The Securities and Exchange Organization has mandated companies to prepare their financial statements based on International Financial Reporting Standards for the current fiscal year (ends March 20), in an official letter to all Iranian securities issuers and auditors. 

SEO’s board of directors is doing this in accordance with a directive by Iran Audit Organization. Financialtribune reported.

“This is a pertinent step to enhance transparency and development of the Iranian capital market and uplift its international status,” Hassan Amiri, SEO's deputy for supervision on exchanges and issuers, wrote in the letter.

Now, all commercial banks, financial institutions and insurance companies registered by SEO are required to prepare and publish their audited annual financial statements based on both IFRS and local Generally Accepted Accounting Policies.

Also, all companies listed on Tehran Stock Exchange and Iran Fara Bourse, whose registered capital exceeds 10 trillion rials ($272 million at market exchange rates), must prepare and publish financial statements based on both standards.

SEO encouraged companies to comply with these standards in 2013. Most companies ignored the SEO, apart from a handful of companies with foreign stakeholders like detergent producer Henkel Pakvash and glass and crystal manufacturer Ghazvin Glass Company.

The Central Bank of Iran mandated commercial banks to adopt IFRS and barred them from holding shareholder meetings. As such, their bank stocks have not been tradable since mid-July.

Corporate Dilemma

The companies cited a lack of consensus among SEO, Iran Audit Organization, Iran Accounting Association and Iranian Association of Certified Public Accountants on the matter.

More importantly, valuation of fixed assets as in IFRS puts companies in a dilemma. For example, many companies have their property holdings recorded at their historic prices.

These assets often have strategic locations but are primarily used as plants and warehouses. If they are revalued, the companies' assets will surge. This will hit their performance ratios, like Return on Asset and Return on Equity. Corporate executives aren't keen on that.

On the other hand, companies are reluctant to devalue their assets, which are mostly held as collateral with banks. A decrease in the value of those assets will decrease their borrowing power.

Without IFRS in place, connection with international businesses will be slow. International auditing and credit rating cannot be done with local GAAP.

As of today, around 120 nations and jurisdictions have successfully adopted IFRS standards for their domestic listed companies. Iran is not on that list yet.

Regulators believe if banks successfully adopt the standards, other companies will follow.

Meisam S. Hoseini
Analyst at Securities & Exchange Organization

Source: SENA