Comments on the implementation of Law 25/2018 “On Accounting and Financial Statements”

Published by the National Council of Accounting (NCA), the Commentary, in implementation of Law 25/2018; Download the full document here

Commentary

LAW No. 25/2018 For Accounting and Financial Statements

Law No. 25 of May 10, 2018 “On Accounting and Financial Statements” establishes the general principles and rules for the preparation and components of financial statements, the determination of applicable accounting standards, as well as the maintenance of accounting records. This law applies to all for-profit economic units (regardless of their legal form, whether an individual, a limited liability company, or a joint-stock company) as well as by all nonprofit economic units (except in cases where their financial statements and accounting are subject to special laws or regulations, such as p.e.g., the case of foreign organizations operating in Albania which, according to agreements between the Albanian Government and their countries of origin, have been exempted from the obligation to prepare and file financial statements).

Article 3 and the definition of the economic unit

Chapter I General Provisions

Article 3 Definitions The term „economic unit“ includes legal and natural persons, public and private, for-profit and non-profit, that carry out activities and have permanent establishments in the Republic of Albania. Public economic units include all companies with the state as the sole shareholder, such as public utility service enterprises (water supply, energy, etc.). This law does not apply to the economic units of General Government, which means the entirety of central, local, and special fund government units (ref. Law No. 9936, dated 6/26/2008 “On the Management of the Budgetary System in the Republic of Albania,“ as amended). The term ”Nonprofit economic unit“ is the same as the meaning and definition of NGOs given in Law No. 8788, dated May 7, 2001, ”On Nonprofit Organizations,„ as well as the definition provided in the GSS for NGOs. This Standard provides a non-exhaustive list of economic units considered non-profit, such as foundations, associations, centers, political parties, religious institutions, trade unions, and any other organization not mentioned in this Standard but that has the status of a non-profit organization. (established to carry out specific activities of a charitable or altruistic nature; not taxed (to the extent that it does not carry out profit-making economic activities); prohibited from distributing surpluses from its activities to its founders and/or members; and is not owned or controlled by the Government), except for those NGOs or some of their activities which, by a special law, are exempt from the obligation to prepare and report their financial statements. Not being nonprofit organizations, for the purposes of this law and the NGO Code, are various government agencies or regulatory entities which, although not engaged in for-profit activities, are nevertheless controlled by the Government. As such, they do not enjoy the status of NGOs. The term “public interest economic entity” refers to economic entities, public or private, which by their nature, size, or number of employees are of public interest. The definition of a public interest economic unit is that provided in Law No. 10,091 of March 5, 2009, “On Legal Auditing, the Organization of the Profession of Legal Auditors and Approved Accountants,” Article 2, paragraph 23, as well as in Government Decree No. 17, dated January 16, 2019 “On the determination of other public or private companies important to the public interest, due to the nature of their business, size, or number of employees.” This group of economic units includes: 1. all publicly listed economic units; 2. banks and branches of foreign banks, as well as other non-bank financial institutions licensed by the Bank of Albania; 3. insurance and reinsurance companies, collective investment fund management companies, voluntary pension fund management companies; 4. other state-owned or private companies that are important to the public interest due to the nature of their business, size, or number of employees, as determined by a Council of Ministers„ Decision. According to the Council of Ministers“ Decision, in the fourth group of the above classification, economic units that simultaneously meet the following are also considered SOEs: a) the criteria for being audited; and b) the criterion(s) of nature / size / number of employees (one criterion is sufficient): i. companies in which the state has an equity participation; ii. companies that have more than 50% of their revenue from public funds; iii. companies that operate as a branch, whose parent company is publicly listed; iv. companies that provide a public good in their commercial activity and are subject to the relevant field regulators. The list of regulators is approved and updated by the Public Oversight Board by October of each year. v. companies that, for two consecutive years, have total revenue from economic activity (turnover) in that accounting period equal to or greater than 1,500,000,000 Lek (one billion five hundred million lek); vi. a company that, for two consecutive years, has total assets on the balance sheet at the end of the accounting period equal to or greater than 750,000,000 Lek (seven hundred fifty million lek) vii. companies that, at the end of the accounting period, have more than 250 employees; viii. companies that, for the entire accounting period, have an average number of employees of more than 250. The term ”equity interest" means rights in the capital of other economic units. However, ownership of a portion of another economic unit's capital is presumed to constitute an equity interest when it exceeds the 20 percent threshold. Ownership of a smaller stake implies "other financial investments" in securities, equity instruments. The functional currency is the currency of the primary economic environment in which the economic unit operates. With Law 25/2018, economic units are allowed to keep their accounting in the currency in which the majority of their economic activity is conducted, regardless of whether it is different from the presentation currency. Responsible Person for Preparing