Polish GAAP v IAS: Ties that don't bind

From 1 January, companies have to report under a new framework. But instead of convergence with IAS, Poland is likely to have a unique hybrid solution. Antoni Reczek and Waldemar Lachowski report

The process of constructing a market economy in Poland, begun at the end of 1989, has had a significant impact on the development of accounting regulations.

The first changes were not promising. In 1991, new accounting legislation was passed in the form of a decree of the minister of finance. It was very narrow in scope and, because of its secondary legislative rank, was subject to much inconsistent interpretation by the Ministry of Finance (in contrast to primary legislation, which may only be interpreted by the courts or parliament).

Following three years of conflict in which the international accounting firms pushed the interpretive boundaries out and the authorities struggled with the interpretations that those firms were applying, a new primary Act was drafted in 1994 with the assistance of PricewaterhouseCoopers, and this became law on 1 January 1995. The Act was drafted principally to achieve Polish accounting compliance with the EU Fourth and Seventh Directives. The finance ministry was unfortunately not willing to support either compliance with IAS or even the much less ambitious adoption of IAS solutions for many of the locally deficient areas such as leasing, contract accounting or merger accounting.

Rigorous application of the 1994 Accounting Act did, however, improve transparency and the reporting of transactions' economic substance. Major 1994 Act improvements to Polish Accounting Regulations (PAR) included the introduction of non-merger consolidation rules, deferred tax and the requirement to make provision for costs and losses regardless of their tax-deductibility. The last point, to a certain extent, signified a breakthrough in the separation of financial accounting from tax accounting. Compliance with the EU directives did much to support the development of a real capital market and the inflow of foreign investment.

Despite the improvements the 1994 Act brought, its shortcomings made it inevitable that, in the rapidly developing Polish economy, it would be overtaken by events such as privatisation, foreign investment, growing merger and acquisition activity among Polish corporations and the increasing sophistication of business. A widening divergence between financial statements audited by the major international audit firms and those audited by others, pressure from the Polish Securities and Exchange Commission and the development of a modernised Polish Commercial Code finally forced the Ministry of Finance to update the law. In addition, the models on which the Act was based, ie, EU directives and IAS, had also undergone thorough review and change during the period from 1994 to 1999.

Parliament passed material amendments to the Accounting Act (the 'Amended Act') in 2000. Most of its provisions will apply to financial statements prepared for accounting periods commencing on or after 1 January 2002. Earlier adoption is possible, but not obligatory, in relation to leasing and long-term contract provisions.

The long period of 'vacatio legis' was introduced to give the preparers of financial statements enough time to meet the Amended Act's requirements. The amendments comprise over 100 alterations and new solutions, some of which are more farreaching than EU directives. It is obvious from the Amended Act that IASs were drawn upon on a much wider scale, although not always consistently.

Current structure

PAR comprises the Accounting Act and secondary government regulations (decrees), which companies should comply with when preparing their financial statements. The Act sets out rules governing the preparation, publication and audit of financial statements, the maintenance of accounting records and the selection of accounting policies. The decrees provide detailed rules covering such areas as consolidation, and specialised industries such as banks and investment funds.

The Act does not provide detailed guidance on many issues and in some cases (in particular in relation to accounting for tangible and intangible assets) refers directly to tax legislation. The lack of a clear direction in relation to the substance over form principle has resulted in the development of some accounting practices that are based on tax regulations (eg, the classification of lease contracts and depreciation rates) and that are completely inconsistent with IAS.

Public companies are also obliged to apply extended presentation and disclosure requirements as set out in the 1997 Law on Public Trading in Securities and associated decrees.

Future structure

The Amended Act is the basis of a new accounting framework that applies from 1 January 2002. The finance minister has been obliged to issue 11 associated decrees that cover significant issues such as organising an Accounting Standards Committee (ASC); specific accounting regulations for investment funds, pension funds, banks, insurers; detailed rules for recognising, valuing and disclosing financial instruments; and preparing consolidated financial statements.

In matters not governed by the Amended Act's provisions, an entity may use standards issued by the ASC.

