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The aim of this paper is to provide information about the development of accounting in Norway over the years. Before International Financial Reporting Standards or IFRS were introduced, Norway used Continental European method of accounting but due to the need of a common accounting language resulting from the globalization of commercial and financial exchanges and the need of a more comparable accounting between companies in different countries, Norway accounting changed from a Continental-European creditor and tax oriented model of accounting legislation to a model closer to an Anglo-American investor oriented model. The countries that traditionally belonged to the Anglo-Saxon accounting tradition are the companies in which their capital is built up by a capital-based financial market with individual investors and shareholders. On the other hand, the countries that traditionally belonged to the continental accounting tradition, it is the government and the credit-market who have financed the long-termed investments. Today, the financing market is being more and more globalized. This will imply that companies in different countries need to harmonize their methods of financial reporting. To further understand the differences between of the two methods being Continental and Anglo-Saxon, this paper provides short descriptions on these two traditional approaches. The paper also provides the current condition of the Norwegian Accounting today and the different regulations it follows. It also covers information about how Norway is coping with the financial crisis today and the different accounting changes they will implement to answer to the current problems resulting from the crisis at hand.
The Development of Accounting in Norway
Norway traditionally had small equity markets and Germanic accounting traditions. A deliberate attempt to harmonize accounting was made in the 1970s, leading to similar Accounting and Companies Acts in each country in the late 1970s (Nobes & Parker, 2000).
As years passed, the financial reporting of Norway developed in a speed with which the Germanic traditions have been abandoned. One factor is that Norway joined the European Economic Area (EEA). Another factor is the degree of difference to which professional accountants have been in control of accounting rule making (Nobes & Parker, 2000).
Scandinavian professional accountancy bodies' ages and sizes are shown to be lower than those of the equivalent bodies in the relatively young countries of Australia and Canada which is to be expected for countries that had Germanic tradition. However it is said that Scandinavian countries such as Norway in recent years have become involved in formal standard-setting (Nobes & Parker, 2000). And also according to Nobes & Parker (2000),
The 1970s Nordic harmonization project led to laws as follows:
Denmark: Companies Acts 1973 (separate Acts for private and public companies);
Norway: Companies Act 1976, Accounting Act 1977;
Sweden: Companies Act 1975, Accounting Act 1976.
For continental Europe, the rules were advanced for the first time. For example they allowed revaluation of fixed assets, and they required preparation of consolidated financial statements (and, in Norway and Sweden, funds floe statements). Another common feature was compulsory audit, although smaller companies were allowed to have auditing by members of a second-tier professional body. The financial statements were required to conform to an undefined 'good accounting practice'.
In each case, before the implementation of EU Directives (the second Directive), the countries had only 'companies' as opposed to public and private companies. This has now changed. As in the United Kingdom and the Netherlands, the implementation of the Directives has seen a substantial increase in the legal coverage of accounting. The fourth and seventh Directives were implemented in laws in the following years:
Denmark: fourth, 1981; seventh, 1990;
Norway: both in 1998;
Sweden: both in 1995.
The setting of extra legal accounting standards has been a feature of Anglo-Saxon countries, which gradually arrived in Scandinavia.
Anglo-American and Continental European Model
In this type of legal system, close ties between parties are not needed before entering long-term transactions. Because of this, common-law countries tend to attract widespread investment from the public at large. In this group, common law has greater impact on accounting than codified law. Accounting rules in Anglo-American group have been determined largely in private sector and have been oriented towards disclosure across an arm's-length market to interested parties. These parties are presumed by the courts and by agencies such as the SEC to rely entirely on publicly-disclosed information because they have no close ties to the corporation (Ball, 1995).
This group comprises a variety of countries including Norway before wherein the legal system and the accounting rules are codified by government ministries. This type of system works with major players that must be few in numbers, so corporate capital is largely supplied by banks and other institutional investors. Transaction in such country tend to be based more on private information and less on public information than in common-law countries (Ball, 1995)
History of Changes in Norwegian Accounting
The Norwegian accounting system has considerably changed during the last period of decades. Over the 40 years from 1965 to 2004, Norwegian accounting legislation has changed from a Continental-European creditor and tax oriented model of accounting legislation to a model closer to an Anglo-American investor oriented model. According to the research of Øystein Gjerde & Frode (2010),
Four major accounting events or 'revolutions' have shaped the direction of NGAAP
since 1965.They are the Accounting Act of 1977, the introduction of open asset reserves in 1984, the introduction of deferred taxes in 1992 and the Accounting Act of 1998. In addition, NGAAP have also been gradually influenced by national standard setting and some minor legislative changes. These changes have frequently harmonized NGAAP toward IFRS/IAS or USGAAP.
