CONSIDERATIONS ON INCREASING THE QUALITY AND UTILITY [631426]

CONSIDERATIONS ON INCREASING THE QUALITY AND UTILITY
OF ANNUAL FINANCIAL STATEMENTS

Abstract:
In recent years, the Romanian accounting system was found in a constantly changing,
so that Romanian companies' accounting results are presented in a manner as reliable, clear
and complete. So our study aims to identify the main legislative news concerning the
presentation of financial information through annual financial statements, highlighting
similarities increasingly clearer with the provisions of International Accounting Standards.
Following the accounting regulations we will identify the types of annual financial
statements drawn up by Romanian entities split also on several categories, depending on size.
With this typology, by comparison, we extract the main advantages and disadvantages of each
type of reporting, making the case where any relevant proposals will be conducive to
increasing the quality and usefulness of financial statements.
Key words : annual financial statements, financial and accounting information, microentities,
synthesis documents, meaningful information
JEL Classification: M41, M49
1. Introducere
Any company makes its presence felt in the market by providing financial –
accounting. Users will be more interested in issuing entity, to the extent that the information
provided is attractive and quality, showing favorable results. So any accounting information
quality is a measure of objectivity and transparency pursued transposition. Setting targets for
financial statements depends on many factors and in addition, there is a universal set of
objective, valid for all businesses, whatever the accounting system adopted. Over time, in our
country, the accounting system has undergone various changes aimed at ensuring financial
accounting information as qualitative targets, so try to bring the Romanian accounting near
international accounting standards.
The accounting information offer should normally respond to information needs of
different categories of users, but in our country the various accounting system changes were
aimed mostly the interest of the state. So, after 1990 it imposed a reform of the accounting
system by the French model, and after 2000 has started harmonization with EU directives and

International Accounting Stan dards (IAS). Finally, in 2005, it was compliance with European
directives, but also with International Financial Reporting Standards (IFRS) for certain types
of entities, in falling listed companies and that requirement to draw up consolidated accounts .
From an analysis of the three periods to improve national accounting system, no one
can see only instability reform process accounting, which included regulations associated
initially with European directives (which is also found in French accounting system ), then
with IAS and European directives, in order to subsequently take place reversing the order of
accounting regulations, putting in this regard, European directives first, and IFRS (whose
application is reduced) on the second place, combination that ha s led to the emergence of
contradictory situation in some cases.

2. The architecture of international , european and national financial reporting
The presentation of the annual financial statements was changed at once with
economic and financial developme nts of the entity level involving specific and complex
accounting work. So, today, starting from the specific of the entities and scope of
normalization we find various structures of financial reporting.
According to international accounting standards (IAS 1 Presentation of Financial
Statements ), the entities that falling under their incidence, must prepare annual financial
statements according to the following structure:
 balance sheet or the presentation of financial position at the end of the period ;
 profit or loss or income statement and other comprehensive income for the period;
 statement of changes in equity for the period reflecting the movement in equity
arising from transactions with shareholders or not;
 cash flows;
 notes representing the summary of significant accounting policies and other
explanatory notes.

Withal, this s tandard provides that the entities applying these rules may draw up
additional and binding, certain financial analysis reports, environmental reports or added
value. These reports have the capacity to present and explain the main features of the
perform ance and financial position, but also the possible uncertainties facing the entity at a
certain time. Thus, we believe thes e reports, once made, help the accounting information
users , interested , in particular , about financial performance s of those entities.
In our country, the number of entities that prepare annual financial statements in
accordance with International Financial Reporting Standards is about 80 entities, according to
a statement from the Financial Supervisory Authority. Thus, this category of annual financial
statements , is made , at national level by companies whose securities are admitted to trading
on a regulated market. These entities apply accounting regulations in a ccordance with
International Financial Reporting Standards (IFRS), together with the Accounting Law and
Order no. 1286/2012 updated in order to ensure a high degree of transparency and
comparability of these reports. In this way, the communication of finan cial information in a
single language provides the required confidence of users and increase opportunities of access
to the capital market. However, in case of multinational companies, allows the application of
accounting principles common to all subsidiar ies, something which optim izes the quality of
reporting to management, and implicitly internal communication.
The a nnual financial statements architecture , at european level , is required by
Directive 2013/34 / EU of the European Parliament and of the Counc il of 26 June 2013 ,
according to they contain: the balance sheet, income statement, notes and other outbuildings .
Analyzing the provisions of the directive mentioned, we consider that the european standards
in domain underpinning movements quite noticeable for harmonization across member s tates,