Financial Statements. The economic unit may keep its accounting records and prepare its financial statements internally through its technical staff employed under an employment contract, or it may secure this service externally. In the first case, an individual employed under a work contract by the economic unit to maintain accounting and prepare financial statements is not prohibited from holding a second job. The only restriction in this case is the limit set by the labor code on the number of hours allowed to be worked per week. In the second case, the unit enters into a service contract for the provision of accounting services with a natural or legal person licensed to provide this service. Accounting services may be provided by natural or legal persons licensed as certified accountants/accounting firms or statutory auditors/auditing firms. The provisions governing the rights and obligations of KM and AL are enshrined in Law No. 10091 of March 5, 2009, "On Legal Audit, the Organization of the Profession of Legal Auditor and Authorized Accountant," as amended. Article 4 – Categories of economic units and groups As part of the transposition of the EU Accounting Directive (Dir 34/2013) into the new accounting law, thresholds for the classification of business entities for financial reporting purposes have been established. These thresholds differ from those set for tax purposes (income tax legislation) or for macroeconomic purposes (Law No. 10,042 of December 22, 2008, on certain amendments and additions to Law No. 8,957, dated 10/17/2002 On Small and Medium Enterprises, as amended). The law provides that for classification, meeting two of the three specified thresholds is sufficient, meaning that each threshold carries equal weight. We recall that in the previous classification under Law No. 10042 “On the Classification of Small and Medium Enterprises,” the employee headcount limit was one of the defining criteria, while the other criterion was the limit on the business turnover or the activity figure. Also, in order to classify the economic unit, the thresholds set forth in this law must be met for two consecutive years. For example, if at the end of the 20X0 reporting period the economic unit is classified, based on the indicators of turnover, assets, and employees, as a small economic unit, but in 20X1 and 20X2 it meets the criteria for a m“classified as a micro economic unit, then in 20X1 and 20X2 continues to prepare financial statements under IFRS for SMEs (1-14), while in 20X3 it will keep its accounting and prepare financial statements in accordance with IFRS for SMEs 15 ”For the Accounting and Reporting of Micro-entities." The same principle applies in other cases as well, e.g., an economic entity that applied IFRSs in 20X0 through 20X5 and in 20X6-20X7 meets the criteria for applying GAAP, in accordance with the requirements provided by law, will continue to apply the SNRFs in 20X6–20X7 in order to transition to applying the SKKs from 20X8 onward. The transition from IFRS to GAAP will require explanatory notes explaining the differences arising from the transition to GAAP. Since there is no specific national standard for the initial application of IFRS, the accounting policies provided by IFRS will be applied prospectively. The new law also provides for the classification of economic groups. However, in the case of groups there is a specific requirement in the classification. If the group classification is made before performing eliminations of intragroup transactions, then the thresholds provided in this law must be increased by 20%. If the elimination of intra-group transactions has been completed (as part of preparing the group's consolidated financial statements), then the classification thresholds are those set out in Article 4, paragraph 2, of the Accounting Law. The law states that the classification thresholds for business entities/groups will be adjusted proportionally every three years until, in 2028, they reach the levels set out in EU Directive 2013/34. This means that the business entity/group must be reclassified again at the beginning of 2022, 2025, and 2028. On these dates, the rule provided for in point 5 of Article 4 of the Accounting Law does not apply. The classification will be made using the information obtained from the 2021, 2024, and 2027 statements, respectively, for the turnover, assets, and number of employees. Article 5 – Accounting standards applicable to the preparation of financial statements Economic entities, for the most part, apply IFRS in the preparation of their financial statements. National accounting standards are applicable to micro, small, and medium enterprises, except in cases where they are public interest entities operating in certain sectors specified in this law. Public interest entities and the regulators of certain public interest entities (those operating in the lending sector, e.g., the Bank of Albania, and in the insurance sector, e.g., the Financial Supervisory Authority) apply IFRS. Large undertakings apply the SNRFs as they are considered public interest undertakings. All undertakings designated by a Council of Ministers' decision as being of public interest are exempt from the SNRF reporting obligation. (NCEIP) due to the nature of their business, size, or number of employees, BUT that do not exceed at least two of the criteria specified in Article 4, paragraph 1.3 of the accounting law: a) assets, 750 million lek; b) revenue from business activities (turnover), 1,500 million lek; c) average number of employees during the reporting period, 250. The following are not included in the group of entities exempt from the obligation to apply IFRSs, regardless of their size or number of employees: a) all publicly listed economic entities; b) banks and branches of foreign banks, as well as other non-bank financial institutions, licensed by the Bank of Albania; c) insurance and reinsurance companies, management companies of collective investment funds, management companies of voluntary pension funds; All economic units, except those legally required to apply IFRS, may apply them on a voluntary basis when preparing their financial statements. Thus, the law allows but does not require the application of IFRS even by entities that are required to apply GAAP.

