The 2007 KPMG Investment Guide for Baltic States explains that, pursuant to the 2003 Accounting Act, Estonian companies may choose to apply either Estonian Accounting Standards (RTJs) or International Financial Reporting Standards (IFRSs). KPMG states that RTJs generally require less disclosure than IFRSs and are primarily designed for the application by small and medium sized entities. Therefore, differences between RTJs and IFRSs occur, and some areas are not covered at all. These include accounting for joint ventures, employee benefits, retirement benefit plans, and income taxes. The World Bank, in its 2004 Report on the Observance of Standards and Codes (ROSC) on Accounting and Auditing, adds that Estonian public interest companies, such as credit institutions, financial holding companies, mixed-activity holding companies, insurers, and companies whose shares or other securities are traded on a stock exchange in Estonia or other EU Member State are required to prepare their consolidated and legal entity financial statements pursuant to IFRSs beginning January 1, 2005. Estonia complies with European Commission (EC) Regulation No 1606/2002. However, at the time of the assessment, some public interest entities, including investment and pension funds, were not required to apply IFRSs. Therefore, the World Bank urged the Estonian authorities to require all public interest entities to prepare financial statements according to IFRSs.

General Overview

According to the 2007 KPMG Investment Guide, beginning in 1995, Estonia based its national accounting standards on International Financial Reporting Standards (IFRSs). Pursuant to the 2003 Accounting Act, all Estonian companies may choose to apply either Estonian Accounting Standards (RTJs) or IFRSs. However, according to the 2004 World Bank Report on the Observance of Standards and Codes (ROSC) on Accounting and Auditing, public interest companies such as credit institutions, financial holding companies, mixed-activity holding companies, insurers, and companies whose shares or other securities are traded on a stock exchange in Estonia or other European Union (EU) Member State are required to prepare their consolidated and legal entity financial statements pursuant to IFRSs beginning January 1, 2005. Estonia thereby complies with European Commission (EC) Regulation No 1606/2002, which requires all EU listed companies to prepare consolidated accounts following IFRSs as endorsed by the EC starting January 1, 2005.

In its 2004 ROSC, the World Bank pointed out, however, that some public interest companies, including investment and pension funds, were not required to apply IFRSs and recommended requiring all public interest entities to apply IFRSs. As of 2004, the two criteria for the definition of "public interest" were the nature of the business and the fact that the entity's securities were listed on a stock exchange. However, the size of the company was treated as irrelevant. The World Bank urged Estonia to include the size of the company among the criteria defining public interest companies, in order to include large state- or family-owned businesses. Otherwise, the World Bank opined, the application of RTJs may not show the desired transparency.

The 2004 ROSC explains that the 2003 Accounting Act is the main legislation that governs accounting in Estonia. In addition, the following laws cover some accounting and auditing related issues as well: the Commercial Code, the Authorized Public Accountants Act, the Securities Market Act, the Credit Institutions Act, the Insurance Activities Act, the Investment Funds Act, and the Funded Pensions Act.

According to the 2004 World Bank report, the Estonian Accounting Standards Board (EASB), under the supervision of the Ministry of Finance (MoF), is responsible for the issuance of RTJs. Since 1995, the EASB revised its RTJs several times in order to bring them in line with IFRSs. The World Bank 2004 report describes RTJs as accounting standards that "are essentially a simplified summary of IFRSs, cross-referenced to corresponding paragraphs in IFRSs standards, and focusing on... areas that are relevant for Estonian small- and medium-sized enterprises (SMEs). Some IFRSs accounting areas are covered only briefly or not at all. In such areas, the IFRSs treatment is recommended, but not mandatory" (p. 10). In general, according to the KPMG Baltics 2006 guide, RTJs require less disclosure than IFRSs. At the end of 2006, 17 RTJs were in effect.

The KPMG goes on to list the following main differences between RTJs and IFRSs: The Estonian Accounting Act gives a more detailed description of balance sheet and income statement formats and the composition of different items. RTJs do not allow the valuation of property, plant, and equipment at their fair values. Intangible assets may only be valued at their amortized cost less impairment losses. Specific principles account for business combinations between entities under common control. Finally, several areas, including accounting for joint ventures, employee benefits, retirement benefit plans, and income taxes, are not covered by RTJs at all, since they are considered irrelevant in the Estonian business and legal environment.

Besides monitoring auditors and auditing firms in Estonia, the Estonian Auditing Board (EAB) is required to establish the ethical requirements of the audit profession. To this end it has issued Auditing Guidelines that include ethical standards. In its 2004 ROSC, the World Bank noted that the EAB's code of professional conduct "falls short of the International Federation of Accountants (IFAC) Code of Ethics for Professional Accountants" (p. 7). However, as stated in its 2006 self-assessment, the EAB intends to adopt the IFAC Code of Ethics in the near future. The EAB is listed as a member on the IFAC website.

