AN

ASSIGNMENT
ON

FINANCIAL REPORTING SYSTEM IN

PORTUGAL (A COUNTRY STUDY)

PREPARED BY:
KALPESH MORADIYA
ROLL NO: - 15 (GIA)

GUIDED BY:
DR. VEDANT PANDYA

SUBJECT: - INTERNATIONAL ACCOUNTING AND FINANCE

SUBMITTED TO:
DEPARTMENT OF BUSINESS ADMINISTRATION
M.K. BHAVNAGAR UNIVERSITY
BHAVNAGAR

INTRODUCTION

From good practices that firms develop around the world, in the private sector, are also being
establish by the public sector, in general, and by the State and National Agencies, in particular,
answering to their mission of more sustainability. Then, the value of geospatial decisions appears
with accounting connection to the objective of full convergence. In today business, contractual
rights of property demands a value that is required to establish taxes, insurances and returns of
investments. So this value depends on different geospatial technologies, practices and driving
policies. Accounting international standards are fundamental to allow the comparability of the
data to get more information to markets and with detail reports to generate better investment
decisions to the long term and strategic decisions.

HISTORY OF ACCOUNTING
PERIODS
PHASES
Commercial Bookkeeping

DESCRIPTION

Until 1863
The books published in the
nineteenth century did not
dedicate a specific chapter to
management
accounting
issues; the small size of the
companies;
financial
information was directed only
towards the owners and
agriculture was the most
important sector at the time.
Until early twentieth century

Autonomy of Industrial
Bookkeeping

Until Decade 1930s

Industrial Accounting

Before 1954

Portugal
found
political
stability that contributed to the
beginning of a period of
economic
recovery;
In
industry, some innovations
were registered (e.g. steam
machines, new technology in
the milling industry; the
appearance of books that
included in their titles the
designation
of
industrial
bookkeeping and the creation
of a dedicated chapter on this
issue.
New curricular plans of
industrial accounting subjects
were approved in the ISC
(1913); appearance of books
covering
only
Industrial
Bookkeeping.
Development of the
conceptual framework; the
economic growth; the great
increase in the use of the
electricity; the reforms in
education, little theoretical

deepening of the issues

covered in the books
After 1954
Analytical /Cost Accounting

From mid-1970s

Management Accounting

From mid-1990s

Strongly influenced by Gon

alves da Silvas book.
The translations of French
books to Portuguese, which
introduce the denomination
Analytical Accounting were
introduced while on the other
hand translations of American
books
introduce
the
denomination
Cost
Accounting, there was no
great development at the level
of concepts and the structure
of the issues. The main
concern with stock valuation
continued
and
decisionmaking focusing grew.
Economic development which
was
a consequence of
Portugals entrance into the
European
Union;
generalization, in diverse
countries, of Management
Accounting
term
and
educational development of
accounting, formalized by the
appearance of masters and
doctorates in Accounting.

ACCOUNTING STANDARDS
In the accounting standards, the value of the firm is derived from the relevant information of
assets ,liabilities and equity. Then, models and methods based on the balance will emphasize the
neoclassical static component of the value. Those models and methods do not show themselves a
specific methodology, but they make a general classification for the value of the firm
(Damodaran, 2002). In general, this valuation procedure is affected by higher level of
subjectivity. In reality, Hadley (1928) details three different concepts, which sometimes
generates different concepts: value and price and cost. Following these definitions, actually,
ISVC (2015) publishes that:
Price is the amount asked, offered or paid to exchange an asset. Because of the financial
capabilities ,motivations or special interests of a given buyer or seller, the price paid may be
different from the value which might be ascribed to the asset by others.
Cost is the amount required to acquire an asset. When that asset has been acquired, its cost is a
fact .Price is related to cost because the price paid for an asset becomes its cost to the buyer.
Value is not a fact but an opinion of either: (a) price to be paid for the exchange of an asset or
(b) the economic benefits of owning an asset. In this case, the first part is the sale the building or
the second part rent it .But, on the context of accounting standards, the IFRS 13 Fair Value
Measurement (IASB, 2015) detail several fundamental concepts of value associated with
investment:
Fair value is the price that would be received to sell an asset in an orderly transaction between
market participants at the measurement date;
Exit price is the price that would be received to sell an asset;
Highest and best use is the use of a non-financial asset by market participants that would
maximize the value of the asset or the group of assets.
Also, related with the value is the influence of the concept of market, because the concept of
market in fluencies the IFRS 13 Fair Value Measurement (IASB, 2015), such as:
Most advantageous market is the market that maximizes the amount that would be received to
sell the asset or minimizes the amount that would be paid to transfer the liability, after taking into
account transaction costs;
Principal market is the market with the greatest volume and level of activity for the asset;

