On 26 December 2008, the National Assembly of Armenia adopted the amendment to the Law on Accounting and Reporting, according to which all Banks are required to prepare and present their Financial Statements in compliance with IFRS with effect from 1 January 2009. All non-banking financial organizations i.e. credit settlement organizations, payment organizations, reporting issuers at the Securities Market, investment companies, the regulatory market operator, Central Depository, insurance and reinsurance companies and insurance brokers are required to prepare and present their Financial Statements in compliance with IFRS with effect from 1 January 2010.
The Law also states that all other organizations with a turnover of over 100 million Armenian drams (AMD) (reported for the previous calendar year) will be required to prepare and submit their Financial Statements in compliance with IFRS with effect from 1 January of the year, following a six-month period after the Government publishes the appropriate Standards and Interpretations, as well as any further changes thereon.
In addition, the Law on Accounting and Reporting also requires that large companies should have their annual financial statements audited and published. The Law defines that companies are considered large when either of the following criteria is met: previous year’s turnover exceeds AMD 500 million; or, as at the end of the previous year, the book value of total assets exceeds AMD 500 million.
To ensure rapid, complete and smooth IFRS convergence, the Ministry of Finance of Armenia has established a Translation Committee, a council of professional translators and accounting/audit professionals who are responsible for translation of the IFRSs and their Guides and Interpretations into Armenian.
Benefits for Armenian companies
Harmonization of financial reporting of Armenian listed companies with those around the world will help to raise confidence of international investors who seek to obtain comprehensive, transparent and understandable information for their decision-making purposes. For non-listed medium to large scale companies, having financial statements prepared under IFRS means being better prepared to “go public” via an Initial Public Offering (“IPO”) should companies have the need for more capital.
However, IFRS transition brings more benefits to Armenian companies than just increasing the interest of potential investors and compliance with legislative requirements. Adopting IFRS will result in reduced costs for those financial organizations and listed companies which were required to report both under IFRS and ASRA (Accounting Standards of the Republic of Armenia) by eliminating the double reporting requirement. The greater confidence in reliable and transparent information will also translate into a lower cost of capital, primarily in reduced interest costs.
Many leading Armenian companies have already converted or are in the process of conversion to IFRS. Companies who have started the transition process, have already gained a number of benefits, the most important of which is that IFRS reporting really enhances the effectiveness of the company’s management and decision making process since IFRS principles provide better decision-making aids to management because they are more oriented to a realistic reflection of economic efficiency.
Internal challenges for Armenian companies
On the other hand, the new Law brings a number of challenges for Armenian companies in the process of transition to IFRS.
IFRS adoption means undergoing major changes as Armenian companies predominantly align their accounting and reporting practices to comply solely with the Armenian tax legislation requirements which usually give rise to significant differences in the accounting treatments with those under IFRS.
Without a definite mandate to begin applying IFRS, the directors and managers of companies with over AMD 100 million turnover are less likely to pay due attention and make preparations before the Law starts to operate. According to Samvel Mkhitaryan, the Infrastructure Team Leader in FSDP (Financial Sector Deepening Project), a USAID Contractor, which supports the Ministry of Finance in its IFRS translation and implementation efforts, translation of IFRS official version is expected to be completed by the end of August 2009. This means that under the current plan and according to the Law, the companies with over AMD 100 million turnover would begin reporting under IFRS with effect from 1 January 2011. However, even if the Government translates and publishes IFRSs and their Guides and Interpretations any time later but before 1 July 2010, these companies would still be required to report under IFRS with effect from 1 January 2011. However, in order to report under IFRS from 2011, these companies would be required to retrospectively apply IFRS to previously filed financial reports as the IFRS application requires adjustment of opening balances. In some cases, IFRS 1 (Standard on First Time Adoption), may require applying IFRS to Financial Statements for as many as two previous accounting years. Therefore, Armenian companies will certainly need more time to prepare than they think they will. They would definitely save significant time, efforts and financial resources by thinking about IFRS implementation plans earlier rather than later.
However, an IFRS adoption plan is not just an accounting project. Indeed, its use will impact on many functions within the business. As illustrated in the following diagram, there are issues for Accounting and Reporting, Systems and Processes, People and for the wider Business. Effective Project Management is also an essential ingredient for a successful and sustainable IFRS implementation process.
KPMG Armenia Assistance
To help businesses meet IFRS conversion challenges, KPMG has developed a global methodology which presents a structured approach to the conversion which is designed to assist our clients to convert to IFRS in the shortest possible time, and without incurring additional expenses. During the last few years, KPMG Armenia has worked with a number of leading Armenian enterprises to assist them to develop and implement IFRS transformation projects.
Our IFRS Conversion Advisory Group assists conversion to IFRS by providing the appropriate resources, knowledge and practical support in the following areas:
- Accounting and Reporting
- Determine new IFRS accounting policies and supporting accounting procedures
- Perform a gap analysis between information required and what is currently available
- Consider the impact on statutory reporting and tax accounting Systems and Processes
- Assess the systems and process impacts on financial reporting and consolidation systems
- Determine changes required to source systems to provide the additional data
- Understand the impact on other strategic initiatives in the organization (e.g. Enterprise Resource Planning (ERP) and other system integration and upgrade initiatives) Business
- Understand the financial and business impacts of IFRS conversion
- Determine actions to mitigate the possible volatility of results under IFRS
- Assist management, shareholders and analysts in understanding new reporting requirements to avoid misinterpretation People
- Successful and sustainable IFRS implementation requires senior management sponsorship
- Buy-in and support is required at all levels in the business - this is not just a Finance and/or Accounting Department issue
- Need to establish a communication plan (internal and external)
- Need to plan for comprehensive and in-depth IFRS training and knowledge transfer
- Practical application of IFRS We can assist enterprises at all stages of their IFRS conversion process, from the assessment phase to design and implementation.
If you would like more information please contact:
IFRS Conversion Team: Andrew Coxshall, Partner Tigran Gasparyan, Director Gayane Boyakhchyan, Senior Advisor Gohar Harutyunyan, Senior Advisor
KPMG Armenia Risk Advisory Services 8th floor, Erebuni Plaza 26/1 Vazgen Sargsyan Street, Yerevan, 0010, Armenia Tel./fax: + 374 10 566 762 Email: gboyakhchyan@kpmg.com gharutyunyan@kpmg.com