1. Implementing the Acquis Communautaire Recent Experience in Estonia Ago Vilu Chairman of the Estonian Accounting Standards Board Implementing the Acquis Communautaire Recent Experience in Estonia Ago Vilu Chairman of the Estonian Accounting Standards Board

2. Acquis Communautaire – main laws and regulations Accounting –4th EU Directive – annual accounts –7th EU Directive – consolidated accounts –IAS Regulation – requires use of International Accounting Standards (IAS / IFRS) from listed companies starting from 2005 Auditing –8th EU Directive –EC Recommendations on auditor’s independence and on quality assurance

3. Accounting and auditing reforms in Estonia

4. Estonia in numbers Small but flexible – Number of population (mln) 1.4 Excellent price/quality ratio – Average monthly salary (EUR) 460 Growing faster than EU – GDP growth (2003) 6.5% Under control – Annual inflation rate (2003) 1.3% Challenging for foreign investors – FDI stock per capita (EUR) 3,100

5. Accounting a cquis and choices for member states EU IAS Regulation –all EU listed companies have to apply IAS in their consolidated accounts starting from 1.01.2005. –EU member states may permit or require IAS also in respect of non-listed companies and non-consolidated financial statements Issues to deal with in the member states: –Should IAS be permitted or required also in respect of other companies and non-consolidated financial statements? –Do countries still need their own national accounting standards? –If yes, how different should be those standards from IAS?

6. Accounting reforms in Estonia New Accounting Act (effective from 1.01.2003) All companies can choose between: Estonian Accounting Standards (“Estonian GAAP”) (as issued by EASB in Tallinn) IAS / IFRS (as issued by IASB in London and endorsed by EC in Brussels) The framework selected must be applied in both, consolidated and parent’s stand-alone accounts If IFRS is selected, there is no need to prepare Estonian GAAP accounts Listed companies and financial institutions must use IFRS starting from 1.01.2005

7. Estonian GAAP – simplified summary of IFRS Estonian GAAP is a simplified summary of IFRS, focusing on accounting areas, which are more relevant for the Estonian companies –No significant differences in recognition and measurement principles –Main difference - Estonian GAAP requires less disclosure than IFRS The main users of the Estonian GAAP are small and medium size entities (as large entities can always choose IFRS option granted in the Law). –For SMEs the cost of preparation of full IFRS disclosures would exceed the benefits achieved An independent body, the Estonian Accounting Standards Board is responsible for issuing national accounting standards (Estonian GAAP)

8. Estonian accounting reforms – results About 95% of the companies use Estonian GAAP –SMEs –Larger companies, where local GAAP financial statements meet the needs of users About 5% use International Standards (IAS/IFRS) –Listed companies –Other public interest entities (e.g. significant state-owned entities) –Companies required to do so by the shareholders, foreign investors or creditors

9. Auditing reforms New Auditing Act under preparation –Will be based on new EU 8 th Company Law Directive –Will comply with the requirements of the EC Recommendations Topics discussed –Auditor’s independence –Rotation of auditors –Public oversight and quality assurance

10. Achievements and areas for further development May 2004 - World Bank Report on the Observance of Standards and Codes (ROSC) Positive aspects Laws complying with the acquis have been enacted The quality of the IFRS and Estonian GAAP financial statements of most public interest entities is generally very high Negative aspects Smaller entities do not always follow required accounting standards Audit regulation and practices should be improved –Only 25% of licensed auditors can be expected to deliver high-quality audit

11. Some recommendations and learning points Do not invent the wheel, use the work already done by others –International Accounting Standards, International Standards on Auditing Global solutions may not work for all entities - consider cost and benefit –IAS is good for some companies but may be too costly for others (SME-s) Process must be open and involve all stakeholders Enforcement of laws is usually much more difficult than enacting the laws –Laws enacted should be realistic to keep –Develop appropriate enforcement mechanisms Co-operate with each other and with existing member states

12. Thank you for inviting!