Chapter II and the Maintenance of Accounting Records

Chapter II

General Provisions on Accounting Documents and Financial Statements

Article 6 – Keeping accounting records Economic units, depending on the standards they apply in preparing their financial statements, refer to BSNK or KKK regarding the accounting principles, methods, and guidelines they apply. The KKK is not authorized to issue interpretations of the SNRFs. Economic units turn to the KKK for interpretations of events or transactions solely for the purposes of the SKKs. Article 8 – Retention of accounting documents The law provides that accounting documents must be retained for a period of ten years. The calculation of this period begins with the period following the date of closing of the financial statements in which those accounting documents are included. The financial statements of the economic unit are kept at the office where it conducts its activities or at its central office, unless otherwise provided by another legal regulation. The financial statements of groups are kept at the headquarters of the parent economic unit. The term “headquarters” refers to the definition given in the fiscal legislation. Since the period for retaining documents begins in the year following the date of the document, there is no conflict with the practice of businesses that, during the year, may keep documents at the offices of the person responsible for preparing the financial statements when this service is provided outside the economic unit. Article 9 – Reporting Period The reporting period lasts 12 months, beginning on January 1 and ending on December 31. Exemptions for special activities, upon the proposal of the National Accounting Council, are approved by the minister responsible for finance. In some cases the duration may be longer or shorter than 12 months, but not less than three months and not more than 15 months. If the activity's duration is shorter than three months, then the information for this period is attached to the following or preceding period, as the case may be. E.g., an economic unit is registered as an entity with the QKB at the beginning of the last quarter of the year 20X0. For this 3-month reporting period, the entity does not prepare 20X0 financial statements but combines the information for this period with the 20X1 financial information by presenting a combined statement. The information in the 20X1 statement pertains to a 15-month period. By analogy, if the economic unit were to cease operations in the first quarter of 20X1, then the financial information for that quarter would not be presented separately but would be combined with the prior year's information for presentation in the 20X0 financial statements. Although the fiscal regulation has established a 12-month period (January through December) as the fiscal reporting period, the requirement for a longer or shorter financial reporting period does not conflict with the former. For the purposes of calculating taxable income, the economic unit makes the necessary calculations and adjustments to move from accounting profit to taxable profit. Article 10 – Language and monetary unit of accounting records and financial statements Accounting records are kept in the Albanian language and amounts are expressed in the functional currency, regardless of whether the functional currency is the same as or different from the presentation currency. Meanwhile, the financial statements are presented in Albanian and the amounts are expressed solely in the presentation currency, which is the national monetary unit (leka). If the entity has business relationships or receives donations from foreign economic entities, meaning it has documents in a foreign language that evidence its relationships with foreign economic entities, then these documents must be translated into Albanian. Accounting records, i.e., the recording of transactions in these records, are made in one of the following two ways: – in the national currency or in a foreign currency, when the latter is the functional currency; in the event that the records are kept in the foreign currency because it is the functional currency, then at the end of the reporting period, the information is translated into the presentation currency, the national monetary unit, in compliance with the requirements of the accounting standards (GAAP – GAAP 12, p. 30 or IFRS – IFRS 21, p. 39). According to IFRS, the results and financial position of an economic entity, whose functional currency is not the currency of a hyperinflationary economy, shall be translated1 into a different presentation currency by following the procedures below: (a) the assets and liabilities of each financial position statement presented (i.e., including comparative amounts) will be translated using the closing exchange rate on the date of that financial position statement; (b) the revenues and expenses of any statement of profit or loss and other comprehensive income (i.e., including comparative amounts) will be translated at the transaction date exchange rate; and (c) all differences arising from the conversion will be recognized in the statement of comprehensive income. – in foreign monetary units, converting them into the national monetary unit or into the functional currency if the functional currency is different from the national monetary unit and the foreign currency; In this case, the economic entity records each foreign currency transaction in the national currency or in the functional currency by applying the immediate exchange rate between the national/functional currency and the foreign currency on the date of the transaction. In the proper application of this legal requirement, the economic unit takes into account what is provided in the accounting standards (GAAP 12, p. 11 or IFRS 21, p. 21) for reporting foreign currency transactions in the functional currency. Financial statements may be presented in rounded figures, provided that no loss of information is incurred that would affect the users of these statements.