If there is no relevant national standard, the entity may apply IAS. This is a very important provision, which could have a significant, positive impact on the quality of financial information in Poland. It is regrettable, however, that the application of national accounting standards or IAS for specific issues unregulated by the Amended Act is voluntary. As a result, the financial statements of two similar entities may not be comparable.

Changes in the Amended Act include the introduction of new definitions and also amendments of those already in force. In particular, the introduction of definitions of assets and liabilities, revenues (gains) and costs (losses) is very significant, and should help practitioners to correctly recognise the effects of transactions for which the Act does not provide detailed solutions. In principle, the new or amended definitions are consistent with IAS, although interpretation problems may arise with respect to the definitions of such terms as equity instruments, financial liabilities or permanent diminution in value.

The substance over form principle was included in the Act for the first time. The introduction of this principle should significantly reduce the use of tax rule driven accounting practices.


At present it is practically impossible to come to any conclusion over the compliance of PAR with IAS. At the time of writing, none of the aforementioned statutory delegation rights has been exercised. The minister of finance has yet to issue new regulations based on the Amended Act for banks, insurance companies, investment funds and pension funds. The ASC has not yet been formed. Moreover, even when the Committee is formed, neither its standards nor reliance on IAS will be binding.

While the Amended Act incorporates much that is good, some of its provisions are questionable, and there is considerable doubt about whether the Act will be implemented in accordance with its authors' intentions. Instead of congruence or convergence with IAS, in practice we are likely to have a unique hybrid solution that will apply only in Poland.

PricewaterhouseCoopers Poland recently conducted an initial analysis of the Amended Act's compliance with 164 key areas of IAS. In our view, only 66% of the key areas may be said to be comparable or broadly comparable with IAS. A good deal may change when the missing decrees are issued, the ASC is formed and national standards published. In our view, it is important to convince businesses that for issues that the Amended Act does not cover, they should apply national accounting standards or, if they do not exist, IAS. We support the view that without these standards the Act will fail to be implemented.

Worst-case scenario

The worst-case scenario is that Polish financial reporting will be unfamiliar and inconsistent, due to 'creativity' and the fact that multiple solutions to certain issues are permitted. The history of actions taken by the Polish SEC, which has supported all initiatives aimed at introducing 'best practice' in financial reporting, suggests that public companies will sooner or later be compelled to follow national standards and IAS solutions because of a combination of regulatory or peer pressure.

The problem is likely to be with non-public companies that are not required to follow standards in matters the Act does not cover. It is necessary to introduce further changes to the Act by making the application of standards and a secondary delegation to IAS legally binding. In many ways it would have been simpler to have adopted IAS . . .

Antoni Reczek is a partner and head of financial sector services for PricewaterhouseCoopers in central and eastern Europe. Waldemar Lachowski is technical senior manager in PwC Poland.

Main requirements of Poland's amended Accounting Act Business combinations

The pooling of interests method has been introduced for the first time and is to be applied where it is not possible to identify the acquirer or if the combining enterprises are under the common control of the same parent. The acquisition accounting method is to be applied where it is possible to identify the acquirer. The Act gives detailed criteria, which must be met for the pooling of interests method to be applied. The Act's business combination and goodwill calculation provisions are based on IAS 22 (revised), Business Combinations; however, they only cover the basics. It is hoped that more detailed guidance will be provided by standards to be issued by the Accounting Standards Committee, although it is possible that certain differences between PAR and IAS will continue. An example is the requirement to use the pooling of interests method when both combining entities are whollyowned by the same shareholder, while a lower level of shareholding, eg, 99%, gives the option to use the acquisition accounting method.