Sub period of 1965-1976
During this period, financial reporting was based on measurement at cost combined with the principle of using the lower of the cost and the market. Estimates, for instance of the economic life and residual value of depreciable fixed assets, were based on careful assessments because of tax considerations, thereby leading to hidden asset reserves. This was regulated by Chapter 9 of the Company Act of 1957 for the accounting of limited companies in Norway (Øystein Gjerde & Frode, 2010, p.5)
Sub period of 1977-1984
In this period, financial reporting was regulated by Chapter 11 in the Company Act of 1976 for limited companies and by the Accounting Act of 1977 for others. Although the tradition of measurement at cost combined with prudence continued, a tax linked model was introduced as an attempt to present financial statements more in line with the information requirements of investors and creditors as well as those of the tax authorities. This model made a link at the end of the income statement, where the difference between accounting income and taxable income was reported. In the balance sheet, these differences are known as untaxed reserves or untaxed equity, a combination of debt and equity. Accordingly, the change in untaxed reserves over the year was reported as an adjustment to accounting income, immediately preceding the bottom line in the income statement. This format was gradually adopted for various timing differences between accounting and tax values. With gradually reduced tax incentives, the extent of prudent assessments was reduced over this period. Accounting standards were issued by the Association of Certified Public Accountants. (Øystein Gjerde & Frode, 2010, p. 6)
Sub period of 1984-1991
The preparation of financial statements was regulated by the Accounting Act of 1977. Following a major change in the tax rules for depreciation in 1984, timing differences in the accounting valuation of fixed assets were also addressed by the tax link format, leading to more accounting based estimates for the useful life of these assets as opposed to the conservative ones that follow from pure tax considerations. Previous hidden asset reserves due to tax-motivated depreciation now became open asset reserves, called untaxed equity on the capital side of the balance sheet. More information about tax induced reserves was also disclosed in the footnotes to financial statements. However, for a long period of time, minimization of taxes continued to play an important consideration in measuring accounting income. In this period, the Norwegian Accounting Standards Board, NASB, was established with the objective of continuing the work of certified public accountants issuing accounting standards (Øystein Gjerde & Frode, 2010, p. 6).
Sub period of 1992-1998
Financial accounting was regulated by the Accounting Act of 1977. In 1990, however, an Accounting Act Committee was appointed by the Ministry of Finance in order to draft proposals to revise existing accounting legislation. In 1992, this Committee submitted a report on accounting for income taxes. As a consequence of the Tax Reform of 1992, the Norwegian accounting legislation was changed by introducing deferred tax liabilities and assets, starting in 1992. According to Hoogendoorn's study (as cited in the research of Øystein Gjerde & Frode, 2010), he concludes that Norway since then belongs to the group of European countries with the highest degree of independence between accounting and taxation. (Øystein Gjerde & Frode, 2010, p. 6-7).
Sub period of 1999-2004
Financial reporting was regulated by the Accounting Act of 1998, following the proposals from the Accounting Act Committee of 1990. As noted by Johnsen and Eilifsen (cited in the research of Øystein Gjerde & Frode, 2010 ), this law represents continued adherence to a legal framework of regulation. It is principle-based with specific rules derived from the stated basic principles, e.g. rules for fixed and intangible assets and for current assets like inventories. The main principle is transactional historic cost with separate principles for revenue and cost recognition, such that revenues should be earned and costs matched with earned revenues in the period. In addition, prudence is a basic principle such that all losses should be recognized. Fair value for liquid short term financial instruments was introduced. The general requirement that annual accounts should be in accordance with good accounting practice implies that standard setting by the NASB is recognized by legislation. It could be argued that the main change introduced by the Accounting Act of 1998 is to require unbiased accounting estimates, which contribute to terminate hidden cost reserves. (Gjerde & Sættem, 2010, p. 7)
Over the whole period, Norwegian accounting regulation changed from a Continental-European model toward a model close to an Anglo-American model.