Article 12 on consolidated financial statements

Chapter III Components of Financial Statements

Article 12 – Consolidated Financial Statements At point 3 of this article, it is provided that the parent economic unit and all units controlled by it must be included in the consolidation, regardless of where the controlled units operate or where their headquarters are located. Also, in IAS 9, pages 33–43 (2015) and in IFRS 10, page 33, the principle is the same: there are no instances in the accounting standards where a controlled entity may be excluded from consolidation in the financial statements of the parent entity. Meanwhile, in the EU Accounting Directive, Dir 34/2013, Article 23.9(c) provides for the exemption of parent companies from the obligation to consolidate subsidiaries operating in jurisdictions with long-term, substantial restrictions on rights over assets or their management. This requirement of the Directive is taken into account in the amendment made to IAS 9, adopted by Order No. 28 of January 30, 2019, of the Minister responsible for finance. Article 13 Components of Financial Statements Economic units classified as „small„ prepare the statement of financial position, the statement of income and expenses, and the explanatory notes to the financial statements. To complete these statements, small business entities refer to IFRS 2 Presentation of Financial Statements. If the economic entity, classified as a small entity, is a public interest entity that is required to apply IFRSs or voluntarily elects to apply IFRSs, then for the preparation of its financial statements it refers to these standards. Economic entities classified as „medium,„ “large,” and “public interest,” In addition to the statements required in paragraph 1 of this article, they also prepare the statement of comprehensive income, the statement of cash flows, and the statement of changes in equity. Depending on the standards they apply (national or international), the annual financial statements are prepared and presented. Economic entities classified as “micros” prepare the abbreviated statement of financial position and the abbreviated statement of income and expenses in accordance with the requirements of IFRS 15. "On Accounting and Reporting for Micro Entities," as amended (2019). These statements are also accompanied by the relevant explanatory notes. Referring to IFRS for Micro-entities, paragraph 5, micro-entities with annual revenue of up to 5 million leks are exempt from the obligation to prepare annual financial statements in accordance with the requirements of this standard. These micro-entities comply with the provisions of the applicable fiscal legislation for their filings. In cases where an economic entity, by the criteria, is classified as a microenterprise but is a financial holding company, it does not apply IFRS 15 but is regulated in accordance with the legislation in force for non-bank financial institutions. Non-profit economic entities (NPEs), as defined in this law as economic entities that do not have the purpose of generating profits from their activities to be distributed to investors in their net assets, prepare the statement of financial position, statement of activities, statement of cash flows, and the explanatory notes to these statements. Referring to the SKK for OJF, paragraph 26, those OJF whose assets or revenues exceed 5 million lekë apply accrual accounting and prepare all financial statements in accordance with the paragraph of this Standard, while OJFthat do not meet this criterion apply cash‐basis accounting and prepare only the statement of cash flows, accompanied by explanatory notes regarding the types of activities or services they provide. Article 14 Special adjustments to the statement of financial position Point 1 – According to the IFRSs, development expenses, if they are not part of the cost of another asset that meets the recognition criteria, are treated as expenses in the period in which they occur. According to IFRSs, however, these expenditures, if they meet the criteria set out in paragraphs 54–62 of IFRS 38, are treated as an asset item. When development expenses are included among the assets, the economic entity, when deciding on profit distribution, takes into account whether this asset element has been fully depreciated or not. If this asset element has not been fully depreciated, the distribution of profit is made to the extent that the remaining portion of undistributed profit plus reserves equals the undepreciated cost of this asset (Dir 34/2013, Article 12, paragraph 11, third subparagraph). Example Economic unit A recognized an intangible asset (development costs) in July 20X1, in the amount of 1.8 million lek, in accordance with the requirements of IFRS 38. In the financial statements for the 20X1 period, there are no reserves or retained earnings from prior periods. The economic unit has decided to amortize the asset over a 10-year period on a straight-line basis. In years 20X1 and 20X5, the economic unit's earnings were 4, 5, 3, 3, and 2 million lekë, respectively. The tax rate is 15%. The dividend policy has been to distribute the entire profit. How have the distributions and reserves been calculated for the years 20X1, 20X5? Note! For this example, it will be assumed that accounting and taxable profit are equal. Depreciation calculation for the intangible asset (development costs) for the years 20X1, 20X5 No. Beginning Balance Depreciation Ending Balance 1 1,800,000 90,000 1,710,000 2 1,710,000,180,000 1,530,000 3 1,530,000,180,000 1,350,000 4 1,350,000,180,000 1,170,000 5 1,170,000,180,000,990,000 Distributions and reserves for the years 20X1, 20X5 No. Profit before tax Tax Net income for distribution Development costs (AAJM) not yet amortized Dividend Calculation of income for distribution (dividend paid) 0 1 2=1*15% 3=1-2 4 5 6 1 4,000,000,600,000 3,400,000 1,710,000 1,690,000 1,690,000 = 3,400,000 -1,710,000 2 5,000,000 750,000 4,250,000 1,530,000 4,430,000 4,430,000 = 1,710,000 + 4,250,000, 