A COMPARATIVE-INTERNATIONAL THEORY FOR

PORTUGUESE BUSINESS ACCOUNTING

1.Nature of business ownership and financing system

2. Colonial inheritance
3. Invasions
4. Taxation
5. Inflation
6. Level of education
7. Age and size of accountancy profession
8. Stage of economic development
9 Legal systems
10. Culture
11. History
12. Geography
13. Language
14. Influence of theory

LOCAL GOVERNMENT ACCOUNTING

Legal/juridical system
Organization of the public sector
Specific c objectives of governmental
financial (including budgetary) reporting
Principal users of the financial reporting
Impulse of governmental accounting regulatory bodies
Interest and formation of professionals
Political and administrative environment in which each system operate.
Conceptual Framework
The accounting basis for budgetary accounting, with budgets still essentially cash-based in
Portugal.
The importance of budgeting and budgetary control
The integration in Portugal has not diminished the role of budgeting in determining

the development of the accounting and reporting systems.

AGRICULTURAL ACCOUNTING: RECOGNITION/MEASUREMENT

CRITERIA
Accounting Frame Of
Reference

Recognition Criteria

Measurement Criteria

Portuguese Accounting Plan

(POC)

Biological assets shall be Biological assets shall be

recognized as property, plant measured at their acquisition
and equipment assets.
costs, less any accumulated
depreciated amounts

Accounting Frame

Recognition Criteria

Measurement Criteria

Portuguese

An entity shall recognize

Accounting

a biological asset when

Standardization

and only when:

A biological asset shall be

measured
on
initial
recognition and at the end of
each reporting period at its fair
value less costs to sell.

System (SNC)

a) The entity controls

A biological asset shall be

measured cost less any
The asset as a result of past accumulated depreciation
events.
b) It is probable that

and
any
accumulated
impairment losses,

Accounting Frame
Of Reference

future
economicCriteria
benefits
Recognition

Measurement Criteria

International
Accounting
Standards Board
(IAS 41

An entity shall recognize

a biological asset when
and only when:
a) The entity controls
the asset as a result of
past events.
b) It is probable that
future economic benefits
associated with the asset
Will flow to the entity.
c) The fair value or cost

A biological asset shall be

measured on
initial recognition and at the
end of each
reporting period at its fair
value less costs
to sell.
A biological asset shall be
measured at its
cost less any accumulated
impairment

of the asset can be

Measured reliably.

losses, only and only if the

presumption.

