Financial Reporting Rules Latvia

8/3/2019 Financial Reporting Rules Latvia

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In the paper is used two part structure. The first part describes creation of thereconstructed accounting policy and the respective development stages. Problems linkedwith development of accounting regulations and standards are disclosed. Development ofregulations and standards was assessed in historical context and the respective classification ofaccounting policy periods was worked out.

Implementation of accounting policy is impossible without well-educated and well- trained

professional accountants. Therefore in second part was analysed and assessed education andtraining system of professional accountants in the country. Final part of the paper containsconclusions and proposals (based on the research done) for amending the accounting

policy including accountant education and certification .

IntroductionOn the world map, Latvia is to be found on the east coast of the Baltic Sea at the crossroads

of northern and eastern Europe. Latvia, a parliamentary republic is bordered by Estonia to the north,Russia and Belarus to the east, Lithuania to the south and has a maritime border with Sweden to the

west. Over the last five years, Latvia experienced very rapid economic growth and developmentacross all sectors. Today, as many other countries, Latvia has been affected by the global economiccrisis and faces a number of difficult economic challenges. The Latvian government has expressedits clear determination to meet these and has set out a programme of measures to do so. One of thekey objectives is the attraction of foreign direct investment (FDI), recognised to be an importanttool for successful economic recovery.

Name of country Republic of Latvia

Country code LV

Size of Area 64 589 km2

Population (at thebeginning of 2009)

2,229 million

Capital City Riga

Ethnic Composition(beginning of 2008)

59.4% Latvian, 27.6% Russian, 3.6% Belarusian,2.5% Ukrainian, 2.3% Polish, 1.3% Lithuanian,0.4% Jewish, 2.9% other nationalities

Language Latvian (official); Russian, English and German are alsowidely spoken

Political system Republic, parliamentary democracy

Head of State President Mr Andris Brzi(elected in 2011 by Parliament for a four-year term)

Head of Government Prime Minister Mr Valdis Dombrovskis

Political Parties

Unity (Vienotba) - 33 seats,Association of Political Parties Harmony Centre (Politisko

partiju apvienba Saskaas Centrs) - 29 seats,Greens and Farmers Union (Zao un Zemnieku savienba) -22 seats,

National Association All For Latvia! - For Fatherland andFreedom/LNNK (Nacionl apvienba Visu Latvijai!

Tvzemei un Brvbai/LNNK) - 8seats ,Association of Parties For Good Latvia (Partiju apvienbaPar Labu Latviju) - 8 seats


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Membership inInternationalOrganizations

Member of NATO since 2004Member of WTO since 1998

EU Membership Since 2004

Latvia started moving towards a market economy after it regained its independence in 1991.A wide range of reforms were implemented, including steps towards setting up a national systemfor corporate financial reporting. The first World Bank report on the observance of standards andcodes in accounting and auditing (A&A ROSC) in Latvia was published in March 2005 and made arange of recommendations for improving the Latvian framework for accounting and auditing and itsapplication in practice.

Latvia has been a member of the European Union since May 2004 and its legal andinstitutional framework for financial reporting is aligned with the EU acquis. However, there aresome areas where progress in implementing the provisions of the acquis is required. In particular,there is a need to improve the operation of the system of public oversight and to strengthen thecapacity of the auditing profession to implement the provisions of the Statutory Audit Directive.

The projects organized under Latvia's FRTAP program are designed to address these issues.Latvia is part of the following programs at the CFRR:

Financial Reporting Technical Assistance Program (FRTAP)The Financial Reporting Technical Assistance Program for the new EU member states supportscountries in the field of financial reporting. It aims to assist in the implementation of sustainableregulatory and institutional frameworks and in furthering the correct implementation of the acquiscommunautaire in the area of financial reporting. Funds for this program are provided from theSwiss State Secretariat for Economic Affairs under the so-called Swiss Enlargement Contribution.The Swiss Enlargement Contribution was approved by the Swiss electorate in a referendum on 26

November 2006, and made available funds to help reduce economic and social disparities within theenlarged European Union. With a total of CHF 1 billion significant assistance is given to the group

of ten countries that joined the EU on 1 May 2004 including Estonia,Lithuania, Latvia,Poland, Czech Republic, Slovakia, Hungary, Slovenia, Malta and Cyprus.

Accounting and Auditing Reports on the Observance of Standards and Codes (A&A ROSC)As part of the Accounting and Auditing Reports on the Observance of Standards andCodes (A&A ROSC) initiative, the World Bank has established a program to assist its membercountries in implementing international accounting and auditing standards for strengthening thefinancial reporting regime.

State aid programmes for 20072013

To ensure Latvias approach towards European Union average level of welfare, in 2007 2013 programming period the support will be provided to the development of science, innovationand business by encouraging research, development and technology transfer, promoting practicalresearch, encouraging the formation of new enterprises and by facilitating availability of financialresources.

To encourage development of innovation in 2007 2013 programming period the assistancewill be provided to the formation of competence centers and integrated technology transfer systems,finance of new high and medium technology companies in technology incubators, attraction ofhighly-qualified workforce, acquisition of equipment and instruments to implement manufacturingof innovative products as well as to the investment in enterprises who during production processgenerate high value added.

