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NEW YEAR CHANGES IN ACCOUNTING FOR LITHUANIA

From 01 January 2016, new legislation approved by the official Lithuanian Authority for Audit and Accounting (LAAA) will create new requirements for companies, which may not be so ‘‘painless‘‘ for them to implement, especially those which received European Commission grants to acquire non-current assets (NCA).

UNIFIES FINANCIAL STATEMENT FORMS

There is now a new requirement that all companies must now provide their financial statements in the same structure (as approved by LAAA). This is a change from the previous arrangement when there were four different approved standard balance sheet structures for:

1) Large size companies

2) Abbreviated forms

3) Agriculture companies forms and

4) State enterprises forms

The new requirement UNIFIES the four different structures. Company accountants need to know about the new standard structure for all companies.

As a result, in Lithuania, a big bank will use the same chart as a small agricultural firm, and so the bank will have to declare its “biological assets”.

CHANGED DEFINITION OF EQUITY WILL AFFECT ACCOUNTING FOR GRANTS

One of the most radical changes implied by the new forms is the resulting change in definition of EQUITY. According to these changes, government grants automatically “move” from equity to liability.

Defining equity

Until 31 December 2015 in Lithuania, the definition of EQUITY (third class) consisted of these main groups:

   i.            Capital (shares)

   ii.            Reserves

   iii.            Profit (or loss) and

   iv.            Government[1] grants[2] (assistance, subsidies)

 

From 1st January there is an obligation to classify grants as LIABILITIES and not as EQUITY.  You might think that moving the classification of grants from one group to another doesn’t matter. But in reality it does.  The “New Year Conversion’’ will directly affect two user groups:

a)      Organisations that have grants on their own balance sheet and at the same moment have loans as liabilities to banks;

b)      Banks with outstanding loans to companies.

 

Gearing Ratio –banks use this as one of the financial ratios to analyse an entity’s financial performance when deciding to provide a loan.  It compares long-term debt with equity. E.g.

ü  Entity’s liabilities 50

ü  Ordinary share capital 60

ü  Grants 40.

 

Gearing ratio =((50/(40+60)) x 100% = 50%

But from 1st January the Gearing Ratio will be calculated differently:

(50+40)/60 x 100% = 150%

Obviously, the ratio became worse, although the entity’s activity in reality has not changed.

SOME COMPLICATIONS

There are no transition arrangements, so this change could be considered as a very drastic “overnight” change in companies’ financial position.

Bank loan conditions

When banks provide a loan, an Appendix can be added to the loan agreement, with requirements to comply with obligatory ratios (e.g. the Gearing Ratio). The condition may appear: ‘‘...if the enterprise does not comply with one of the obligatory ratios.....then the enterprise must repay the loan immediately”.  The change calculated above could trigger a demand for repayment, from the bank.

Gearing ratio calculation

For a company already receiving a grant, it is better to continue to apply the Gearing Ratio calculation using the rules applying on the date of the loan agreement and not those applying to balance sheet data after 1st January.  However there could be another solution.

How to calculate depreciation?

It is possible in IFRS either to directly reduce the acquisition cost of NCA or to depreciate the original amount of NCA and in parallel to reduce the grant amount.

For both cases, according to the Lithuanian Business Accounting Standards the balance sheet would have: on one side money received in the bank account (an increase); on the other side an increase due to the grant. In the second case, the grant reduces in parallel according to the depreciation of the NCA. When the asset is fully depreciated in the entity’s activity, so has the grant on the balance sheet.

According to International Accounting Standard 20 Accounting for Government Grants and Disclosure of Government Assistance the entity can choose its own policy on this issue.  Whereas, according to Lithuanian Accounting rules there is no such possibility.

Different understandings could cause trouble

If strict measures are applied, companies could be confronted with a bank requirement immediately to repay loans. Alternatively if banks approach this in a more constructive way, life for companies would be easier.

UAB Raimda auditas Director-Auditor

A member of ACCA Daiva Zumbakiene

   


[1] “Government” here also includes funds from the European Commission

[2] In the text below, wherever “grants” is written, this also includes assistance and subsidies.

 

 *SODRA – State social insurance fund board of the Republic of Lithuania under the ministry of social security and labour