SNCS ACCOUNTING STANDARD AND FINANCIAL REPORTING

17 (AGRICULTURE)
The POC did not express a clear accounting treatment for Agriculture. In 1986, the
Portuguese Government issued Portaria n 715/86 and Portaria n 725/86 demanding the
implementation of simplified accounting systems for those farmers who have benefited from EU
funds. The main purpose of this regulation was to control and manage EU funds. In 1997, the
Portuguese Accounting Committee issued Accounting Directive 18 (The Objectives of Financial
Statements and Generally Accepted Accounting Principles), establishing the permission to apply
IASB standards for all those topics not properly addressed by the Portuguese Accounting Plan.
After January 2005, the European Commission released Regulation (EC) 1606/2002 requiring
companies with securities traded on a regulated market to prepare consolidated accounts in
accordance with IAS/IFRS. Accounting treatment for Agriculture was established by
International Accounting Standard (IAS/IFRS) 41 (Agriculture). After the adoption of SNC, in
January 2010, accounting treatment for biological assets and for agriculture produce harvested
from an entitys biological assets at the point of harvest is established by NCRF 17 (Agriculture).
NCRF are based on IAS/IFRS. IAS 41 and NCRF 17 require that both biological assets and
agricultural produce harvested from an entitys biological assets at the point of harvest shall be
measured on initial recognition and at the end of each reporting period at its fair values less costs
to sell. If market-determined prices or values are not available, or alternative estimates of fair
value are unreliable, biological assets shall be measured on initial recognition at its cost less any
accumulated depreciation and any accumulated impairment losses.

HARMONIZATION AND STANDARDIZATION

Harmonization and standardization can be traced to two interrelated levels: harmonization

andStandardization as a process at the level of accounting standards and accounting practices. If
the Harmonization of accounting standards is observed, then a formal (de jure) harmonization
which is operational zed through stages of disclosure (so-called formal harmonization of
disclosure) and through evaluation (so-called formal harmonization of measurements) exists. In
relation to accounting standards it is necessary to harmonize accounting practices and create a
demand for material (de facto) harmonization. Effects of harmonization and standardization can
be measured by using generally accepted index (C, H, I) which was successfully presented by
various examples and opinions of the many authors. Although, there are certain contributions and
controversies of statistical indices use for the purpose of measuring processes and states, it is
necessary to develop a unique generally accepted index after accounting harmonization process
with the goal of achieving global convergence degree.

ACCOUNTING CONSERVATISM IN PORTUGAL: SIMILARITIES

AND DIFFERENCES FACING GERMANY AND THE UNITED
KINGDOM

CONSERVATISM AND THE COMPARABILITY OF

ACCOUNTING INFORMATION
The existence of conservative practices in the Portuguese accounting system, and whether these
conservative practices affect the comparability of financial information provided by Portuguese
Companies with respect to that disclosed by companies in other countries in the European Union.
Whether the book value figure can be understated due to conservative practices to protect
creditors interests and whether accountants delay the recognition in earnings of economic events
that affects the firm positively, while immediately recognizing those that affect negatively.
Given that the European Union is attempting to set up a new single securities market in Europe,
the financial information provided by the companies of countries that will join this new
institution must be completely comparable. This is one of the main reasons why the European
Commission requires all listed European Union companies to prepare their consolidated accounts
following the new IASB standards. These movements towards a single stock market have led to
the alliance between the London and Frankfurt Stock Exchanges, as well as to the creation of
Euro next, a new securities market formed by the merger of the Amsterdam, Brussels and Paris
Stock Exchanges. The Stock Exchange of Lisbon and Oporto (Bolas de Valores delis boa e
Porto) joined this institution, and therefore Portugal is involved directly in the movements
towards the future European single stock market. Our objective is thus to provide some empirical
evidence on whether Portuguese companies accounting information is comparable to that of the
rest of Europe
The differences we find between Portugal and Germany and the UK will be affected by the
compulsory use of the IASB standards (International Financial Reporting Standards, IFRS) from

2005 onwards. However, it is unlikely that the differences will disappear. With respect to balance
sheet conservatism, the IFRSpermit the use of fair value accounting for assets.
However, the decision to reevaluate an asset will depend on managers incentives, which are
likely to differ between countries. With respect to earnings conservatism, the situation is similar.
As pointed out by Garca Lara et al. (2005) managers in Germany have very different incentives
than managers in the UK. While managers tend to manage earnings upwards in the UK to beat or
meet certain earnings thresholds, in Germany they will very likely be more concerned with
reporting low earnings numbers dueto dividend, taxation and investment policies, and with
smoothing earnings.