According to the 2004 ROSC, in 2002, Estonia established the Financial Supervision Authority (FSA), which supervises the banking, insurance, and securities markets. The FSA enforces accounting standards applied by banks, investment firms, insurance companies, listed companies, management companies, and investment funds. However, as stated by the World Bank in 2004, there is "no standardized procedure for monitoring compliance with IFRSs and ISAs" (p. 11).

The Principles

IFRS 1: First-time Adoption of International Financial Reporting Standards (effective 2006)

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According to the 2006 EAB self-assessment, IFRS 1 is not applicable in Estonia.

IFRS 2: Share-based Payment (effective 2005)

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In its 2006 self-assessment, the EAB states that there is no RTJ that corresponds to IFRS 2, since IFRS 2 is only relevant for a small number of entities in Estonia. However, if necessary, entities should follow IFRS guidance.

IFRS 3: Business Combinations (effective 2004)

NC

According to the 2006 EAB self-assessment, RTJ 11, Business Combinations and Investments in Subsidiaries and Associates, corresponds to IFRS 3. RTJ 11 and has been in effect since January 1, 2005. The EAB points out that in addition to the requirements set forth in IFRS 3, RTJ 11 provides guidance for transactions between entities under common control. On the other hand, it should be noted that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IFRS 4: Insurance Contracts (effective 2006)

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In its 2006 self-assessment, the EAB states that there is no RTJ that corresponds to IFRS 4.

IFRS 5: Non-current Assets Held for Sale and Discontinued Operations (effective 2005)

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According to the 2006 EAB self-assessment, RTJ 5 Property, Plant and Equipment (PPE) and Intangible Assets, covers accounting requirements under IFRS 5. RTJ 5 is effective from January 1, 2005. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IFRS 6: Exploration for and Evaluation of Mineral Resources (effective 2006)

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In its 2006 self-assessment, the EAB states that there is no RTJ that corresponds to IFRS 6, since IFRS 6 is only relevant for a small number of entities in Estonia. However, if necessary, entities should follow IFRS guidance.

IFRS 7: Financial Instruments: Disclosures (effective 2007)

II

There is insufficient information publicly available as to Estonia's compliance with this principle.

IAS 1: Presentation of Financial Statements (effective 2007)

NC

According to the 2006 EAB self-assessment, RTJ 2, Presentation of Financial Statements, corresponds to IAS 1 and is effective from January 1, 2005. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 2: Inventories (effective 2005)

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According to the 2006 EAB self-assessment, RTJ 4 Inventories corresponds to IAS 2 and is effective from January 1, 2005. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 7: Cash Flow Statements (effective 1994)

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In its 2006 self-assessment, the EAB states that RTJ 2 Presentation of Financial Statements, which is effective from January 1, 2005, covers accounting requirements under IAS 7. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors (effective 2005)

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According to the 2006 EAB self-assessment, RTJ 1 General Principles, which is effective from January 1, 2005, covers accounting requirements under IAS 8. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 10: Events after the Reporting Period (effective 2005)

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According to the 2006 EAB self-assessment, RTJ 1 General Principles, which is effective from January 1, 2005, covers accounting requirements under IAS 10. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 11: Construction Contracts (effective 1995)

NC

In its 2006 self-assessment, the EAB states that RTJ 10 Revenue Recognition, which is effective from January 1, 2005, covers accounting requirements under IAS 11. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 12: Income Taxes (effective 2001)

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According to the 2006 EAB self-assessment, RTJ 8 Provisions, Contingent Liabilities and Contingent Assets, is effective from January 1, 2005, and covers accounting requirements under IAS 12. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 14: Segment Reporting (effective 1998)

NC

In its 2006 self-assessment, the EAB states that RTJ 16 Segment Reporting, which is effective from January 1, 2004, corresponds to IAS 14. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 16: Property, Plant and Equipment (effective 2005)

NC

According to the 2006 EAB self-assessment, RTJ 5, PPE and Intangible Assets, corresponds to IAS 16. RTJ 5 is effective from January 1, 2005. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 17: Leases (effective 2005)

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According to the 2006 EAB self-assessment, RTJ 9 Leases corresponds to IAS 17. RTJ 9 is effective from January 1, 2005. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 18: Revenue (effective 1995)

NC

In its 2006 self-assessment, the EAB states that RTJ 10 Revenue Recognition, which is effective from January 1, 2005, corresponds to IAS 18. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 19: Employee Benefits (effective 2006)

NC

According to the 2006 EAB self-assessment, RTJ 8 Provisions, Contingent Liabilities and Contingent Assets, effective from January 1, 2005, covers accounting requirements under IAS 19. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs. The EAB also points out that defined benefit plans are not common in Estonia; if relevant, entities should follow IAS 19 guidance.