To promote development of entrepreneurship in 2007 2013 planning period ERDF willprovide support for capture of external markets, establishment of clusters and business incubators,business development consultations, investment in small and medium-sized companies in speciallysupported territories and development of industrial territories.
http://www.worldbank.org/ifa/rosc_aa_lat.pdfhttp://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTCENFINREPREF/0,,contentMDK:21927199~menuPK:7356126~pagePK:64168445~piPK:64168309~theSitePK:4152118,00.htmlhttp://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTCENFINREPREF/0,,contentMDK:22680596~menuPK:7518265~pagePK:64168445~piPK:64168309~theSitePK:4152118,00.htmlhttp://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTCENFINREPREF/0,,contentMDK:22680490~menuPK:7518300~pagePK:64168445~piPK:64168309~theSitePK:4152118,00.htmlhttp://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTCENFINREPREF/0,,contentMDK:22680583~menuPK:7518343~pagePK:64168445~piPK:64168309~theSitePK:4152118,00.htmlhttp://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTCENFINREPREF/0,,contentMDK:22680481~menuPK:7518261~pagePK:64168445~piPK:64168309~theSitePK:4152118,00.htmlhttp://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTCENFINREPREF/0,,contentMDK:22680870~menuPK:7518353~pagePK:64168445~piPK:64168309~theSitePK:4152118,00.htmlhttp://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTCENFINREPREF/0,,contentMDK:21569478~menuPK:7356128~pagePK:64168445~piPK:64168309~theSitePK:4152118,00.htmlhttp://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTCENFINREPREF/0,,contentMDK:21927199~menuPK:7356126~pagePK:64168445~piPK:64168309~theSitePK:4152118,00.htmlhttp://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTCENFINREPREF/0,,contentMDK:22680596~menuPK:7518265~pagePK:64168445~piPK:64168309~theSitePK:4152118,00.htmlhttp://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTCENFINREPREF/0,,contentMDK:22680490~menuPK:7518300~pagePK:64168445~piPK:64168309~theSitePK:4152118,00.htmlhttp://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTCENFINREPREF/0,,contentMDK:22680583~menuPK:7518343~pagePK:64168445~piPK:64168309~theSitePK:4152118,00.htmlhttp://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTCENFINREPREF/0,,contentMDK:22680481~menuPK:7518261~pagePK:64168445~piPK:64168309~theSitePK:4152118,00.htmlhttp://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTCENFINREPREF/0,,contentMDK:22680870~menuPK:7518353~pagePK:64168445~piPK:64168309~theSitePK:4152118,00.htmlhttp://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTCENFINREPREF/0,,contentMDK:21569478~menuPK:7356128~pagePK:64168445~piPK:64168309~theSitePK:4152118,00.htmlhttp://www.worldbank.org/ifa/rosc_aa_lat.pdf


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After evaluating the implementation of European Union structural funds in 2004 2006 programming period, responsible authorities have planned to develop more effective andtransparent implementation system of state aid programmes that would provide more opportunitiesfor attracting investment.

During 2007 2013 programming period Investment and Development agency of Latviawill offer wide range of consultation opportunities for entrepreneurs to help them to choose the

most appropriate state aid programme as well as to prepare good quality project application.In accordance with the management draft law of the European Union structural funds and

the Cohesion fund, the whole project application evaluation procedure will not be divided inadministrative and quality specific evaluation procedures but there will be one united evaluation

procedure. Consequently project applications will be evaluated based on their total quality andcontribution to development of entrepreneurship and innovation.

Mainly the evaluation of project applications will be held in form of open tender. After theannouncement of open tender and submission of project applications they will be compared againsteach other.

After the submission deadline of project applications final decision upon approval orrejection of project application will be made during tree to four months.

ASSESSMENT OF ACCOUNTING POLICY TRENDS IN LATVIA

When Latvia regained independence in 1991 and the economic system was changed,transition to market economy brought about necessity to alter financial accounting policy in Latviaand adjust it to the new market relations. With reorientation from planned to market economyfundamental changes in accounting policy took place and effectively accounting system ofyear 1939 was restored and amended making use of practice of European Union (EU) memberstates.

Objective of this study was to analyse and systematise development trends of

the restored financial accounting policy in Republic of Latvia (LR) and the present time problemsin order to prepare propositions for further amendments of accounting policy in thecountry.

To reach the said objective one has to cope with the following tasks:to examine and assess the process of making regulatory legal acts and standards in the field offinancial accounting in Latvia;to classify periods of development of financial accounting;to analyse and assess the system of accountant education (training) andcertification;to disclose problems in implementing accounting policy and to generate suggestions foramending the policy.

1. Classification of LR accounting policy periods and development stages

Before independence was restored Latvia was one of republics within USSR, whereaccounting policy was determined by the panned economy. The integratedaccounting system of these times was unsuitable under conditions of market economy;therefore it was necessary to develop new appropriate accounting policy.

The new accounting policy should support successful development of economy both inprivate and public sectors i.e. to provide financial information concerning results of entrepreneurialactivity required for enterprise management and at the same time to set up information basenecessary for implementing the macroeconomic functions and establishing international business

relations.


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Formation of accounting policy was linked with several key events, which to some extentbroke up the policy development in several stages and thus mapped the policy developmenttendencies. Our research resulted into classification as follows:

1 stage. Making the basis for LR accounting policy (1992 1998).2 stage. Amending the LR accounting policy (1999 2002).3 stage. Further development of LR accounting policy and harmonisation with EU

requirements (since 2002).To assess the present accounting policy trends it is advisable to examine in

more detail the essence of each stage and its impact on the entrepreneurial activity.

