1. Leo Ašmanis Deputy Chief Accountant Bank of Latvia March, 2006 Vienna Adoption of IFRS in Latvian banking sector

2. March, 2006 Initial transfer to IAS Transfer to International Accounting Standards (IAS) was implemented in Latvian banking sector in mid 90-s Implementation was achieved through reference to IAS in the Law on Credit Institutions No translation of IAS into local language was provided, however, trainings in local language were provided to banks on application of IAS Transfer to International Accounting Standards (IAS) was implemented in Latvian banking sector in mid 90-s Implementation was achieved through reference to IAS in the Law on Credit Institutions No translation of IAS into local language was provided, however, trainings in local language were provided to banks on application of IAS

3. March, 2006 Initial transfer to IAS At initial implementation period the main focus was: proper establishment of accruals valuation of bonds and derivatives establishing allowances for loans and advances At initial implementation period the main focus was: proper establishment of accruals valuation of bonds and derivatives establishing allowances for loans and advances

4. March, 2006 Subsequent changes to IAS Implementation of subsequent changes to IAS was mainly the duty of banks themselves Despite the fact that the central bank provided local regulations on preparation of annual accounts which were based no IAS requirements, the regulations were not as extensive, and sometimes were not up- to-date Implementation of subsequent changes to IAS was mainly the duty of banks themselves Despite the fact that the central bank provided local regulations on preparation of annual accounts which were based no IAS requirements, the regulations were not as extensive, and sometimes were not up- to-date

5. March, 2006 Implementation of IAS 39 (2001) Lack of knowledge and expertise across whole banking sector on practical implementation of the new standard Lack of adequate translation in local language Main focus placed on four categories of financial instruments and transfers between portfolios Few years passed before issues like application of effective interest rate on loans, assessment of financial assets impairment, embedded derivatives were properly addressed Auditors were the most active in promoting change Lack of knowledge and expertise across whole banking sector on practical implementation of the new standard Lack of adequate translation in local language Main focus placed on four categories of financial instruments and transfers between portfolios Few years passed before issues like application of effective interest rate on loans, assessment of financial assets impairment, embedded derivatives were properly addressed Auditors were the most active in promoting change

6. March, 2006 Hedge accounting rarely implemented due to strict documentation requirements The banking regulator and supervisor, which were separated from the central bank in 2000, did not take active role in implementation of changes in IAS Local regulations on preparation of annual accounts for banks, which should be based on IAS, were amended one year later and became in force as of 1 January 2002 However, amended local regulations were not fully in line with regard to assessing impairment losses Implementation of IAS 39 (2001)

7. March, 2006 Implementation of IAS 39 (2001) Information systems of banks were generally not adjusted for IAS 39 requirements, therefore a number of calculations were done manually at year-end Only in 2006 some banks have adjusted their IT systems to calculate properly effective interest rate on loans. However, most of the banks will continue to assess the required adjustment manually

8. March, 2006 Implementation of IFRS (2005) In general, lack of information on changes as such. Again, auditors are largely the main driving force for promoting the change Subsequently, the regulator decided to reduce the scope of local accounting and reporting regulations and provide more direct references to IFRS. This change will take place in 2006. Lack of enforcement since fully dependent on the auditors of banks Significant loan impairment losses have been reverse as a result of IAS 39 requirement for loss event

9. March, 2006 Loan impairment losses Loss event (triggering event) largely is linked to loan payment delays which is a basis for establishing loan impairment losses (loan provisions) under prudential reporting rules. Additional events like change in financial position of borrower is reliable for large companies. In medium and small companies financial reporting is not sufficiently reliable. Sometimes the bank has its own assessment of the companies financial position as poor, however, such information is not reflected in the financial reporting of the borrower. Accordingly, this might not be viewed as objective evidence for loss event.

10. March, 2006 Loan impairment losses Future cash flows are largely determined by reference to collateral and historical information on recovered payments for similar problematic loans. Individual assessment of future cash flows are not used in practice since it takes significant resources for preparation of such calculations and often there is not sufficiently reliable information on which such cash flows can be based. The issue on differences between prudential reporting and annual financial reports remains unresolved. The regulator still requires banks to assess loan impairment losses based on its own regulations which are not in line with IAS 39, however, IAS 39 rules can be applied when preparing annual financial reports.

11. March, 2006 Remaining problem areas Lack of unified enforcement. Different approaches taken by different audit firms, e.g. there could be different approach on loss events used for determining loan impairment losses. Lack of proper IT support for calculation of effective interest on loans and assessing loan impairment based on expected future cash flows. Lack of market information and developed techniques to assess fair value of loans for disclosure purposes. Lack of historical information for better assessment of loan impairment losses