This is mainly due to lower IFRS impairment provisions for loan portfolios as compared to Romanian GAAP (e.g. approximately 38% difference in terms of 2008’s profits and increasing at a higher pace in 2009).

Romanian banking and non banking financial institutions use Romanian GAAP for fiscal and prudential purposes. IFRS is mandatory for the preparation of Romanian credit institutions’ consolidated financial statements. In practice, many Romanian banks and other financial institutions use IFRS for reporting to other stakeholders (shareholders; international financial institutions; and capital markets).

“Romanian banking and non banking financial institutions use Romanian GAAP for fiscal and prudential purposes. IFRS is mandatory for the preparation of Romanian credit institutions’ consolidated financial statements. In practice, many Romanian banks and other financial institutions use IFRS for reporting to other stakeholders (shareholders; international financial institutions; and capital markets)”, said Serban Toader (photo), Senior Partner at KPMG in Romania.

The aim of this study is to highlight again the differences between IFRS and Romanian GAAP in the banking and financial sector. In recent years, the two systems have moved closer together on certain conceptual frameworks. There are fewer significant differences, but their impact has recently increased, as this publication seeks to highlight and explain. The major impact of these differences relates mainly to loan impairment – a direct consequence of the deteriorating financial performance of the banks’ customers.

The loan impairment differences increased from below 5% on 2007’s profits, to almost 40% on 2008’s profits and to an alarming six-fold difference for the accumulated results posted by the banks in our sample for the first six months of 2009.

“The effects of the loan impairment differences on equity are smaller - i.e. approximately 12-13% on banks’ equity in 2008. This proves a good capitalisation of Romanian banks but the concern is there – banks’ solvency ratios can differ significantly when using IFRS instead of Romanian GAAP. The same trend can be noted for non-banking financial institutions (leasing, consumer finance, mortgage companies, etc.) as the difference on loan impairment between Romanian GAAP and IFRS stood at approximately 18% of these entities’ accumulated results,” said Cezar Furtuna, Partner in KPMG in Romania.

The research was carried out by KPMG in Romania and covers 15 Romanian banks (large, medium and small) that report under both IFRS and Romanian GAAP including 6 banks from the top 10 in terms of total assets.