Norway Accounting Today
It was in June 2002 that the European Union adopted the International Accounting Standards IAS / IFRS requiring European companies listed in an EU securities market, including banks and insurance companies, to prepare their consolidated financial statements in accordance with IFRSs starting with financial statements for financial year 2005 onwards. The main purpose of this was to answer the need of a common accounting language resulting from the globalization of commercial and financial exchanges. According to Deloitte (2010),
EU countries are given the option to:
Require or permit IFRSs for unlisted companies.
Require or permit IFRSs in parent company (unconsolidated) financial statements.
Permit companies whose only listed securities are debt securities to delay IFRS adoption until 2007.
Permit companies that are listed on exchanges outside of the EU and that currently prepare their primary financial statements using a non-EU GAAP (in most cases this would be US GAAP) to delay IFRS adoption until 2007.
Norway is an EEA Member therefore Norwegian companies listed in an EU/EEA securities market follow IFRSs since 2005.
The European Commission has also implemented the following phrasing for use in the notes to the accounts and in the audit reports of companies subject to EU Regulation 1606/2002/EC:
"in accordance with International Financial Reporting Standards as adopted by the EU" or
"in accordance with IFRSs as adopted by the EU".
Companies may also state, in a footnote, compliance with IFRSs as adopted by the IASB, if that is the case. (Deloitte Touche Tohmatsu, 2010)
In a 2009 survey of IFRS adoption around the world, PricewaterhouseCoopers (PwC) notes that according to the Accounting Act, basic IFRSs are permitted for small and medium enterprises. PwC also clarifies that consolidated financial statements of listed companies are required to use IFRSs if it resides in Norway or the EU, while foreign corporations outside the EU listed on a Norwegian exchange are required to use Norwegian Accounting Standards (NASs) set by the NASB. Supplementary foreign companies may use either local NASs or IFRSs. PwC also pointed out that accounting standards in Norway are comparable to IFRSs, and it is predicted that local NASs will continue to converge towards IFRS (eStandardsForum, May 2009).
As regards to Norway's standard compliance, Norway actually achieves a high overall compliance with international standards and codes. Norway fulfills all the requirements for effective payment systems as a member of the European Economic Area. Norway is also following the European Union's approach on international auditing and accounting standards. Further, Norway's compliance in the insolvency framework area also lacks an independent assessment.
The Norwegian Institute of Public Accountants
The Norwegian Institute of Public Accountants is the professional body for registered public accountants and state authorized public accountants in Norway. According to the website revisorforeningen.no (2010),
The objectives of The Norwegian Institute of Public Accountants are to raise the professional standards of its members, to ensure that its members observe the ethical standards, to represent its members' interests in relation to the authorities and to the general public, to express opinions on professional matters, and to promote the education of prospective auditors. As one of the means to achieve this, The Norwegian Institute of Public Accountants has developed a professional code of ethics for its members. The professional code provides standards on professional conduct and auditors' independence, and regulates the auditor's relationship to his or her clients, to other accountants, and to the general public.
Here are the following services provided by Public Accountants in Norway:
External audit work and related work as statutory auditor
Attestation of financial statements
Attestations to the Tax Authorities
Attestation of paid in share capital and changes in capital
Other specific attestations
Tax advice - Representing clients in tax matters
Public Sector Audits.
Den norske Revisorforening (DnR)
Den norske Revisorforening is the legal framework for accounting practices in Norway which comprises the Accounting Act, Auditing and Auditors Act, Private Companies Act, Public Companies Act, and Partnerships and Limited Liability Partnerships Act. The International Monetary Fund's (IMF) 2005 Financial Systems Stability Assessment (FSSA) for Norway notes that accounting, auditing, and actuarial standards are "well developed" and are in line with European Union (EU) directives and international best practices.
The Norwegian Institute of Public Accountants (DnR) also develops the professional code of ethics which are based on the International Federation of Accountants (IFAC) code of ethics issued prior to 2004. However, as of 2006, the DnR was planned to incorporate the latest version of the IFAC Code into national requirements.
Financial Supervisory Authority of Norway (FSAN)
The FSAN was established in 1986 as an integrated supervisor for the above mentioned sectors, and is responsible for monitoring compliance with the financial reporting requirements for listed companies. The regulatory responsibility for banks, insurance firms, and the securities market falls under this. The FSAN is also the licensing authority for auditors and accountants. The 2008 FSAN publication "The Financial Market in Norway 2007: Risk Outlook" states that since March 31, 2007 banks, finance companies and mortgage companies have been permitted to use IFRSs. Listed financial institutions which are a part of a group have been required to apply either IFRSs or the basic IFRSs for the preparation of their separate accounts. Other banks and finance companies are allowed to choose between IFRS, simplified IFRS, and the NASs. Further, it was noted that the Annual Accounts Regulations for insurance companies were amended to permit non-life insurers to recognize investment properties at fair value and to account for reinsurance in conformity with IFRS.
