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Traditionally, the Portuguese government used a modified cash-based, single entry system for budgetary accounting. The budgetary accounting is very important to the Portuguese government because it is the main influence on the activities that are undertaken. The modified cash basis must incorporate accrual basis accounting because some accounts cannot be recognized under cash basis accounting because there is no cash flow associated with them, namely depreciation. The Portuguese government has used the modified cash basis approach to capture these differences however there has been some criticism from integrating the two different bases. The government, along with the business sector, also uses the accrual based approach for its financial accounting (Jorge 2003).
Portuguese accounting was initially established using the historical cost principle applied to all assets and liabilities. Furthermore, the practice of valuing short term financial assets as the lower of cost or market was also adopted. The measurement of future contracts is also noted under Accounting Directive 17. The market price is used for trading operations and hedging operations are held at cost, with gains and losses being deferred until the hedged position are recognized. However, Accounting Directive 18 requires all non-financial companies to comply with IAS where national accounting rules are absent, therefore subjecting non-financial Portuguese companies to IAS 32 and IAS 39. Due to the implementation of Accounting Directive 18, non-financial Portuguese companies are closer to paralleling IFRS (Lopes, Patricia, and Lucia Rodrigues).
However, accounting rules for credit institutions and financial companies are created by the Bank of Portugal which established the Accounting Act for the Banking System (PCSB - Plano de Contas do Sistema Bancario) through Instruction No. 4 of 1996. The PCSB requires financial companies to apply fair value to all trading securities, which is in congruence with IFRS, with any changes in fair value to be shown in the period in which they occur. As for available for sale financial assets, Portuguese standards require companies to record them at acquisition cost or nominal value. This is different from IFRS which requires available for sales financial assets to be recorded at fair value (Lopes, Patricia, and Lucia Rodrigues).
As for property, plant and equipment, Portuguese GAAP states "most revaluations of property, plant and equipment (legally based on price indexes) are not generally at fair value and are not kept up to date," ("eStandardsForum.org").
Portugal has traditionally been a very rule based accounting society based off code-law. It was only relatively recently that codification took place, beginning in 1963 with a tax reform. 1974 saw Portugal create an accounting standards board named the Comissão de Normalização Contabilística (CNC) to facilitate standard setting and interpretation. However, it wasn't until 1977 when the Plano Oficial de Contabilidade (POC - Official Accounting Plan) was created. As noted earlier, an interesting particularity of the Portuguese standard setting is that the Bank of Portugal issues the accounting rules and regulations for banks and other financial institutions (Ferreira, García Lara, and Gonçalves 2006). Termed "Instruction on Chart of Accounts for Banking System", the accounting standards are issued independent from other regulatory bodies and the enforcement is also done by a supervisory department from the Bank of Portugal ("eStandardsForum.org").
Other regulatory bodies include the Ordem dos Revisores Oficiais de Contas (OROC - Portuguese Institute of Public Auditors) created in 1974 which governs all certified auditors. Auditors must follow regulations issued by the OROC, and their main objective is to express an opinion on whethere financial statements present a "true and fair view in accordance with the Portuguese GAAP" (Ferreira, García Lara, and Gonçalves). The Câmara dos Técnicos Oficiais de Contas (CTOC - Accounting Institute), created in 1995, represents all accounting professionals and focuses on professional ethics, ongoing education, and standard setting in conjunction with the CNC. Membership in the CTOC is required in order to practice accounting in Portugal (Ferreira, García Lara, and Gonçalves 2006). Professional ethics are further discussed in the Portuguese Code of Ethics, issued December 2001, and subsequently revised to incorporate the International Federation of Accountants code of ethics in 2006 ("eStandardsForum.org").
Portuguese GAAP has also been strongly influenced by tax law and tax regulations. This is apparent through the tax reform that initially sparked the creating of the current accounting system in Portugal. All of the subsequent accounting regulations, namely the POC, have been written to parallel tax law. The ratification of the Tax Law of 1988 further influenced the accounting system by providing guidelines on how to record and measure items for tax purposes. This includes guidelines on how to value inventory, and measurement and depreciation amounts of fixed assets, therefore determining the amounts reported on the financial statements (Ferreira, García Lara, and Gonçalves 2006).
In 2002, the European Union adopted the IAS Regulation requiring all European companies listed in an EU securities market to adopt IFRS by 2005, with exceptions stretching no later than 2007. In February 2005, Portugal implemented Decree No. 35 of 2005, observing Regulation No. 1606 of 2002 from the European Commission, requiring all Portuguese listed companies to apply IFRS in preparation of consolidated accounts. Portuguese companies still are required to apply their own national generally accepted accounting principles for their annual accounts but they are also permitted the use of IFRS for such accounts. Exceptions to the use of national GAAP for annual accounts are banks, insurance companies, and other financial institutions which are all required to apply IFRSs in preparations of annual accounts ("eStandardsForum.org").
The application of IFRSs is third in the order of priority in terms of applicable accounting standards. First priority is given to the Portuguese Accounting Plan, then Accounting Directives issued by the CNC and finally the application of IFRS is used in the absence of a national reporting rule or guideline.
According to the CNC the following entities that are required to apply the POC: "(1) national and foreign enterprises which are under the scope of the Commercial Companies Code; (2) enterprises governed by the Commercial Code; (3) single partner enterprises; (4) governmental enterprises; (5) co-operative enterprises; (6) complementary arrangements of enterprises and European arrangements of economic interest; and (7) other entities legally required to apply the POC under specific laws," ("eStandardsForum.org").
Overall, when comparing Portuguese GAAP to IFRS, it can be determined that there is no compliance. Differences arise under fair value for business combinations and discontinued operations. When fair value provides a more accurate measure than the acquisition cost in a business combination, it can be treated in two ways: "(1) Assign the difference to the non-monetary assets proportionally to their fair value; (2) Consider the difference under Deferred Income, and impute it to results in a systematic manner in a period not greater than 5 years (exceptionally up to 20 years can be accepted)" ("eStandardsForum.org").
As for discontinued operations, Portuguese GAAP states that "discontinuing operations do not need to be divulged so thoroughly" and are simply reported in a line before extraordinary results, after taxes ("eStandardsForum.org"). A major difference between Portuguese GAAP and IFRS are the presentations of the financial statements. The statement of cash flows is "obligatory only for companies who, in two consecutive years, surpass two of these three limits: Total Assets 1,500,000 Euro; Turnover 3,000,000 Euro; Average number of employees 50" ("eStandardsForum.org").
Further research done on the compliance of Portuguese businesses with IFRS has shown that even though Portuguese GAAP refers to IFRS in the event that national accounting rules don't exist, many Portuguese businesses still do not apply IFRS. This is further perpetuated by the lack of enforcement found in practice. Research has found that many fail to comply with IFRSs due to the lack of "a strong and clear accounting framework or accounting standard with legal power to compel companies". The lack of application is further enabled by the failure of auditing firms to alter their opinions on the financial statements for those firms that actively disregard the use of IFRS when necessary (Ferreira, García Lara, and Gonçalves 2006).