IAS 20: Accounting for Government Grants and Disclosure of Government Assistance (effective 1984)

NC

In its 2006 self-assessment, the EAB states that RTJ 12 Government Grants, which is effective from January 1, 2005, corresponds to IAS 20. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 21: The Effects of Changes in Foreign Exchange Rates (effective 2005)

NC

According to the 2006 EAB self-assessment, RTJ 1 General Principles and RTJ 11 Business Combinations and Investments in Subsidiaries and Associates, which are effective from January 1, 2005, cover accounting requirements under IAS 21. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs. Also, IAS 21 provides the entity with a choice of presentation currency. Under RTJ 1, on the other hand, the presentation currency must be the Estonian Kroon.

IAS 23: Borrowing Costs (effective 1995)

NC

According to the 2006 EAB self-assessment, RTJ 5, PPE and Intangible Assets, covers accounting requirements under IAS 23 and is effective from January 1, 2005. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 24: Related Party Disclosures (effective 2005)

NC

In its 2006 self-assessment, the EAB states that RTJ 2 Presentation of Financial Statements, which is effective from January 1, 2005, covers accounting requirements under IAS 24. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 26: Accounting and Reporting by Retirement Benefit Plans (effective 1998)

NC

In its 2006 self-assessment, the EAB states that there is no RTJ that corresponds to IAS 26, since IAS 26 is only relevant for a small number of entities in Estonia. However, if necessary, entities should follow IFRS guidance.

IAS 27: Consolidated and Separate Financial Statements (effective 2005)

NC

According to the 2006 EAB self-assessment, RTJ 11, Business Combinations and Investments in Subsidiaries and Associates, covers accounting requirements under IAS 27. RTJ 11 is effective from January 1, 2005. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 28: Investments in Associates (effective 2005)

NC

According to the 2006 EAB self-assessment, RTJ 11, Business Combinations and Investments in Subsidiaries and Associates, corresponds to IAS 28. RTJ 11 is effective from January 1, 2005. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 29: Financial Reporting in Hyperinflationary Economies (effective 1990)

NC

According to the 2006 EAB self-assessment, Estonia is not a hyperinflationary economy, and therefore, IAS 29 is not applicable.

IAS 31: Interests in Joint Ventures (effective 2005)

NC

In its 2006 self-assessment, the EAB states that there is no RTJ that corresponds to IAS 31, since IAS 31 is only relevant for a small number of entities in Estonia. However, if necessary, entities should follow IFRS guidance.

IAS 32: Financial Instruments: Disclosure and Presentation (effective 2005)

NC

In its 2006 self-assessment, the EAB states that RTJ 3 Financial Instruments, which is effective from January 1, 2005, corresponds to IAS 32. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 33: Earnings per Share (effective 2005)

NC

According to the 2006 EAB self-assessment, there is no RTJ that corresponds to IAS 33.

IAS 34: Interim Financial Reporting (effective 1999)

NC

In its 2006 self-assessment, the EAB states that RTJ 15 Interim Reporting, which is effective from January 1, 2004, corresponds to IAS 34. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 36: Impairment of Assets (effective 2004)

NC

According to the 2006 EAB self-assessment, RTJ 5, PPE and Intangible Assets, covers accounting requirements under IAS 36 and is effective from January 1, 2005. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 37: Provisions, Contingent Liabilities and Contingent Assets (effective 1999)

NC

According to the 2006 EAB self-assessment, RTJ 8 Provisions, Contingent Liabilities and Contingent Assets, which is effective from January 1, 2005, corresponds to IAS 37. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.

IAS 38: Intangible Assets (effective 2004)

NC

According to the 2006 EAB self-assessment, RTJ 5 PPE and Intangible Assets corresponds to IAS 38. RTJ 5 is effective from January 1, 2005. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs. Also, RTJ 5 does not allow the revaluation method set forth under IAS 38.

IAS 39: Financial Instruments: Recognition and Measurement (effective 2006)

NC

According to the 2006 EAB self-assessment, RTJ 3 Financial Instruments corresponds to IAS 39. RTJ 3 is effective from January 1, 2005. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs. Also, RTJ 3 does not cover certain simplifications allowed for the application of amortized cost calculation, tainting rules for maturity investments, and hedge accounting.

IAS 40: Investment Property (effective 2005)

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In its 2006 self-assessment, the EAB states that RTJ 6 Investment Properties, which is effective from January 1, 2005, corresponds to IAS 40. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs. Also, under RTJ 40, property leased under operating leases cannot be treated as investment property.

IAS 41: Agriculture (effective 2003)

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According to the 2006 EAB self-assessment, RTJ 7 Biological Assets corresponds to IAS 41 and is effective from January 1, 2005. It should be noted, however, that RTJs are simplified IFRSs and therefore require less disclosure than IFRSs.