This Act states that foreign enterprises carrying out activities or participating in activities within Norway, and who are subject to Norwegian taxation according to domestic legislation, are obliged to keep accounts pursuant to the Accounting Act (Bedin.no, 2010). The following are included in this Act:
Enterprises must register transactions that are of importance to the magnitude and composition of their assets, liabilities, income and expenses in an accounting system.
The registration must comprise all information that is of substance to the preparation of the annual accounts and other financial reporting that follows from acts and regulations.
Accounting records must be stored in Norway for 10 years subsequent to the end of the financial year.
Many businesses use external accountants. The accountant must have the required authorization or be a registered accountant.
Accountants may also assist with filling in and transfer of the periodic VAT returns, PAYE and payroll taxes.
According to the Act, self-employed businesses/sole proprietors (having a balance sheet total of up to NOK 20 million and up to 20 employees) and liable companies (having a turnover of up to NOK 5 million and less than 5 employees) do not have to produce a financial statement as defined in the Act.
When so requested by the tax authorities, the books shall be made available for control.
Norway: Coping with the Financial Crisis
Effects of crisis in Norway
The financial crisis in 2008 and 2009 has thrown the world economy into the worst recession since the 1930s. The Norwegian economy has been hit less hard by the financial crisis than other countries. This is not only due to factors in the economy and the business sector and in the financial system, but also to regulation and supervision. Industrial production has weakened internationally. Norway's manufacturing sector is small, raw materials based and exports largely to emerging countries with relatively higher growth rates. Deliveries to the oil sector have also made a positive contribution. The authorities have much economic freedom of action and the rapid, hefty interest rate reduction combined with substantial fiscal policy stimuli has kept unemployment low and stimulated household consumption. Moreover, all sections of the Norwegian financial market are subject to regulation, capital requirements and supervision. The negative trend in the international stock markets also spread to Norway. From autumn 2007 to February 2009 the value of companies on the Oslo Stock Exchange more than halved, bringing a large reduction in non-financial firms' and households' financial wealth and impaired results for life insurers and pension funds. The disorder in the money and bond markets brought a sharp increase in risk premiums and substantial liquidity problems for the banks, which were resolved by resolute intervention on the part of the authorities. Bankruptcies are still on the rise, although at a slightly lower pace (Finanstilsynet, 2009).
Improvements to Accounting Rules
The accounting rules were in center of attention in the early stage of the crisis. Use of the market value principle increased the substantial fluctuations and falls in the value of banks' assets. The International Accounting Standards Board (IASB) has a number of projects under way to reflect on changes to the International Financial Reporting Standards (IFRS). Changes are being considered in accounting for financial instruments, particularly for loans. The present event-based incurred loss model in IAS 39 has been criticized that it delays accounting for expected loss since it requires objective evidence that a loss event has occurred before write down is allowed. A final standard is considered for completion by the end of 2010, with mandatory application as from 2013 and optional application for companies before that point. The new standard will be reviewed by the EU for possible application to European Companies, and for when, in the event, it should take effect. The EU Commission has indicated that it will consider the need for special rules on dynamic loss provisioning in the capital adequacy framework as a result of any amendments to the accounting rules (Finanstilsynet, 2009).
EU Commission also wants to see amendments made to the capital requirements framework as regards requirements on security for derivative contracts. In line with a resolution by the G-20 leaders in September and with support from the EU Council, the aim is to introduce mandatory clearing of standardized derivatives contracts through a central counterparty and mandatory reporting to a contract register of derivatives contracts that are not cleared wherein the objective of this regulation is to reduce counterparty and operational risk and to increase system transparency.
The changes in accounting in Norway over the years has proven t o have positive results. The outstanding overall value relevance recognized to accounting quality is considerably increasing over time, signifying public regulatory success in accomplishing more relevant financial reporting over time. The most essential event causing the positive time trend is the Accounting Act of 1998, which included the requirement of the use of unbiased accounting estimates within a framework of primarily transactional cost accounting, where matching of expenses with matching revenues is an important issue. But as was given in the reports of Finanstilsynet (2009), there are still changes and amendments to be done in the accounting regulations as it is evident that there are flaws in them.