which concern accounting rules. In other words, these rules are the starting point in terms of
preparation and presentation of annual financial statements, allowing member s tates which
have adopted this directive to adapt their national accounting system , so that the f inancial
information provided be comp arable, suitable and sufficient .
Currently, the legal basis of preparation and presentation of annual financial
statements is formed, at national level , from: Accoun ting l aw no. 82/1991 modified and
republished and national accounting regulations in ac cordance with Directive 34/2013 /EU by
Order no. 1802/2014, as in effect from 1 January 2015 . Thus, from the above mentioned
regulations, the structure of the annual fina ncial statements has five components or three
components, depending on the size category of the reporting entities. The complete structure
of the annual financial statements is made up of: balance sheet, income statement, statement
of changes in equity, ca sh flow statement and notes set.

3. Considerations regarding to the financial reporting in accordance with
national accounting regulations in effect
In order to carry out properly the accounting results of economic activities of an entity
and their presen tation in the financial statements, are nominated , in the Accounting Law,
several operations mandatory tha t lead to quality information that are obtained, which refers
to "the chronological and systematic registration, processing, publish and maintain of
information regarding to the financial position, financial performance and other information
related to the activity performed , both for internal requirements and also in relations with
current and potential investors, financial creditors and commercial cus tomers, public
institutions and other users ".
Another essential obligation regarding to commercial entities accounting recorded also
in the mentioned law (art. 9, paragraph 1) , regards the provision information system of
appropriate activities using annual financial statements. These summary documents or
mandatory reporting , at the end of each financial year , shall be addressed to all recipients of
information and is prepared according to specific methodologies so as " to give a true and
fair view of the fi nancial position, financial performance and other information related to
the activity performed ".
We also consider that this last requirement is a defining characteristic of the object
of financial accounting and, implicitly , of annual financial statements or otherwise
expressed it constitutes the ultimate goal of all other obligations or attributes incumbent
that scientific disciplines. This opinion is justified, actually , by the names and applicable
accounting regulations of the e uropean directive which is assimilated within them. Thus, both
provisions title uses the expression according to which, they " relate annual financial
statements " and naturally the information they provide, which is a relevant novelty to
previous accounting rules (valid until the e nd of 2014).
This feature suggests convincingly also the fact that to the accounting information and
annual financial statements that provide them are assigned new qualitative values, raising
their contribution in making decision that they have been adopted at the level of economic
entities.
In the context of previous statements we also consider that it is justified to express an
opinion regarding the way that can be understood, according to the Accounting Law and
Accounting Regulations applicable , the utility or purpose of the three categories of
signi ficant information that annual financial statements prov ide. In this regard, we note
that in both acts provided mentioned it’s seen, equally , that the firs t two categories of
information ensure the knowledge and analysis in decision -making of financial position and
respectively financial performance .

But, for the next category of information exists , in regulations invoked different
expressions on the order in which they are generated, which may suggest a mismatch, which
in reality is apparent.
The Accounting Law (art. 9, para. 1) states that the information concerning " activity
performed " and in applica ble accounting regulations (art. 17) is stated that they refer to " cash
flows of an entity ".
In order to avoid a potential confusion regarding these expressions , in sense that the
contested legislation would amend the content ’s text of the law to which it refers, we consider
that is benefic the assertion according to that the cash flows relate the activity performed by
the entity, but this expression is clear er and easiest to put into practice because it makes direct
reference to the entity's business divis ions or its subtasks , in the sense of knowledge for each
of the inputs or outputs of cash or cash equivalents appropriate to the investment and
financing operations .
Regarding to the expression of " accurate presentation " prescribed in the Accounting
law ca n highlight the fact that in the applicable accounting regulations (pt. 24) it is defined
using other words, without affecting its content. Thus, this requirement is that the annual
financial statements " should provide an accurate presentation of the asset s, liabilities,
financial position and profit or loss of the entity ".
In terms of meeting the requirements of financial accounting and also the object of an
accurate image is enlightening also the fact that annual financial statements, although are
contain ing more elements or specific documents they are viewed as a whole. They are,
legally, official documents for the presentation of financial -economic activity of the reporting
entity and ensure the supply and , therefore , the disclosure of information that r elate interest
both for this and for interested third parties to engage in the reported activities.
The c ontext of previous statements allow s the underlining the fact that can not be
neglected the aspect according to which the synthetic documents in questi on can meet the
informational objectives default , only if they contain the forms legally established, and reflect
only useful and timely appropriate information suitable to that class size in which it is framed
the reporting entity.
This last point needs t o emphasize the absolute newness that current accounting
regulations contain. Thus, economic entities are reclassified , under accounting aspect,
according to three criteria of size (total assets, net turnover and average number of
employees during the fina ncial year) in three categories of entities (A. micro -entities, B.
small entities and C. medium and large entities) and the components for annual
financial statements are nominated for each of these categories of entities.
The last aspects are essential and requires some additional information , that are
presented, suggestively in Table. 1.

