Majlis Think Tank Endorses CBI on Financial Reporting Standards

In case of disagreement between the Central Bank of Iran and the Audit Organization of Iran over who gets to set financial reporting standards for banks and credit institutions, which issue has already borne significant costs for lenders, the parliamentary think tank has ruled in favor of the central bank.

Majlis Research Center, the parliament's research arm, has now released its analytical report on its website, reviewing the case and lending its support to the central bank.

For years, as the country was grappling with the heavy pressure exerted by international sanctions on the Iranian financial system, banks were the most isolated even as the international banking system was undergoing groundbreaking changes in terms of upping its standards in the aftermath of a global financial crisis.

This caused the balance sheets of Iranian lenders to be overwhelmingly outdated and remains one of the most significant obstacles to their reconnection with their international counterparts.

However, an internal disagreement between the two major organizations created further confusion and delay in their conformity to the International Financial Reporting Standards, a set of globally accepted accounting standards development by the independent, not-for-profit organization International Accounting Standards Board.

Less than two years ago, the central bank devised its own set of standards and templates, and obligated banks to adhere to them to get closer to IFRS. However, the audit organization, affiliated with the Ministry of Economic Affairs and Finance, rejected CBI's claim and was backed by the Securities and Exchange Organization of Iran who bound the banks to devise their balance sheets in conformity with standards dictated by the audit organization.

This forced the embattled lenders to devise two sets of balance sheets to appease the deciding entities.

Nevertheless, the research center advises that "legal ambiguities must be resolved and the central bank must be introduced as the legal entity for devising financial reporting standards for banks and credit institutions".

This ruling has been made in light of CBI's intrinsic supervisory mandate and the commendable efforts it has undertaken in the past few years in line with IFRS conformity.

MRC concedes that "the templates released by the central bank are still not completely in concordance with IFRS", but adds that the templates are the first step in fully adhering to international standards, as it will be a lengthy and gradual process just as it has been for other countries.

The complete implementation of IFRS could potentially create overwhelming changes in the financial statements of lenders, so it must be done with much forethought and preparation.

Compared with previous balance sheets, MRC notes, the templates released by CBI are different in 169 cases, "16 of which are fundamental changes that are also in line with Usury-Free Banking regulations" that are being altered for the first time in the past 32 years.

There are also 100 minor changes related to improving transparency and disclosure of information while 53 changes made in the new templates are direct measures made in line with IFRS conformity.

As MRC also outlines, the disagreement between the central bank and the audit organization has led to difficulties in holding the annual general meetings of banks and credit institutions.

As was recently reported, after a significant number of lenders failed to hold their shareholder's meeting last year, by the end of the first month of summer on July 22—the deadline for holding meetings this year, nine online banks managed to adhere to CBI templates and held their meetings.

However, 20 banks and credit institutions, including some of the biggest names in the banking system, are still lagging behind.

The parliamentary research center noted that by electing the central bank as the official entity in charge of balance sheets, these problems would be resolved and that the CBI has the right legal claim.

In fact, regulations cited in the Fifth Five-Year Development Plan that authorized CBI to devise reporting standards are more recent than those permitting the audit organization while regulations in favor of CBI are more specialized while the ones allowing the audit organization are more general in nature.

In its proposals, MRC recommends the central bank and the audit organization jointly devise accounting standards that would improve the performance of auditors "in proportion with the needs of the central bank".

What is more, the think tank calls on CBI to form a committee tasked with undertaking serious and unwavering oversight over the performance of auditors.

Owing to the fact that in recent years a significant portion of banking assets has been locked away in the form of non-performing loans, MRC directs CBI, the audit organization and independent auditors to act in unison in implementing the CBI directive on categorizing the assets of banks and how their NPLs are calculated.

Lack of sufficient provisions for NPLs in the balance sheets of lenders has been identified as a significant challenge for IFRS conformity and another reason behind the delay in convening shareholder's annual general meetings.

In conclusion, the parliamentary think tank calls for "stricter auditing of the deals made by banks" so that any profit generated by them in contrast with accounting standards and CBI regulations would be identified and tackled.