1,530,000 3 3,000,000 450,000 2,550,000 1,350,000 2,730,000 2,730,000 = 1,530,000 + 2,550,000, 1,350,000 4 3,000,000 450,000 2,550,000 1,170,000 2,730,000 2,730,000 = 1,350,000 + 2,550,000, 1,170,000 5 2,000,000,300,000 1,700,000,990,000 1,880,000 1,880,000 = 1,170,000 + 1,700,000, 900,000 Net profit earned in 5 years: 14,145,000 (3,400,000 + 4,250,000 + 2,550,000 + 2,550,000 + 1,700,000) Dividends paid (cumulative) in 5 years: 13,460,000 (1,690,000 + 4,430,000 + 2,730,000 + 2,730,000 + 1,880,000) The difference between net profit and dividends paid, over the 5-year period: 990,000 (14,450,000, 13,460,000). This difference is equal to the remaining value of development costs (AAJM) at the end of the fifth year (990,000 lekë). Point 2 – In cases where the economic entity has investments in equity and uses the equity method for their recognition and measurement, then it is likely that the income recognized in the statement of performance from the investment will be greater than the dividend received or for t"received from the participation. In cases where the income recognized as interest from the participation exceeds the amount of the dividend received or to be received, the difference is posted to reserves, i.e., it is not distributed to the shareholders. Example Economic unit A has investments in equity in the capital of economic unit B, amounting to 35%. Unit A has chosen the equity method for measuring its investments in equity. For the year 20X1, economic unit B reported a profit of 200,000 lek. Economic unit A makes an adjusting entry in its accounting by recognizing in the income statement an income from equity investments equal to 35% of the profit reported by economic unit B, i.e., 70,000 lek. The dividend received by Entity A from its equity investments in Entity B amounts to 40,000 lek, which is less than the income this entity recognized as profit from equity investments. The difference of 30,000 lekë will be transferred to reserves. Therefore, in PASH, an income from equity investments of 40,000 lekë will be reported, and the remaining amount of 30,000 lekë will be reported under other comprehensive income. Another example to guide the application of paragraph 2 of Article 14 is provided in Appendix 2 of this commentary. Article 15 Inventory of Assets and Liabilities Economic units, at least once during the reporting period (primarily at the end of the reporting period), verify the existence and value of their assets, liabilities, and equity. The inventory of physical assets is carried out not only by counting them but also by comparing their physical quantities with the accounting records, which have been documented in the relevant accounting records. Meanwhile, the inventory of non-physical assets and liabilities is carried out by verifying their existence with confirmations from the parties involved or by other means deemed appropriate by the management of the economic unit. The valuation of assets, liabilities, and equity items is carried out in accordance with the requirements of national or international accounting and financial reporting standards. To standardize the procedures for verifying the existence and valuing of assets, liabilities, and equity items, the KKK drafts the inventory regulation. Responsibility for following the inventory procedures rests with the management body, which includes all department heads, including the head of the accounting department. In economic units where accounting services are provided by licensed individuals or legal entities under a service contract, the responsibilities are stipulated in the agreement between the parties. Note! 1. The executive body is the body charged with the management/administration of the company, depending on the company's legal form; 2. Governing bodies refer to the body responsible for managing/administering the company or that has decision-making powers for the company's benefit, depending on the company's legal form or organization. Often, the governing body may coincide with the executive body; 3. The supervisory body is the body entrusted with the oversight of the company's activities. Article 16 Explanatory Notes In the financial statements published in accordance with IFRS 2, as well as in the requirements set forth in the international standards for the presentation of financial statements, the statement items are presented in a specific order accompanied by the numbers of the main categories and their subcategories. According to this arrangement of the financial statement items, the explanatory notes for these items are also arranged. All business entities, regardless of their classification, must provide in the explanatory notes the average number of employees during the reporting period. For profit-making economic units, providing this information also serves, among other things, for the purpose of monitoring financial statements, because the number of employees is one of the three criteria for classifying units. The classification of the entity determines the applicable accounting and financial reporting standards, except when the economic entity is a public interest entity. Profit-oriented business entities, excluding micro and small ones (unless the latter are public interest entities), must present in the explanatory notes to the financial statements, in addition to what is required by accounting and financial reporting standards, the following information: 1) if the disclosure of this information would not identify the financial position of a specific member of these bodies, the economic entity discloses; a) the amount of salaries paid for the reporting period to the members of the executive, management, and supervisory bodies, indicating the total amount paid for each of the bodies; b) any commitment incurred or undertaken by the economic unit in connection with the pensions of former members of these bodies; 2) Regarding employees, the economic unit details this information in: a) the average number of employees, which it presents broken down by employee categories; b) personnel costs during the reporting period, which it presents broken down by salaries, social security and pension costs (for cases where the P&L is prepared on a functional basis, i.e., personnel costs are not presented separately in the income statement for the reporting period). 