1 stage Making the basis for LR accounting policy(1992 1998)

The accounting system in Latvia in the 90th of the 20 century was to bestarted actually from scratch. The primary task of this time period was to determinethe groups of economic agents and to establish relevant regulatory institutions, whichgovern and coordinate the accounting procedure. Under the new system separateaccounting regulations were provided for public organizations credit organisations and

commercial enterprises. For each group was developed separate set of regulations,however the common conditions had to be formulated in the law On Accounting. As far as fromthe previous time period in area of public organizations and credit organisations there were somegroundwork available, it was modified to comply with the new conditions; however working withcommercial enterprises was a novelty. Therefore it was particularly important to get along with thisarea and in result law On Enterprise Yearly Reports was adopted.

First important event in the area of accounting in history of the Latvian state after regainingindependence was the LR Supreme Council decision of 7 April 1992 On Preparation LegalActs for Accounting in Latvian Republic, which signified approval of two mostimportant legal acts in the area of accounting On Accounting (14.11.1992) and OnAnnual Accounts of Enterprise (14.11.1992). These laws were developed in cooperation withchartered auditor company Schobel & Marholt and basic principles of EU directives were applied[Millere I., 2005]. These legal acts contained references to legal entities, to which theselaws were binding, the primary conditions concerning preparation of financialinformation, contents of yearly reports, rules for assessing assets and liabilities andother important information.

The first edition of On accounting provided that LR government adoptsdecisions on particularly important accounting issues, determines competenceof governmental bodies in the field of methodological management of accountingas well as establishes Board of Accounting Methodology. This Board wasestablished by LR Cabinet of Ministers Regulation No 34 of 21.12.1993. The primary tasks of

the Board were to take charge of drafting legal acts and regulations in the field of accounting; weighup the draft proposals for laws and regulations in context of accounting requirements and practicability, to put forward propositions for accounting staff training; to issue licensesfor activity of chartered auditors; to assess accounting software and data processing systems andto issue the respective recommendations concerning applicability in Republic ofLatvia.

The overall methodological management was provided by Ministry ofFinance to which was subordinated also the Board of Accounting Methodology. In retrospect onemay observe, that in the roughly four years of Board of Accounting Methodology work (up to04.02.1997) no major changes were introduced in the field of accounting policy because the veryCabinet of Ministers regulation No 34 set up critical obstacles to it it did not give the

Board right to request the draft laws concerning accounting from the governmental bodies inorder to assess and approve them.


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However, in this time period the prerequisites were elaborated stating thatexplicit and truthful information is to be included in financial reports because it was the period oftransition to market economy and fast privatisation process. Thus in the second half of 1995 was

prepared and approved LR Cabinet of Ministers Regulation No 339 Rules on EnterpriseAccounting Procedure and Organisation, which elucidated requirements laid downin laws On Accounting and On Annual Accounts of Enterprise and included very

wide scope of issues however not always provided for clear cut answers to the unresolved problemsin accountants work.

Significant turning point in accounting policy development in Latvia wasthe amendments made in the law On Accounting, which provided for essentialchanges in the accounting procedure and started standardisation of Latvianaccounting. The article 15 stated that LR accounting draft standards (harmonised withInternational Accounting Standards (IAS) and the respective EU directives on accounting issues)shall be worked out by Chartered Auditors Association of Latvia and the latter is entitled theright to put forward propositions concerning implementation.

At the same time establishing of a new governmental body ConsultingBoard of Accounting Standards of Republic of Latvia was provided, and this decision actually

terminated activities of Board of Accounting Methodology.Concept of Latvian accounting standards (LAS) was integrated in amendments

of the law On Annual Accounts of Enterprise of 6 November 1996. Theseamendments defined new chapter of yearly report cash flow statement, and Article 4 laid downthat financial statement forms should comply with requirements of the two laws on accounting, LRaccounting standards and other regulatory acts. Such a steep change was based on idea toseparate legislation from making accounting standards, and in result the accounting policyshould have become more flexible in respect to dynamic changes of economy, which is difficult toachieve by means of legal norms [D. Davia, 1998]. One could observe that (in comparison withBoard of Accounting Methodology) the influence of Consulting Board of

Accounting Standards was considerably narrowed because its task was only to assess andoffer recommendations in respect to draft laws concerning accounting and draft Latvian standardsmade by Chartered Auditor Association [V. Paupa, A. Prauli, 2005]. As far as (in the first yearsafter LR independence was regained) the primary attention in economic area was paid to creatingtax system in compliance with conditions of market economy, to which the accounting rules weresubordinated, efforts to start with accounting standardisation can be considered appropriate.

The first two draft LAS No 7 Cash Flow Statements and No1 Mapping of theAccounting Policy in Financial Reports were made at the end of 1997, however no

procedure was provided for their practical application. Therefore in 1998representatives of interested organisations (Chartered Auditor Association of Latvia,Ministry of Finance, Accountant Association of Latvia, Exchequer, Bank of Latvia, Commission

of Securities Market, Riga Stock Exchange, State Revenue Service of Republic of Latvia)worked out propositions for reorganisation of operation of the LR ConsultingBoard for Accounting Standards and for approving standards in such a way that Cabinet ofMinisters regulation was bypassed [I. dre, 1998]. Implementation of these

propositions in 1999 started new stage in management of Latvian accounting methodology.When comparing the activities of Board of Accounting Methodology and Consulting Board

for Accounting Standards one can conclude that amendments adopted by Cabinet ofMinisters were to cardinally alter the methodological administration of accounting by separating theconsulting and standardisation functions. However the expected improvement was not achieved.