Financial instruments

For the first time the Act defines financial instruments and provides some conditions for recognising a hedging instrument. The Act does not give detailed guidance on accounting for financial instruments, and it is not clear how assets and liabilities are to be recognised in the balance sheet. The Act appears to be based mainly on

IAS 32, Financial Instruments: Disclosure and Presentation, and the now redundant IAS 25, Accounting for Investments. A separate decree is envisaged, and it is expected to give detailed principles for the recognition, valuation, disclosure and presentation of financial instruments. It is hoped that the decree will be substantially consistent with IAS 39, Financial Instruments: Recognition and Measurement, and thereby serve to reduce some of the current areas of uncertainty in the Act. In particular this relates to accounting for financial liabilities and hedge accounting. Leasing

The Act introduces and provides definitions of 'the financing party' (lessor) and 'the using party' (lessee) in a manner that is substantially consistent with

IAS 17, Leases. In addition, the Act sets criteria for recognising a lease contract as a finance lease. Unfortunately, the Act does not give detailed guidance on accounting for lease instalments and their impact on the income statement.

Determining revenues and costs from long-term contracts The Act provides detailed conditions for applying the matching concept in order to reliably determine profits/losses on contracts in progress. It stipulates that revenue on long-term contracts shall be determined at the balance date in proportion to the stage of completion, provided it can be reliably estimated. Any expected loss on a contract should be recognised immediately as an expense. The Act's provisions are compliant with

IAS 11, Construction Contracts, to a significant extent, although some of them give cause for concern. It is not clear for instance why these regulations apply only to contracts with terms greater than six months. Consolidation

The Act's provisions that relate to consolidation have been changed. Despite a certain similarity in terminology to IAS, they are likely to become a significant source of discrepancy between PAR and IAS. Under PAR, consolidated accounts need only be prepared if certain conditions and size limits are met.

Furthermore, the Act explicitly requires certain enterprises to be excluded from consolidation, eg, subsidiaries whose business activities are dissimilar from those of the other enterprises within the group. Problems may also arise in relation to foreign operations' financial statements, because the Act lacks a distinction between foreign operations that are 'integral to the operations of the reporting enterprise' and 'foreign entities'.

Deferred taxation

The Act introduces the balance sheet method for calculating deferred tax, and imposes the obligation to recognise deferred assets where it is probable they will be realised in the future. The provisions in the Act appear to comply in principle with

IAS 12, Income Taxes. Capitalisation of financing costs

The Act permits the capitalisation of financing costs relating to long-term preparation of inventories. So far PAR has only permitted the capitalisation of financing costs relating to tangible assets. The Act's provisions appear to be generally in line with the allowed alternative treatment under

IAS 23, Borrowing Costs; however, certain expressions used in the Act give rise to doubts about the legislator's exact intentions.

Fair value and permanent diminution in value The Act has introduced new concepts such as 'fair value' or 'permanent diminution in value'. We believe that these definitions will cause significant problems for practitioners. In particular, this relates to the determination of permanent diminution in the value of assets. IAS now require the impairment concept to be used. The use of permanent diminution in PAR may delay the recognition of losses. The Act does not define such terms as 'value in use' or 'recoverable amount', which may in practice lead to these terms being incompatible under PAR and

IAS 36, Impairment of Assets. Disclosure requirements

The scope of disclosures required in the notes to financial statements has been significantly enlarged. The Act has also a broad requirement that the notes should include all information necessary for an understanding of the enterprise's financial position. We believe that in practice the disclosure requirements under IAS will continue to be more farreaching than under PAR.

Other significant changes

•   A new asset category, 'investments', has been defined generally in line with IAS.

•   The Act does not permit revaluations as understood by

IAS 16, Property, Plant and Equipment, and IAS 38, Intangible Assets.

•   In general, the IAS treatment of unrealised foreign exchange differences has been implemented.

•   Entities subject to an obligatory annual audit requirement should prepare a statement of changes in equity.

•   It is now obligatory to accrue for non-current employee benefits.

•   It is no longer possible to capitalise start-up costs.

•   A fundamental error relating to a prior year-end should be corrected as an adjustment to equity. Unfortunately, the Act is not clear on the treatment of changes of accounting policies and is silent on changes of accounting estimates. As a result, an enterprise may show different financial results, depending on its interpretation of the Act. This may result in significant non-compliance with

IAS 8, Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies.
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