Table 1 – Documents and size criteria concerning the delimitation of annual financial statements
A. MICRO -ENTITIES
Size criteria Documents from the set of
financial statements1 Criteria Size*
a. Total assets (euro)
b. Net turnover (euro)
c. Average number of
employees  350.000
 700.000
 10 a. Short balance sheet
b. Short profit and loss account
c. Information nominees (4 ctg.)
* It must be respected the limits of at least two
criteria

B. SMALL ENTITIES
Size criteria Documents from the set of
financial statements1 Criteria Size*
a. Total assets (euro)
b. Net turnover (euro)
c. Average number of
employees  4.000.000
 8.000.000
 50 a. Short balance sheet
b. Profit and loss accou nt
c. Explanatory notes
and optional :
 Statement of changes in equity
 Statement of cash flow * Two of these limits must be respected, but to
exceed those from letter A
C. MEDIUM AND LARGE ENTITIES
Size criteria Documents from the set of
financial statement s1 Criteria Size*
a. Total assets (euro)
b. Net turnover (euro)
c. Average number of
employees  4.000.000
 8.000.000
 50 a. Balance sheet
b. Profit and loss account
c. Statement of changes in equity
d. Statement of cash flow
e. Explanatory notes
* At least two of these limits (c riteria) be overcome
1 Each set of annual financial stateme nts that must be submitted to the territorial units
of MFP all one of the category in which the reporting entity fall, shall be accompanied by the
following documents: a. a written statement of accountability administrator entity for
drawing the financial statements and compliance of accounting policies with regulations and
providing accurate image and guarantee that the activity will take place under normal
conditions; b. the administrator report ; c. the audit report , when it is applicable; d. the
internal control report or auditing committee , as applicable; e. proposal for distribution
of profit or covering of accounting loss.

Referring to the information that this table provides are beneficial some clarifications
that facilitates understanding and putting into practice.
 The value in lei of the first two criteria of size is calculated each year based on the
exchange rate of 4.4338 lei / euro, published in the EU Official Journal on July 19, 2013 .
 The c hange of the category of any entity and, therefore, the set of documents that
comprise the annual financial statements shall be made when, in two consecutive financial
years, two of the three size criteria correspond to other categories of entities.
 A copy of the analyzed reporting , approved by the GMS, shall be submitted to the
territorial units of MF P within up to 150 or 120 days from the end of financial year, as the
entities legal system:
 businesses, companies/ national companies, autonomou s insti tutes, national
research /development institutes or subunits based in Romania of foreign legal
entities, respectively,
 cooperative societies and other legal persons than those above and subunits
based in Romania but belonging to companies in the European Ec onomic Area.
 The economic entities who have not any activity until the date of annual reporting
submit, in this regard, a statement within 60 days.