THE PORTUGUESE INSTITUTIONAL FRAMEWORK

Historically, there has been a strong code-law influence on accounting in Portugal. In fact, the
Portuguese standard setting process started almost 40years ago with the establishment of tax
laws. As in other continental European countries, the Portuguese accounting regime is based on a
codified system of law. The first significant attempt to harmonize accounting practices occurred
in1963 with a profound tax reform which contained some implicit accounting regulations. But
only in 1977 was an Official Accounting Plan (POC PlanoOficial de Contabilidade) revealed,
based mainly on the 1957 French PlanComptable. In the past 25 years, Portugal has witnessed
two Official AccountingPlans, several tax laws, fourth and seventh Directive introductions in
Portugueselaw, and the legislation and revision of the securities market regulation.Professional
bodies have been created for the auditing profession and, morerecently, for the accounting
profession, and an Accounting Standards Boardhas been also created (1).The main factors that
influence financial reporting and the Portuguese GAAPhave been the Official Accounting Plan,
the tax law, the EU Directives (4th and7th) and IAS. Portuguese accounting standards are issued
and enforced by government, mainly by enacting the Official Accounting Plan (where
regulations set out the information that companies must report and the principles and rules for
the elaboration of that information), establishing taxation rules (that include some accounting
practices), and ruling the characteristics of the companies that have to be audited as well as both
the audit and accounting professions.

THE LEGAL INFLUENCE

The Portuguese standard setting process started about 40 years ago with theestablishment of tax
laws. In fact, only recently did Portugal begin to realize theimportance of a comprehensive set of
accounting rules. This process took a stepforward with the establishment of the CNC (Comisso
de NormalizaoContabilstica the accounting standards board) and the approval of the
firstOfficial Accounting Plan (POC) in 1977, in Decreelaw Nr. 47/77. In November,1989, a
Revised Version of the POC was issued to comply with the EU fourthDirective. Besides the
Official Accounting Plan, 29 accounting standards (DC Directrizes contabilsticas) have been
approved, covering specific issues.
Accounting standards are developed through a very close due process that involves
only the members of the CNC and a few wellknown individuals. The due processis weak. The
agenda is established internally, there is very little formal informationto the public and only a
certain period reserved for comments from specific parties,namely the Portuguese Institute of
Public Auditors (OROC Ordem dos RevisoresOficiais de Contas) and Accounting Institute
(CTOC Cmara dos TcnicosOficiais de Contas).Regarding the Portuguese Accounting
Standards Board (CNC), it was set up in1974 by law and its structure and functions have been
revised several times sincethen, the last being in 1999. The main objectives of the CNC are
standard setting, standard interpretations, mostly by request and representing Portugal in
international forums and joint working groups. The CNC has 41 membersrepresenting 36
institutions (public entities, professional associations, schools andrepresentatives of economic
sectors) and operates, both financially andadministratively, under the Ministry of Finance,
although it has technicalindependence.Portugals entry into the EU (January 1986) also led to a
major reform of commercial and company law. The Companies Law, published in November
1986,is the key amending regulation in the field of company law, substituting the previous
legislation (dating back to 1888), and was adapted to EU Directives.

Presently, the accounting disclosure of Portuguese firms derives mainly from the Companies
Law and from the Official Accounting Plan. Portuguese companies are required to present a