2 stage Amending the LR accounting policy (1999 2002)

Many reforms were initiated in the period 1999 through 2002, and the Administrative and

Regulatory Cost Survey carried out in Latvia in late-2001 and again in late-2003 and 2005 showedmany signs of continuing improvement:


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a steady reduction in the share of businesses that regard regulations as an obstacle to theiroperation and growth improved access to information and updates regarding tax issues reduced frequency and duration of inspections declines in the incidence and severity of fines imposed on businesses There have been reductions in the time and money costs of administrative procedures, such as

time spent registering a company and registering title transfer in Land Books.Amendment of 1999 of Article 15, law On accounting stated that Cabinet

of Ministers should issue regulation concerning mandatory LR accounting standardswhile standards preparation, approval and registration should be regulated by the Lawof Standardisation. It means that a new body Ministry of Economy (as aninstitution coordinating issues of Standardisation Law) was introduced in the LRaccounting management system.

The split responsibility (between Ministries of Finance and Economy) in areaof LR accounting standards was criticised in the Progress Report 2000 of EuropeanCommission [J. Lasis, I. Klis, S. Vilcne, 2002]. An essential innovation was the LatvianAccounting Standardisation Technical Committee established in 14 May 1999,

which acted in area of preparing and approving accounting standards for Latviain compliance with international standards [D. Davia, 2000]. Four standardswere approved in the years of Committees activity Preparation of financial reports,Inventories, Cash Flow Statements, Profit or Loss in Report Period, Fundamental Faults andChange of Accounting Policy, however it should be added, that Latvian Standardisation Law doesnot provides for mandatory application of standards. In publications experts observedthat problems of application of these accounting standards were deepened also by insufficientfunding.

Another distinction of this period of shaping accounting policy was adoption of law OnConsolidated Annual Accounts of Enterprises, which specified in more detail the legal normsearlier described in a chapter of law On Annual Accounts of Enterprises. After thenew law was adopted the just mentioned chapter was deleted from text of the law. As anothernovelty can be mentioned the adding Statement of Equity Alterations to annual report.

In April 13, 2000 legislator issued particularly important legal act Commercial law,which (after certain transition period) regulated activities of all types of enterprises (fromnow on just 5 types instead of previous 17). Of course many issues included in that law were linkedwith accounting. For more detailed specification of accounting rules (in comparison with a similar

previous document) was issued new Cabinet of Ministers Regulation No 243Organisation and Procedure of Accounting of 25 July 2000. Notable changes in the areaof bookkeeping affected also participants of capital and financial market - creditinstitutions, insurance companies, private pension funds, investment companies etc., because by

June first 2001 stared functioning Commission of Finance and Capital Markets defined by therespective law. One of functions of this Commission was to issue rules and prescriptions concerning activities of financial and capital market participants andcalculation of indicators of those activities as well as procedure for submission of reports.

3 stage Further development of LR accounting policy and harmonisation with

EU requirements (since 2002)

The present stage of development of accounting policy was introduced by amendments of 15 February 2002 of law On accounting, which provided forestablishing new leading institution in the area of accounting methodology Accounting Council. Objective of the latter was linked with ensuring better quality financial

reports and preparation of accounting standards, which would be harmonised withIAS. In comparison with the previous stage the adoption procedure of LAS in principle remainedthe same, however the scope of the new Accounting Council was notably widened and the


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standard preparation phases were precisely specified both inside the Council and in Cabinet ofMinisters [. . 2005]. Budget funding and support of Ministry of Financeensured functioning of the Council. As a significant distinction of this stage can bementioned widened circle of users of standards, which in general was defined by AccountingCouncil, however Cabinet of Ministers regulation specifies which particular standardsare mandatory. Up to the end of 2005 efforts of Accounting Council have resulted in 8 approved

accounting standards: LAS No 1 Basic Provisions for preparation of Financial Reports; LAS No 2 Cash Flow Statements; LAS No 3 Events After the Balance Sheet Date; LAS No 4 Change of Accounting Policy, Changes of Accounting Calculations

and Errors of Previous Periods; LAS No 5 Long-term contracts; LAS No 6 Revenue; LAS No 7 Fixed Assets; LAS No 8 Accruals, Feasible Liabilities, Feasible Assets.Two standards Lease and Income Taxes are in draft phase. Cabinet of

Ministers regulation No 776 Regulation on The Mandatory Applicable LatvianAccounting Standards defined the circle of users who are obliged to observe LAS requirementswhen preparing financial reports and stated that mandatory are only the first 5 of the abovestandards and in addition LAS No 1 and No 2 have to be applied to reports covering time periodafter 1 January 2005, and LAS No 3, 4 and 5 to reports covering time period after 1January 2006. Application procedure of other standards remains an open issue.

In this time period notable changes were observed also in area of EU accounting standards

development. Requirements to financial reports of various enterprises in context with accountingstandards and legal status of the enterprises are given in Table 1 [Latvija. Ziojumi,


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2005 ]. IAS are gradually replaced by International Financial Reporting Standards (IFRS)which encompass requirements of IAS and EU Directives.