4. The shortcomings of information provided by the annual accounts and ways to
mitigate them
Starting from the annual financial statements typology , previously presented , we ask
whether financial information submitted through the components of each set of reporting
documents are sufficient and useful and if there are some ways to improve their content.
Therefor e, analyzi ng the composition of each category of financial statements we can
say that, although the content of the annual accounts has improved, meani ng that for some
entities, these comprise in addition to the three basic components, also a statement of c ash
flows and changes in own equity, this structure is not the optimal variant of the annual
financial statements. Moreover, the purpose of the annual financial statements is to provide to
users of accounting information the necessary data to enable them t o correctly determine
indicators on profitability, liquidity and solvency. The s tructure of financial statements
required by current regulations allow s determining these indicators but a thorough analysis of
the elements that helps to calculate such indica tors can identify some shortcomings, namely:
 to calculate the profitability of an entity, certain amounts from profit or loss
statement which are provided not serve user needs (eg, provisions and depreciation values are
estimates influenced by their spec ific accounting policies or changes in depreciation
methods);
 in case of the micro -entities the structure of the profit and loss account was visibly
reduced (nine lines ), most of the elements of detail being transferred in the form of
informative data, thu s hindering users, how to interpret the information provided;
 in the calculation of the liquidity and solvency of an entity based on annual
financial statements we believe that for small entities the liquidity can be interpreted , because
as no balance shee t or profit and loss are not enough to satisfy the interests of use rs, so it
might be necessary also the cash flow statement to clarify certain aspects unidentified in other
components;
 the annual financial statements are often deformed due to the connecti on between
accounting and taxation;
 often professional judgment that occurs in applying the principles and rules of
evaluation can generate willful results, and not necessarily the real ones.
Certainly the content of annual financial statements will req uire continuous
improvements, but regardless of the form in which the information financial accounting are
presented , they must be relevant, accurate, reliable and complete so as to base economic
decisions of both the managers and the others users. Indeed, we note that for certain
categories of users, when appropriate, entities provide , in addition to the annual financial
statements also other financial and accounting documents so that the decisions of
distribution /coverage of the profit /loss (for managers) or the decisions of lending (for banks)
to be taken as closely as possible. We also believe that the economic decisions of users can be
improved if the annual financial statements would suffer some content changes.
Thus, one way to improve the content of annual financial sta tements, we believe that
is the mandatory compilation of cash flow statement for all entities because the accounting
result determined through profit and loss does not satisfy the information needs of users,
required an indicator which clearly reflecting the entity's ability to bring profit.
Assuming that economic decisions of users target the future period s and the annual
financial information provide financial information for the period just ended , it can be
extracted the need to draw up an estimative situation about the future economic activity. Thus,
through provisional information with regard to the future activity of the entity, certain users
(investors, creditors) can decide whether the entity analyzed shows interest in the future or
not. We believe that such a measure amending the annual financial statements can be as
relevant and useful for the category of medium and large entities.

We also consider that to be useful and for quality , the annual financial statements must
be as much improved, so they approached greater interests of several categories of users and
not just for the state who currently uses the annual financial statements as a taxation tool and
not for financial and accounting information.
Therefore, we believe that the annual financial statements present many shortcomings
because in our country accounting regulations regarding the annual financial statements
represent a translations of e uropean regulations, with influences of international standards,
which why most of the times these provisions are not interpreted in the right way. So any
concerns or limitations of national accounting rules require the use of professional judgment
in the exercise of the accounting profession so that the reality from the entity to be refl ected in
the financial statements as accurate and thus the economic decisions can be grounded.

5. Concl usion
In our country are many entities classified by different criteria, the criterion
according to which differs and how to prepare annual financial st atements being the
size, so that according to national accounting regulations in effect micro -entities prepare
annual financial statements with two components, small entities with three components,
and medium and large entities with five components. If we classify entities according to
their quotation on the stock exchange, we retain that the quoted prepare annual financial
statements in accordance with International Financial Reporting Standards and unlisted
comply with national accounting regulations acco rding with European directives.
Concidering the composition of the annual financial statements according to
international reference or national, we can conclude that the format of the annual
financial statements with five components completed by medium and large entities is
similar to the format of the annual financial statements in accordance with IFRS
completed by the listed entities, the differences between these being the content.
We note that to ensure the accurate image of the entities heritage, the annual
financial statements are viewed as a whole, even if they contain more components and
specific documents. Thus they are official documents that describe the economic –
financial activity of the reporting entities and ensure the publication and the provi ding
of econo mic and financial information that have interest to users in making economic
decisions.
Considering the typology of annual financial statements presented we have
identified a number of shortcomings, referring to their composition, but also the amount
of the information provided to users and the ability of accounting professionals to
interpret and use the provisions of accounting regulations. In this sense, we consider that
some measures are useful to mitigate these shortcomings so that the annu al financial
accounting to provide financial information that satisfies the interests of different
categories of users.
As a general conclusion, we can say that irrespective of the annual financial
statements type to be drawn up, of the accounting referent ial whereby they have made or
of the shortcomings that they have, in that the accounting information provided through
these reporting documents being of quality, useful and meet the interests of users, the
professional accountants must use professional jud gment, provided that the information
presented reflects how accurately the economic reality of the entity.

References
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București
2. Drăgan, C., ( 2012 ), Principii și politici europene privind contabilitatea financiară ,
Editura Universitaria, Craiova
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publicat în M. oF. Nr. 902 din 11.12.2014
4. OMFP nr. 1802/2014 pentru aprobarea Reglementărilor contabile privind situațiile
financiare anuale individuale și situațiile financiare anuale consolidate, modificat și
completat prin ordinul 4160/2015 publicat in M. Of. Nr. 21 din 12.01.2016
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conforme cu Standardele internaționale de raportare financiară, aplicabile
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piață reglementată publicat în M. Of nr. 687 din 04.10.2012 și modificat prin
OMFP 123/2016