balance sheet, a profit and loss account, a statement of cash flows and a complete set of notes on
financial statements. Companies below the following size criteria can present abridged financial
statements: when two of the following three limits have not been exceeded for two successive
years: total assets of Euros 1,500,000; turnover of Euros 3,000,000 and average number of
employees 50. These annual financial statements, together with the managements report and, if
appropriate, the auditors report, must be made public by submitting them to the Business
Registry. The layout of the accounts of certain kind of companies differs from those in the POC:
banks and other financial institutions whose accounting rules are issued by the Bank of Portugal
and also insurance companies whose accounting principles, procedures, and financial reports
depend on the Insurance Institute of Portugal. With regard to consolidated accounts, the
amendment to the Official Accounting Plan, approved in 1991 following the seventh Directive,
made consolidation mandatory for all groups controlled by a parent company. However, some
groups are exempt owing to reasons of size or because they belong to larger groups with parent
companies in EU member countries. Inany case, parent companies of listed groups must always
present their consolidated annual financial statements.
The harmonization effort also brought about the adoption of IAS. The influence of such
standards can now be observed in almost every DC issued and in thedisclosure requirements of
the Stock Exchange authority. Thus, in DC 18 ahierarchy of GAAP is presented: Official
Accounting Plan; Accounting Standards(DC); and International Accounting Standards.
Therefore, the latter must be applied in case of absence of Portuguese accounting rules. And
from 2005 on, they should apply to consolidated accounts of listed companies. In fact, the CNC
has been strongly influenced by the IAS when preparing thedirectrizes contabilsticas. The CNC
issued its first accounting guideline in 1991,and in 1999 these guidelines became of compulsory
application. Portuguese accounting guidelines are very close in content to comparable IAS issued
by theIASB so that among the 29 Portuguese accounting guidelines issued by the CNC,over two
thirds of them were developed in line with IAS, for instance, Accounting for business
combinations (DC 1); Elimination of profits and losses resulting from transactions, between
group undertakings (DC 6), and Deferred taxation (DC28) among others.

Portuguese accounting rules may differ from IAS/IFRS because there is no accounting
standardization in some topics. Concerning these topics, DirectrizContabilstica No. 18 includes
a formal reference for using IAS where Portuguese accounting rules do not exist. However, this
reference has not been extensively applied by companies. Such evidence can be found in
literature. Gomes, Serra and Ferreira (2006) approached the harmonization of Portuguese listed
Companies in terms of intangibles accounting treatment according to IAS 38. In this study little
evidence is found in terms of enforcement in the sample of such rule. Authors justify it on noncompulsory character, although DC18 states differently. Even when the IAS has been translated
to national normative,companies tend not to apply them. Ferreira, Pinto, Isidro and Alves (2004)
compare Portuguese GAAP, IAS and tax law assessing the degree of compliance with the
international accounting regulation and the effectiveness of enforcement mechanisms in case of
observed non-compliance. The results show that few Portuguese listed companies are disclosing
and computing deferred taxes, hence companies are not applying DC 18 and IAS 12, and those
enforcement mechanisms are not working properly. They found that there still remained some
doubts about the obligation to follow international standards in the absence of national rules
possibly because there was not a strong and clear accounting framework or accounting standard
with legal power to compel companies. Authors also observed that, although IAS must be
applied in the absence of a national standard, auditors are not sanctioning companies for their
failure to comply with IAS 12.Such conclusions are in line with Ginner and Rees (2005).
According to them, the ASB has to convince those with regulatory and enforcement power to
approve and mandate the use of international rules since such a board (IASB) can not dot on its
own. In fact, as the authors pinpoint, this will lead rules to be enforced differently or with
different effectiveness, losing many of its benefits. Moreover, Flower (2004) calls attention to
what he believes will be the future of such a process of harmonization. According to this author,
financial reporting in Europe will develop differently whether we consider major European
enterprises of an international character or small and medium-sized home country implanted
companies. In his vision, the former will move towards a global accounting framework where
IASB will have a major role, while for the latter more national diverse accounting practices will
prevail.