To understand linkage of LAS to IFRS, one have to keep in mind that Latvia is EU Memberstate since 1 May 2004 and therefore national accounting regulations should be harmonised withEU requirements. Already in 1995 European Commission recognised the documentHarmonisation of Accounting: A newstrategy vis--vis international harmonisation

and started to harmonise EU accounting directives with International Accounting Standards.Thus LAS drafted on the basis of IFRS will satisfy both the requirements of international

standards and EU directives. However they will differ by structure and contends,because LAS should be adjusted to Latvias specifics.

Information in the table shows that in Latvia in accounting area concurrentlyare taken in account both national and international standards and therefore in certain situations

problems may arise for those who prepare yearly reports as well as for those whoread them. As to standardisation the accounting policy has to be unified not split in differentdirections.

Summing up the above described Latvian accounting policy development period one should point out that approach practised by LR Cabinet of Ministers and Ministry of Finance in the

field of accounting policy was based on improving the methodologicaladministration. This approach is manifested by four methodological administration institutionsCabinet of Ministers has established and the amendment of accounting standardisation

process, which was harmonised with EU requirements.

Financial Reporting Rules in Latvia

In June 2002, the European Union adopted an IAS Regulationrequiring Europeancompanies listed in an EU securities market, including banks and insurance companies, to preparetheir consolidated financial statements in accordance with IFRSs starting with financial statementsfor financial year 2005 onwards. EU countries have the option to:

Require or permit IFRSs for unlisted companies. Require or permit IFRSs in parent company (unconsolidated) financial statements. Permit companies whose only listed securities are debt securities to delay IFRS

adoption until 2007. Permit companies that are listed on exchanges outside of the EU and that currently

prepare their primary financial statements using a non-EU GAAP (in most cases this would be USGAAP) to delay IFRS adoption until 2007.

The European IAS regulation applies not only to the 27 EU Member States but also to thethree members of the European Economic Area (EEA) Iceland, Liechtenstein, and Norway.

Latvia is an EU Member State. Consequently, Latvian companies listed in an EU/EEA

securities market follow IFRSs since 2005. In July 2010, the European Commission published theresults of a survey of the 27 EU member states and the 3 EEA member states regarding the fouroptions above. For information on each country's plans, click to download:

Table on Use of IFRS Options in 30 EU Member and EEA States The European Commission has adopted the following wording for use in the notes to

the accounts and in the audit reports of companies subject to EU Regulation 1606/2002/EC (the'IAS regulation'):

"in accordance with International Financial Reporting Standards as adopted by theEU" or

"in accordance with IFRSs as adopted by the EU".Companies may also state, in a footnote, compliance with IFRSs as adopted by the IASB, if

that is the case.In September 2011, the European Commission services published a report an update on theextent to which certain options included within the Accounting Directives have been incorporated
http://www.iasplus.com/restruct/euro2002.htm#jun2002http://www.iasplus.com/europe/1007ias-use-of-options.pdfhttp://www.iasplus.com/restruct/euro2002.htm#jun2002http://www.iasplus.com/europe/1007ias-use-of-options.pdf


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into the law of the Member States and EEA countries. Please click foraccess to the report. Latvia isincluded in the IFAD GAAP Convergence Studies

National Professional Organisation Website:Latvian Association of CertifiedAuditors

World Bank ROSC Accounting and Auditing Report According to the 2005 World Bank Report on the Observance of Standards and

Codes on Accounting and Auditing, national Latvian laws and regulations for financial reportingwere generally in line with European Union (EU) directives, but some fundamental differences withInternational Financial Reporting Standards (IFRSs) existed. Latvian accounting rules, which must

be complied with in the preparation of annual accounts of listed and non-listed companies, aredeveloped based on IFRSs; however, as stated in the 2006 self-assessment prepared by the LatvianAssociation of Certified Auditors (LACA), the alternatives which contradict Latvian accountinglegislation are excluded, disclosure requirements for financial information are reduced, andadditional illustrations to the standards are added. In a way, these Latvian standards are a simplifiedversion of IFRSs suitable for the needs of small and medium-size enterprises. Being a member ofthe EU, Latvia complies with the European Commission (EC) Regulation No. 1606/2002, whichrequires all EU listed companies to prepare their consolidated financial statements in accordance

with IFRSs endorsed by the EU from January 1, 2005. As far as the option for the extended use ofIFRSs provided for in the EC regulation is concerned, Latvia requires the application of IFRSs inthe annual and consolidated accounts of banks, insurance companies, and other supervised financialinstitutions, and permits the use of IFRSs in the consolidated accounts of all other companies.