3) the name and address for each of the economic units in which the economic unit, either directly or through a person acting on its behalf, holds a participation interest, indicating the percentage of capital owned, the amount of capital and reserves and the profit or loss for the most recent reporting period of the said economic unit for which the financial statements have been approved. Ownership of a portion of the capital of another economic unit is presumed to constitute a participation interest when it exceeds the 20 percent threshold. The above does not apply to the parent economic entity in cases where: i) the entity in which the parent entity holds a participation interest is included in the consolidated financial statements of the parent entity or in the consolidated financial statements of a larger group of entities; ii) this participation interest has been accounted for by the parent economic unit in its annual financial statements; c) the existence of any participation certificates, convertible debt, share purchase rights, options or securities or similar rights, indicating their number and the rights they confer; d) the name, address, and legal form of each of the economic units in which the economic unit is a general partner; dd) the name and address of the economic entity that prepares the consolidated financial statements of the larger group of economic entities, to which the economic entity belongs as a controlled entity; e) the name and address of the economic entity that prepares the consolidated financial statements of the smaller group of economic entities, to which the economic entity belongs as a controlled entity, which is included, also, in the group of economic units mentioned in subparagraph (dh) of this paragraph; e) the name and registered office of the economic unit that prepares the consolidated financial statements of the smaller group of economic units to which the economic unit belongs as a controlled entity, which is included, Medium, large, and public interest economic units, in addition to the requirements provided for in paragraphs 2 and 3 of this article or in accounting standards, furthermore, in the group of economic units mentioned in subparagraph (dh) of this paragraph; w) the place where copies of the consolidated financial statements mentioned in subparagraphs (dh) and (e) of this paragraph can be obtained, provided they are available. Medium, large, and public interest entities, in addition to the requirements provided for in paragraphs 2 and 3 of this article or in applicable accounting standards, must present in the explanatory notes the total fees for the reporting period, charged by each statutory auditor or audit firm in connection with the statutory audit of the annual financial statements, and the total fees charged by each statutory auditor or audit firm for assurance services, for tax advisory services, and for other non-audit services. Article 17 Progress Report on Activities The obligation to prepare the performance report and other supplementary reports is presented schematically as follows: Performance report Non-financial report Governance report Economic units of public interest √ √ (over 500 employees) √ (excluding small and medium-sized) Large undertakings √ √ (over 500 employees) √ Medium undertakings √ Small undertakings – (provided that they provide in the explanatory notes information on the purchase of their own shares) – – Micro-entities – – – Non-profit economic entities √ – – 3. Exempt from the obligation to prepare the activity progress report: a) micro-entities; b) small economic units, provided that they provide data on the purchase of their own shares in the explanatory notes; c) non-profit economic units, for which the figures for assets and income in the financial statements do not exceed the value of 30 million lekë. Article 21 – Reporting of payments made to state institutions This article provides that the following are required to prepare and publish an annual report on payments made to state institutions: 1. all large business entities; and 2. those business entities of public interest that are active in the extractive industry or in the harvesting of forest timber. This report shall be submitted together with the other reports required by the provisions of this law. An economically significant entity of public interest active in the extractive industry or in the harvesting of forest timber is treated as a large economic entity, regardless of its revenue, assets, or average number of employees during the reporting period. The report must present, both in aggregate and in detail, each type of payment made to state institutions, as provided in point 4(b) of Article 21. Article 22 – Filing and publication of financial statements All profit-making economic units submit their financial statements and other reports (as provided by law) to the QBK, in accordance with applicable regulations, no later than July 31 of the year following the financial statements. Medium and large economic units of public interest are required to publish their financial statements and accompanying reports (as provided by law) on their official websites within seven months of the year following the financial statements. Parent economic units submit to the QKB and publish on their official websites the consolidated financial statements, accompanied by the consolidated reports in accordance with Articles 17, 18, and 19 of this law. Nonprofit economic units (NPOs) submit their financial statements to the tax authorities within the deadlines provided in the Law “On Tax Procedures in the Republic of Albania.” In cases where the amount of assets and revenues in the financial statements exceeds 