Adoption Of Ifrs In Bulgaria

Introduction of IFRS for small and medium companies in

Bulgaria

In this essay we discuss the development and adoption of the International Financial Reporting Standards (IFRS) in the Republic of Bulgaria. Most of the characteristics and features apply not only to this country, but also to most developing economies in Europe. The IFRS are a set of standards which imply rules, methods and governance for reporting and interpreting financial data. The purpose of the IFRS is to develop a set of universal standards to be applied and comprehended worldwide, in order to achieve harmonization and standardization among reporting entities.

Bulgaria was accepted as a member of the European Union on 1 of January 2007. A number of obligations set by the EU had to be completed in order for this to happen. One of them was the adoption of the IFRS for listed companies by the end of year 2005. Actually, this happened by the end of year 2003.

Considering the small to medium businesses, the decision was left to each member of the union to decide whether or not to adopt the new standards. Bulgaria decided to accept them by the end of year 2005.

However, the change is not just a formal process- changing the name from “National GAAP” to “IFRS”. There are some serious differences between the two systems. The old system was mainly tax oriented. Some changes affect assets and liabilities valuation, income taxes, provisions, depreciation and amortization. The simplest examples would be the growth of significance of the fair value concept or the amount of the reported profits of the companies under Bulgarian GAAP or the IFRS. There are also differences in provision percentages and disclosures, depreciation methods, income taxes calculation procedures etcetera. Perhaps the ones of greatest importance are changes related to financial instruments. The overlapping National Accounting Standards (NAS) 25 and NAS 32, which lacked basic concepts and principles of the IFRS, implied ambiguity and contradictions in the Bulgarian accounting practices. The new IAS 32, IAS 39 and IFRS 7 are a major improvement, but their implementation would call for a significant change in the existing information systems.

As a famous Bulgarian saying literally states - “change is a headache”. However, there definitely are crucial advantages of the IFRS. To begin with, on the whole the financial statements are of higher quality, more reliable, understandable, complete and objective. The use of IFRS implies a high degree of confidence in the provided information. Another thing is that there exists a comparison possibility of financial data between entities that have adopted the standards. Also users of financial statements that are not aware of the Bulgarian GAAP would safe time, effort and resources to interpret the information. This would enhance the communication and trust between Bulgarian and foreign companies and therefore boost international investments. Entrepreneurs seeking high returns in emerging economies would gladly consider Bulgarian markets as prospective targets. Moreover, large companies from the European Union planning to expand in developing economies of the new members will prefer to look at financial statements produced according to IFRS. When selecting a partner, merger or acquisition target they will consider safety, reliability etcetera, which are ensured by the new standards.

These advantages will not only apply to foreign entities. Bulgarian companies will also benefit from the introduction of IFRS when looking for trade partners, merging and acquisitions, loans from foreign banks, communication, information, services and various other business prospects abroad. This is because of the decreased risk involved, higher trust in the provided financial results etcetera.

Furthermore, the IASB developed the IFRS to improve market efficiency of small to medium enterprises if used in unison with a suitable legislation provided by the governments. In Bulgaria the introduction of such laws was planned parallel to the standards which seems promising from regulation and management of markets point of view.

All the up-stated factors account for an overall increased possibilities for Bulgarian business and facilitation of international investments in the economy. Steps have to be taken in order to help and position the blooming