production of financial statements in accordance with IAS will make them more attractive to foreign investors. We, at Price Waterhouse, hope that more companies look to adopt IAS in their reporting

We, at Price Waterhouse, also believe that the application of IAS in the preparation of financial statements, the subsequent audit of those statements, and their public availability should improve the efficiency of the Lithuanian Capital Market.