30 million lek, OJs must publish their financial statements on their official website no later than July 31 of the year following the financial statements. NGOs publish on their website, together with the financial statements, the performance report, the format of which is drafted by the KKK. Appendix 1 EXAMPLE: TRANSLATION OF FINANCIAL STATEMENTS INTO THE PRESENTATION CURRENCY Economic unit ABC was established on January 1, 20X0. Its functional currency is the euro. Since its owners want to increase bank borrowing from a bank in a foreign country, they prepare the financial statements in the currency of the country where the foreign bank operates, namely the U.S. dollar. The economic unit's financial statements for the years 20X0 and 20X1, prepared in the functional currency, Euro, are as follows: Statement of Financial Position as of December 31, 20X0 Description 20X1 20X0 Euro Euro Cash and cash equivalents 494,200 Accounts receivable 300 200 Inventories 150 250 Land, buildings, machinery and equipment 840 870 Total assets 1,784 1,520 Current liabilities 160 100 Payroll taxes payable 99 126 259 226 Stockholders' equity 1,000 1,000 Retained earnings 525 294 1,525 1,294 Total liabilities and equity 1,784 1,520 Statement of Comprehensive Income as of December 31, 20X0 Description 20X1 Euro 20X0 Euro Revenue 700 800 Cost of goods sold (200) (250) Gross profit 500 550 Selling expenses (90) (80) Administrative expenses (80) (50) Profit before taxes 330 420 Income tax expense (99) (126) Net profit 231 294 Statement of Cash Flows as of December 31, 20X0 Description 20X1 Euro 20X0 Euro Cash flows from operating activities Cash received from customers 600 600 Cash paid to suppliers and employees (180) (500) Cash generated from operating activity 420 100 Income tax paid (126) – Net cash from operating activity 294 100 Cash flows from investing activities Amount paid for the purchase of an IAS – (900) No cash flows from financing activities Net increase (Decrease) in cash and cash equivalents 294 (800) Cash and cash equivalents at beginning of period 200 1,000 Cash and cash equivalents at end of period 494 200 Statement of Changes in Equity as of December 31, 20X0 Description Share Capital Retained Earnings Total Euro Euro Balance as of January 1, 20X0 1,000 – 1,000 Profit for 20X0 294 294 Balance as of December 31, 20X0 1,000,294 1,294 Profit for 20X1 231 231 Balance as of December 31, 20X1 1,000,525 1,525 Additional information: Spot exchange rates have been as follows: Date Rate January 1, 20X0 1 Euro = 2 USD December 31, 20X0 1 Euro = 1.95 USD December 31, 20X1 1 Euro = 2.1 USD Average rate 20X0 1 Euro = 2.11 USD Average rate 20X1: 1 Euro = 1.79 USD On the date of income tax payment: 1 Euro = 2.05 USD On the date of purchase and payment of AAM: 1 Euro = 1.90 USD Net assets at opening, January 1, 20X0 = 1,000 Euros For simplicity, the same average rate is used for translating the consolidated income statements and cash flow statements (excluding income tax paid and the amount paid for the acquisition of the AAM). Required: Translate the 20X0 and 20X1 financial statements of the economic entity ABC from the functional currency, Euro, to the presentation currency, USD. Answer, Translation of the statement of financial position into the presentation currency Description of item Euro USD Rate Euro USD Rate 20X1 20X0 Fixed Assets 840 2.1 1,764,870 1.95 1,696,500 Inventories 150 2.1 315 250 1.95 487.5 Receivables 300 2.1 630 200 1.95 390 Cash 494 2.1 1,037.4 200 1.95 390 Total Assets 1784 3,746.4 1520 2,964.0 Payables 160 2.1 336 100 1.95 195 Provision for taxes 99 2.1 207.9 126 1.95 245.7 Total liabilities 259 543.9 226 440.7 Share capital 1,000 2 2,000 1,000 2 2,000 Reserve for conversion differences n/a 169 n/a (97) Retained earnings 525 1,033.8 294 2.11 620.3 Total equity 1,525 3,202.5 1,294 2,523.3 Total liabilities and equity 1,784 3,746.4 1,520 2,964 Translation into the statement of comprehensive income presentation currency Description of item Euro USD Rate Euro USD Rate 20X1 20X0 Revenue 700 1.79 1,253,800 2.11 1,688 Cost of sales (200) 1.79 (358) (250) 2.11 (528) Gross profit 500 895 550 1,161 Shipping costs (90) 1.79 (161.1) (80) 2.11 (168.8) Administrative expenses (80) 1.79 (143.2) (50) 2.11 (105.5) Profit before taxes 330 590.7 420 886.2 Income tax expense (99) (177.2) (126) (265.9) Net income 231 413.5 294 620.3 Other comprehensive income Foreign currency translation differences n/a 265.7 n/a (97) Total comprehensive income 231,679.2 294,523.3 Calculation of differences from changes in foreign exchange rates Description 20X1 20X0 Euro Euro Reclassification of net assets from the opening rate to the closing rate of the statements Net assets at opening translated at the closing rate 2,523.3 2,000 Net assets at opening translated at closing rate 2,717.4 1,950 Difference (194.1) 50 Translation of profit from average rate to closing rate Profit translated at average rate 413.5 620.3 Profit translated at closing rate 485.1 573.3 Difference (71.6) 47 Total foreign exchange differences (265.7) 97 Translation to the statement of cash flows for monetary instruments presented in the statement of financial position Description of item Euro Rate USD Euro Rate USD 20X1 20X0 Cash flow from operating activities Cash receipts from customers 600 1.79 1,074,600 2.11 1,266 Paid to suppliers and employees (180) 1.79 (322.2) (500) 2.11 (1,055) Cash generated from operating activities 420 751.8 100 211 Income tax paid (126) 2.05 (258.3) Net cash from operating activities 294 493.5 100 211.0 Cash flows from investing activities Cash paid for the acquisition of an AAM (900) 1.9 (1,710) Net cash from investing activities (900) (1,710) Cash flows from financing activities Issuance of shares 1,000 2 2,000 Net cash from financing activities 1,000 2,000 Net increase (decrease) in cash or cash equivalents 294 494 200 501 MM and their equivalents at beginning of period 200 1.95 390 Unrealized losses from foreign exchange rate changes, in MM or their equivalents n/a 