The World Bank in its 2005 ROSC on Accounting and Auditing noted that under theCommercial Law financial statements of all limited liability companies are required to be audited.However, some companies that that do not exceed two of three size thresholds are exempt fromaudit requirements. With the enactment of Directive 2006/43/EC of the European Parliament andCouncil, all statutory audits of annual and consolidated accounts in European Union member statesmust be carried out on the basis of International Standards on Auditing (ISAs) as adopted by theEuropean Commission. According to the information provided on the European Commissionwebsite, Latvia has fully transposed the above-mentioned Directive into its national legislation. Pera 2006 self assessment by the Latvian Association of Certified Auditors (LACA), pursuant to theLaw on Sworn Auditors, statutory audits must be carried out in accordance with ISAs issued by theInternational Federation of Accountants (IFAC), and approved by the LACA. As stated in theLACA self-assessment, as of 2006, the 2004 version of ISAs was effective in Latvia and the 2005IAASB Handbook was in the process of being translated. Further, the IFAC Code of Ethics forProfessional Accountants was fully adopted in December 2004. In the 2005 ROSC the World Bankexpressed its concern about the low quality of the actual statutory audits carried out in Latvia. Inthis respect, the World Bank recommended that Latvia enhance enforcement mechanisms, improvesystems of professional education and quality assurance, and increase public oversight of the audit

profession.Accounting and bookkeeping in Latvia are regulated by the Law on Accounting, whichstates that accounts must reflect all of a companys economic transactions and all changes in thestate of the companys property so that a third person qualified in the area of accounting may obtaina true and clear representation of the financial position of the company.

Accounting registers must be maintained in the Latvian language and kept together withsource documents in the territory of Latvia. If a foreign legal or natural person participates in theeconomic transactions, another language may be used. Companies, except for individual merchantsand farms whose revenues in the previous financial year did not exceed LVL 200 000, mustmaintain accounting registers using a double entry accounting system. All source documents,accounting registers and other documents related to the companys accounts must be kept in the

companys archive for a period between 5 and 75 years, depending on the type of the respectivedocuments.
http://ec.europa.eu/internal_market/accounting/docs/2010-options_en.pdfhttp://ec.europa.eu/internal_market/accounting/docs/2010-options_en.pdfhttp://www.iasplus.com/resource/ifad.htmhttp://www.lzra.lv/enhttp://www.lzra.lv/enhttp://www.lzra.lv/enhttp://www.worldbank.org/ifa/rosc_aa.htmlhttp://ec.europa.eu/internal_market/accounting/docs/2010-options_en.pdfhttp://www.iasplus.com/resource/ifad.htmhttp://www.lzra.lv/enhttp://www.lzra.lv/enhttp://www.worldbank.org/ifa/rosc_aa.html


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Companies commencing activities and in the future, at the end of each accounting year,must carry out an inventory, in which all the property owned by the company is assessed on site, asalso are the amounts of debtor and creditor claims and obligations. Based on the initial inventorydata, companies must draw up an opening balance sheet.

The accounting year usually coincides with the calendar year. The first accounting year fornewly established companies may not exceed 18 months. Companies may change their accounting

year if appropriate explanations are provided. Where the financial year is different from thecalendar year, this should be stated in companies Articles of Association.


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Implementation of the IAS Regulation 1606/2002 in the EU and EEA (published for

information purposed only) Date: 01.07.2010

Italy LatviaEuropean CommissionStatus of theimplementation ofIAS/IFRS

Final law Final law

Article 5(a) of the IAS

Regulation

LISTED COMPANIES1. Does your MS use theoption to permit IAS in theannual accounts for listedcompanies?

No, even for insurancecompanies

No

2. Does your MS use theoption to require IAS theannual accounts for listedcompanies?

Yes , except for insurancecompanies

Yes

Article 5(b) of the IASRegulationOTHER COMPANIES

1. Does your MS use theoption to permit IAS in theconsolidated accounts forother companies? If yes,what type of companies?

Yes, except for smallenterprises and required

companies

Yes, all types (except forbanks, insurance

commercial companies andother supervised financial

institutions2. Does your MS use theoption to require IAS inthe consolidated accountsfor other companies?

If yes, what type ofcompanies?

Yes, for some companies Yes, banks, insurancecommercial companies andother supervised financial

institutions

3. Does your MS use theoption to permit IAS inthe annual accounts forother companies. If yes,what type of companies?

Yes, except for insurance,small enterprises andrequired companies

No

4. Does your MS use theoption to require IAS inthe annual accounts forother companies?

If yes, what type ofcompanies?

Yes, for some companies Yes, banks, insurancecommercial companies andother supervised financial

institutions

Article 9 of the IAS

Regulation(a) Did your MS use theoption to defer theapplication of IAS until2007 for companieswhose debt securities onlywere admitted on aregulated market of any

MS?

No No

(b) Did your MS use theoption to defer theapplication of IAS until2007 for companies

whose securities wereadmitted to public trading

No No


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Annual financial reporting

Companies, cooperatives, individual merchants and farms registered in Latvia must prepareannual financial reports in accordance with the Annual Accounts Law if revenue in the previousfinancial year exceeded LVL 200 000. Annual financial reports consist of a financial report and areport by the companys management. Companies can choose not to prepare cash flow statements,statements of changes in equity, to not calculate and report deferred tax assets and obligations, andmay prepare shortened annexes, if the company does not exceed two of the following conditions:

total value of balance sheet LVL 250 000 net turnover LVL 500 000

average number of employees in the accounting year 25Reports by company management must provide information about the development of thecompany, financial results, also the main risks and uncertain conditions faced by the company.

The annual financial reports prepared by companies who exceed two of the above criteria,also if transferable securities issued by a company are admitted to trading in the regulated market ofa Member State, must be audited by a sworn auditor in accordance with the Law on SwornAuditors.

Companies must submit their annual financial report together with the sworn auditorsreport (if such exists) to the SRS no later than a month after approval of the annual financial reportand no later than four months after the end of the accounting year.