Finally, concerning the accounting and auditing professions and their influence on accounting in
Portugal, we should start by remarking that, as is the case another European countries, this
country has separate professions, and not just separate professional bodies. The CTOC represents
all accounting professionalism any matter related to the profession. Membership is required to
trade as an accountant in Portugal. The Law created this body in 1995 and slightly revised it in
1999. The CTOC activity is focused on the profession, professional ethics and ongoing
education, but it also plays an important role in standard setting through the CNC. At the moment
there are nearly 80,000 members, turning this institution into the largest professional association
in the country with a large budget, which may anticipate its increasing influence. Traditionally,
accountants have had remarkable relation with tax laws and tax authorities, assuming several
responsibilities regarding taxes and professional liabilities. This relationship can justify, at least
partially, the use of tax rules over accounting standards.
The Law established the OROC, which represents the certified and statutory auditors, in 1974.
This law has been revised several times. All members have to follow the rules approved by the
Institute, in accordance with EU eighth Directive. The main functions of the OROC are the
issuing of auditing standards, the continuing updating of these standards in compliance with
market needs, EU legislation and advances in auditing standards. Auditors have to present a
report in which they express their opinion as to whether the financial statements present a true
andfair view in accordance with the Portuguese GAAP.The accounting and auditing professions
have not been an important group in anticipating the application in Portugal of IAS. Furthermore,
neither the accounting nor the auditing professional bodies have developed a set of accounting
principles and procedures that are considered as generally accepted.

PROVIDERS OF FINANCE AND CAPITAL MARKETS REGULATION

Portuguese firms present a high debttoequity ratio, since capital has traditionally been
channeled through the banking system. Consequently, firms must periodically send accounting
information to the banks (e.g., quarterly and annual financial statements). Nevertheless, the
importance of the stock marketin financing the activities of companies - although still small - has
increased indecent years. After 1994, and until Portugal joined Euro next, there were two
stock exchanges (Lisbon and Oporto) under one direction only, on which corporate shares and
bonds are traded. Since 1991, the Securities Market Commission (CMVM Commissar do
Mercado de Valores Mobilizations) has assumed the function of regulation, supervision and
promotion of the securities market and similar activities carried out by market participants. An
Executive Board, appointed by the Council of Ministries by indication of the Ministry of
Finance, governs the CMVM. The Executive Board is assisted by the Advisory Board, which
represents all market participants, and is overseen by the Supervisory Board. The CMVM is
entitled to approve regulatory provisions, the technical rules and the instructions necessary for a
regular functioning of the securities market, as well as to propose to government legislative
changes, to ensure the continuous updating of the legal structure regarding the demands of the
market and the EU requirements. The CMVM can also establish some rules regarding financial
reporting and influence the accounting standards through its representation in the CNC.

INFLUENCE OF TAXATION
Traditionally, accounting in Portugal has been highly influenced by tax regulations. In fact, the
first significant attempt to harmonize accounting practices occurred in1963 with a profound tax
reform, which contained some implicit accounting regulations. Furthermore, the 1977
Portuguese Official Accounting Plan was strongly influenced by tax-collecting aspects. It was
arranged in order to facilitate tax inspections and to justify a companys income tax fairness,

(since the basis for the calculation of the tax is accounting earnings), more than to disclosing
information on the companys financial position, performance and cash flows. This orientation
towards tax continued with the Tax Law of 1988 and with its various revisions

CONCLUSIONS
Portugal has made significant changes in its monetary and fiscal policies over the past decade. Its
current macroeconomic policies, directed toward inclusion in the new European Economic and
Monetary Union, are now supported by the two major political parties. These facts
notwithstanding Portugal remains far from achieving a truly sustainable fiscal policy,
specifically, one that entails generational balance. Under our baseline assumptions future
generations face a roughly 50 percent higher fiscal burden than do current newborns. This
imbalance reflects Portugals past debt accumulation and the aging of its population. A variety of
alternative tax increase and expenditure reduction policies can be used to achieve generational
balance. Which of those policies spreads the burden most appropriately among old and young
current generations is a matter for political debate. Achieving generational balance in Portuguese
fiscal policy would not only improve economic prospects for future Portuguese citizens. It would
also indicate to foreign investors that Portugal is not likely to expropriate their investments in the
future through extraordinary fiscal levies. While actually producing generational balance in
Portuguese fiscal policy may prove difficult, the longer the delay, the more painful will be the
requisite fiscal adjustments. The generational accounts constructed here can help the Portuguese
public to understand the true cost of adjusting the tax and transfer system.