153.9 n/a (111) MM and their equivalents at the end of the period 494 2.1 1,037.4 200 1.95 390 Share capital Reserve for foreign exchange differences Retained earnings Total USD USD USD USD Balance as of January 1, 20X0 2,000 2,000 Comprehensive income 20X0 (97) 620.3 523.3 Balance as of December 31, 20X0 2,000 (97) 620.3 2,523.3 Comprehensive income 20X1 265.7 413.5 679.2 Balance as of December 31, 20X1 2,000,168.7 1,033.8 3,202.5 Annex 2, Referred to in Article 14, paragraph 2 It is assumed that economic unit A has an equity participation investment in the capital of economic unit B amounting to 25%. The capital of unit B is valued at 20,000 euros. Therefore, the initial participation investment is 5,000 euros (20,000 * 25%). Economic unit A classifies this item under investments in equity. Individual statements of economic units A and B as of December 31, 20X0 Economic unit A Economic unit B Euro Euro Current assets 50,000 0 Financial investments (at B) 5,000 0 AAM 60,000 20,000 Total of assets 115,000 20,000 Payables 75,000 0 Capital and reserves 40,000 20,000 Share capital 24,000 20,000 Reserve 0 0 Retained earnings 16,000 0 Total equity and liabilities 115,000 20,000 Initial data for profit/loss of business units A and B for the 20X1 fiscal year Business unit A Euro Business unit B Euro Sales revenue 100,000 40,000 Cost of sales 80,000 28,000 Income from equity investments 3,000 0 Net income 23,000 12,000 Initial data for the income/loss of business units A and B for the year 20X2 Business unit A Euro Business unit B Euro Sales revenue 120,000 50,000 Cost of sales 100,000 30,000 Income from equity investments 5,000 0 Net income 25,000 20,000 Year 20X1 – Economic Unit A At the close of the 20X1 year, economic unit A adjusts the value of its financial investment in B by the percentage of economic unit B's profit. (This adjustment may be made by referring to the published financial statements of Entity B, or to the minutes of Entity B's shareholders' meeting approving those statements, or to other means of communication as agreed between Parties A and B). Assuming that the financial statements of Economic Unit B are published before the financial statements of Economic Unit A are published, the latter makes the adjustment in the following year but it affects the 20X1 statements. 1) Adjustment of the investment in the financial statements of economic unit A by the percentage of the declared profit of economic unit B D Financial investment 3,000 (12,000 * 25%) K Income from investment in participations 3,000 2) During the year 20X1, entity A does not receive dividends from its investment in entity B, so the income recognized from investments in equity will be presented by entity A as a reserve and will not be available for distribution to shareholders. D Undistributed profit 3,000 K Reserve 3,000 Income Statement for Economic Unit A as of December 20X1 Description of Items | Euro Sales revenue | 100,000 Cost of sales 80,000 Gross profit 20,000 Income from equity investments 3,000 Net income 23,000 Statement of Financial Position for Economic Unit A as of December 20X1 Euro Current assets 70,000 Financial investments (5,000 + 3,000) 8,000 Other current assets 60,000 Total assets 138,000 Payable 75,000 Capital and Reserve 63,000 Shareholders' Equity 24,000 Reserve 3,000 Retained Earnings (16,000 + 23,000, 3,000) 36,000 Total of equity and liabilities 138,000 Thus, the retained earnings of business entity A for the year 20X1 consist of retained earnings carried forward from previous periods in the amount of 16,000 euros, plus the current year's profit of €23,000 and minus the amount allocated to reserves of €3,000, represented by the difference between income from equity investments and the dividends received from these investments. Year 20X2, Economic Unit A Assume that in July 20X2, Economic Unit B declared dividends amounting to 60% of the declared 20X1 profit. From the calculations, it is determined that the dividend to be distributed by economic unit B will be €7,200 (12,000 × 60%). The declared dividend was fully paid by B in 20X2, and the economic unit records the following accounting entry for the dividend received: 3) Recognition of dividends from the investment in a joint venture, declared for the year 20X1 in the amount of €1,800 (7,200 * 25%) based on the minutes of the shareholders' meeting of economic unit B. D Other receivables 1,800 K Financial investments 1,800 4) Recording of dividends received D Cash 1,800 K Other receivables 1,800 5) Reduction of reserves by the amount of dividends received D Reserve 1,800 K Retained earnings 1,800 Next, the value of the financial investment will be adjusted based on the profit earned in 20X2 by economic unit B. Assume the same situation: economic unit B publishes its statements before economic unit A publishes its financial statements, so A records the transactions related to the equity investment in its 20X2 statements. 6) The investment value is adjusted by the percentage of economic unit B's profit in 20X2 (20,000 * 25%) D Financial investment 5,000 K Income from equity investments 5,000 7) Since the dividends have not yet been received, this amount is reflected in reserves on the statement of financial position. D Undivided profit (20X2) 5,000 K Reserve 5,000 Thus, the investment value as of 31.12.20X2 will be 11,200 euros (5,000 + 3,000, 1,800 + 5,000) and the reserve will be 6,200 euros (3,000, 1,800 + 5,000). Statement of Income of Business Unit A for December 20X2 Business Unit A Euros Sales revenue 120,000 Cost of sales 100,000 Gross profit 20,000 Income from equity investments 5,000 Net income 25,000 Statement of Financial Position of Economic Unit A as of December 20X2 Euro Current assets 91,800 Financial investments (5,000 + 3,000) 11,200 Retained Earnings 60,000 Total Equity 163,000 Payables 75,000 Capital and Reserve 88,000 Stock 24,000 Reserve 6,200 Undivided Profit (36,000 + 25,000 + 1,800, 5,000) 57,800 Total of Equity and Liabilities 163,000 Source: National Accounting Council.