Problems of accountant education (training) and certification in Latvia


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Accounting policy cannot be materialised without well educated and well trainedProfessional accountants, therefore development of Latvian accounting is closely linkedwith enhanced accountant education (training) and qualification. We think that ourresearch disclosed several acute yet unresolved problems. Presently one can become accountant

by taking at least 5 different types of study programmes: programmes forintermediate professional programmes, first level higher education study programmes,

academic and professional bachelor and master degree study programmes and second level highereducation study programmes. We believe this is very tangled professional and academic educationsystem for students and difficult to understand for employers.

Such a rather intricate system triggers a whole number of other secondary problems the mostsignificant of which are:1) difficult choice for applicants;It is difficult for the to be accountant to decide on academic or professional study programme,

because notable differences exist concerning study contents, job opportunities aswell as duration of the studies. Academic study programmes are more oriented towide scope education and scientific research (e.g. various level micro- andmacroeconomics, statistics mathematic, foreign languages, IT etc.), while the

professional accountant programmes are focused on accounting theory, managementaccounting, financial analysis, international accounting standards and other courses. Thestudents of professional programmes have to have extensive practise 26 weeks, which isnot the case for academic programmes students. The study duration also differs usually the

professional study programmes takes more time.2) dissatisfaction of postgraduates with the broad definition of the obtained degree orqualification;If the employer opts the potential accountant by the entry in diploma - mistakes are quite possible,

because the entry in diploma of postgraduates of academic programmesreads:bachelor (master) degree of social sciences in economics or in management and onlyin the addendum to diploma some items indicate the accountant qualification.

The situation is similar concerning the second level professional study programmes, becauseup till now the standard for 5th degree accountant profession is not written, and therefore entryin post graduate diploma reads: 5th level economist qualification.3) incompatibility of first and second level higher education professional study

programmes. Keeping in mind that accredited first level professional study programmes are offered at 18 different educational institutions, it is quite reasonable to expectthat the numerous postgraduates will wish to study further.

However the present Latvian professional study system provides for ratherrestricted possibilities to take the second level professional study programme at anotheruniversity. In this context Article 25, law Of Higher Education Schools states: thefirst level professional higher education programme is part of second level professional education

provided by the higher education school, thus going to another university in order to take thesecond level programme is impossible without special transition period. It deserves mentioningthat education issues are in the scope of Education and Science Ministry and thereare no serious cooperation between the Ministry and institutions interested in issues ofaccountant education and professionalism. The only type of cooperation is related torequirement laid down in Education Law, namely - for accreditation of professionalstudy programme it is advisable that nongovernmental professional organisations(in this case Latvian Accountant Association) provide their recommendations onthe programme contents. The responsible for accounting policy Ministry of Financealso does not take part in resolving accountant education problems.

Necessity to comply with requirements of accounting regulations and legal

acts impose certain requirements on the set of professional knowledge and skills when performingas an accountant, therefore criteria for professional accountant and officialrecognitionof professionalism are needed. At international level issue of accountant


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professionalism is resolved long ago Education Committee of International AccountantFederation (IFAK EC) has issued guidelines for the set of professional accountantknowledge and skills and corresponding requirements are incorporated incertification programmes of accountant professional organisations.

The essence of accountant certification is continuous enhancement (according tosocial and economic development tendencies) of professional knowledge and skills based on

fundamental knowledge provided by higher education. EU directives do not provide forregularising accountant profession, however each member state approaches the issues ofaccountant profession taking in consideration international experience, i.e. they certify accountantsand the certification is carried out by independent professional accountant associations.

Certification was started in U.S.A. where according to qualification requirementscertificates were issued by National Independent Accountant Association. In Belgium it is

National Expert - Accountant Collegiums, in France - Expert - Accountant Associationand in Ireland Institute of Chartered Accountants [., .,1997].

In our neighbour countries Lithuania, Estonia and also Poland and Ukraine certification isdone by Accountant Associations and by government decries (decisions) theAssociations are responsible for certification procedure [Alver J.,Golov S., 2005].

LR Accountant Association started certification in year 2000, however in thelast years various commercial companies offer to certify accountant competency even to issueinternational accountant certificates. It is an indication that in Latvia there is no unified system,which establishes basic requirements and criteria for accountant professionalism. It

poses serious problem for accountants and company chief executives as well asfor society in general. The potential accountants lack information about knowledgeand skills necessary when doing accountant job.

Company managers have difficulties to ascertain accountants professionalism and to makedecision whether to pay salary to accountant or to buy accounting services from somecompany. It is an absurdity that accounting services may be provided by any legal person registeredin the Enterprise Register without any kind of certified specialisation and professionalism,so there is good reason for asking which accountant certificate issued in Latvia certifiesthe necessary accountant professional knowledge and skills?

Our research shows that international practice is issuing certificate ofprofessional accountant usually for 5 years. This term may be extended by enhancing professionalknowledge, attending various courses the scope and contents of which are defined by Provisionsfor repeated certification written by LR Accountant Association define requirements forcertificate extension as follows:

1. Attended free chosen qualification courses and seminaries in field of economics orentrepreneurship. The minimal amount of courses and seminaries (evaluated byspecific point system) should be 250 points in 5 years since issuance of the

certificate.2. If the certified accountant has enhanced his knowledge at state accredited highereducation institution then for each study year he obtains 50 repeated certification

points.3. Job experience in the last three years before the repeated attestation the person should

have been working as accountant, chief accountant or have occupied some other post infield of economy where accounting knowledge is necessary.

