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FOREIGN FIRMS SAY FINANCE MINISTRY COULD HAVE MADE TERMS MORE CLEAR, LAW MORE WIDE-RANGING

Accounting law adopts global standards

AS CORPORATE accounting scandals continue to batter American and international stock markets, Slovakia's new law on accounting standards has won public praise, although some experts say it does not go far enough in bringing accounting practices into line with those in western Europe.
The law, approved in mid-July, is designed to establish accepted internationally-used accounting standards (IAS) in Slovakia, and will take effect at the beginning of 2003, together with new accounting procedures for different business branches, which have yet to be passed.
However, some accounting professionals say that the new law is only a half-measure, and that key issues remain to be addressed.


FOREIGN investors say new law may help demystify Slovak company books.
photo: Ján Svrček

AS CORPORATE accounting scandals continue to batter American and international stock markets, Slovakia's new law on accounting standards has won public praise, although some experts say it does not go far enough in bringing accounting practices into line with those in western Europe.

The law, approved in mid-July, is designed to establish accepted internationally-used accounting standards (IAS) in Slovakia, and will take effect at the beginning of 2003, together with new accounting procedures for different business branches, which have yet to be passed.

However, some accounting professionals say that the new law is only a half-measure, and that key issues remain to be addressed.

"With the new accounting law we are only half way to reaching the IAS level," said Richard Farkaš, a partner at auditing and accounting giant KPMG.

After two years in preparation, the main problem with the legislation, says Farkaš, is unclear definition of some accounting terms.

"Current legislation does not define basic terms. In the new law terms are defined, but only partially, and I'm talking about fundamental definitions such as those for assets and liabilities," he said.

But officials from the Finance Ministry, who steered preparation of the law, disagreed, saying the legislation is in keeping with IAS principles and philosophy.

"It is based on definitions of terms from IAS standards. Critics of the law have to realise that some definitions had to be generalised because this law is not only for businesses, but also municipalities and the state sector," said Helena Ivaničová, head of accounting at the Finance Ministry.

"We had to take account of all interests, not those of just one group," she added.

Not all accountants are buying this answer. According to Mária Fruhwaldová, a partner at PricewaterhouseCoopers, "when the Finance Ministry says that the law is for a variety of institutions, why can't each of them find all it needs there, rather than just fragments?"

The law's backers point to its advantages, first and foremost of which is the supposedly clear and accurate reporting of a company or an organisation's accounts that adoption of IAS requires.

Many foreign investors have complained in the past that they do not understand Slovak accounting methods, and do not get a clear picture of assets they may want to buy.

Ivaničová said that businesses will now be allowed to assign a more realistic 'fair value' to selected assets and liabilities in their financial statements rather than the previously required 'value at cost', which should increase the accuracy of financial reports.

In addition, said Ivaničová, "the new accounting legislation will increase the penalties for providing a misleading or unclear picture of a company's finances."

Current sanctions, which reach a maximum Sk1 million ($22,000) for serious discrepancies in financial statements, will be hiked, and penalties could reach between one and three per cent of a company's total assets.

KPMG's Farkaš said he felt the increase was too drastic: "Such sanctions are too high, and in my experience, sanctions given to businesses are often inadequate; one per cent of total assets, in the case of many companies, will be a large amount of money. I view the increase negatively," he said.

Farkaš also explained that the 'fair value' provisions applied only to securities and derivatives, such as futures, options and swaps, which in Slovakia constitute only a fraction of most companies' assets.

Furthermore, he said, the law does not allow the application of fair value to standard assets, such as inventory, stock and buildings, which is common accounting practice in western countries.

However, he said that the new law did contain a number of positive aspects.

"One of them is implementation of the equity method, which will allow the accounting unit to include the equity of its daughter companies in its separate financial statements, which will give a clearer picture of the company's total equity," said Farkaš.

Another positive change brought by the law, said Ivaničová, is that from January 2004 businesses will be allowed to decide when their fiscal or accounting year starts, again a standard practice in western countries.

At the moment, the Slovak fiscal year copies the calendar year, creating problems for local branches of foreign companies whose corporate books may follow a different schedule.

"The fiscal year of our mother company back in the US starts in October, but our first quarter here starts in January, which is why we have to run separate books for the mother company.

"The possibility of choosing the beginning of our fiscal year would simplify things for us," said George Varmuza, managing director of car components maker Emerson Electric in the western Slovak town of Nové Mesto nad Váhom.

"This is truly the most positive change implemented from IAS, but all in all the law is still not quite what I was originally expecting," he added.

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