4. Attended LR Accountant Association courses mandatory for attestationof professional accountants. Every year Attestation Commission defines the topics ofmandatory courses.

5. Passed qualification test. Every year Attestation Commission determines contents

of the test. [LR GA Resertifikcijas nolikums, 2002. (Provisions for repeatedcertification, 2002)]


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Examination of LR Accountant Association Provisions on repeatedcertification shows, that these requirements comply with Guidelines for the Set ofProfessional Accountant Knowledge and Skills issued by Education Committee ofInternational Accountant Federation (IFAK EC) as well as provide for continuousaccountant professional enhancement in accord with the tendencies of economic development.

Quality of financial reports depends on accountant qualification therefore issues of

accountant qualification became particularly acute after Latvia accessed European Union.The problems of accountant qualification were implicitly referred to also in World Bank report onassessment of requirements to preparation of financial reports and to financial audits practice inenterprises. The report stated that financial reports not always meet standardrequirements and therefore does not satisfy public interests [The World BankReport, 2005].

At the Report presentation attended by representatives of various governmentaland nongovernmental institutions analysts of Latvian commercial banks openly

pointed out the insufficient accountant qualification in the field of preparing financialreports.

Findings and discussion

1. Our investigation shows, that development of Latvian accounting policy can be conditionallydivided in three stages: shaping of the basis for LR accounting policy, amending the LRaccounting policy and further development of LR accounting policy and harmonisationwith EU requirements. In parallel with the positive accounting policy developmenttrends there are still unresolved acute problems. The activities of Accounting Methodology Councilin the first development stage were not successful no major changes in accounting

policy were introduced mainly because contradictions between the defined Councilfunctionality and Cabinet of Ministers regulation. Also unresolved remained theissue of preparing and introducing accounting standards. Solving of the problem wasstarted only in the third stage of policy development. We think that one solution could be thatthe Accounting Council, which develops and approves Latvian accounting standards, should be

given the right to establish the class of agents to whom compliance with the respectivestandards is mandatory. Thus the Cabinet of Ministers would be released from this function.2. It is witnessed by our research results in a field of accountant education andcertification that in accountant education the study programmes contents is incontradiction with statements in postgraduate diplomas; the latter lacks information about

postgraduates real speciality. Lacking is also state level system providing for unified accountantcertification criteria. We believe several solutions could be possible. The AccountantCouncil should be entitled right to define the circle of standards users to whomapplication of the standard is mandatory, thus freeing Cabinet of Ministers fromthis function. To systematise accountant education. Ministry of Education andScience should ensure preparation of standard for fifth level accountant profession

and make the entry in diploma of postgraduate of academic programme morespecific i.e. to bachelor (master) degree of social sciences in economics or inmanagement add a reference to the speciality in accounting, analysis and audit according


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to the particular study programme. Also it should be ensured that the first level postgraduates were ensured opportunity to proceed with their education taking secondlevel professional study programmes without transition period. Ministry of Finance (responsiblefor accounting policy in the country) jointly with LR Accountant Association and

practicing certified accountants have to prepare (countrywide applicable) unifiedcertification system including confirm criteria for issuing a certificate. In this process

of accounting policy materialisation should be engaged experts of Ministry of Education Scienceand Latvian University Accounting Institute as well as professors of other higherschools, who for years have successfully educated accountants for our economy. In conclusion theauthors would like to stress that notwithstanding some problems still waiting resolution theLatvian accounting policy is being enhanced in compliance with requirements laid downin EU directives and provisions of IAS and the general development trends deserve positiveassessment.

1. Par grmatvedbu, LR likums// Latvijas Republikas Augstks Padomes un Valdbas

Ziotjs, Nr. 44/45(3535-3536),1992. (changing up 30.12.2005.)2. Par uzmumu gada prskatiem, LR likums// Latvijas Republikas Augstk Padomesun Valdbas Ziotjs, Nr. 44/45(3535-3536), 1992. (changing up 30.12.2005.)3. Par Grmatvedbas metodisko padomi, LR MK noteikumi Nr.34 // LatvijasVstnesis, Nr.131,1993.4. Noteikumi par obligti piemrojamiem Latvijas grmatvedbas standartiem: LR Ministrukabineta noteikumi Nr.776// Latvijas Vstnesis Nr 2005.5. Finansu un kapitla tirgus komisijas likums: LR likums // Latvijas Vstnesis Nr. 2000.6. Alver J.,Golov S. Accounting & Audit System Integration into European Union Area., ThePapers of International Conference, Vilnius, 2005, p.14- 667. Davia D. Standartu izstrdana aktvi turpins // Grmatvedba un Revzija, Nr.3, 1998.,2.-3.lpp.8. Davia D. Top Latvijas finansu grmatvedbas standarti. // Bilance, Nr.9, 2000.,11.lpp.9. Millere I. Implementing the Legislative Requirements in Latvian Accounting // The Papers ofInternational Conference, Vilnius, 2005, p.155.10. Reports on the OBservance of Standards and Codes (ROSC). Latvia ccounting and Auditing. The World Bank, 2005.,11. dre I. Neliels ieskats standartu tapanas vstur. - Grmatvedba un Revzija, 1998., Nr.2, 1.-2.lpp.12. ., . // , , 1997.,163-237 .

Documents

Financial Reporting Rules Latvia