Iran: Dispute Over IFRS Compliance Resolved

Minister of Economic Affairs and Finance Masoud Karbasian and Governor of the Central Bank of Iran Valiollah Seif have jointly signed a directive regarding bank balance sheets that could finally end a two-year dispute between the CBI and Audit Organization of Iran over who gets to set financial reporting standards for lenders.

Before the implementation of the nuclear accord with world powers in Jan. 2016, which promised to lift curbs on the Iranian banking system, the central bank obligated lenders to draft their financial statements based on its new template.

The template itself is based on the International Financial Reporting Standards and is a crucial step toward reestablishing correspondent banking relations with banks of other nations, especially circumspect European institutions who currently shy away from working with their Iranian counterparts for fear of inadvertently violating US embargo and incurring huge fines.

However, AOI staked its own claim, asserting that lenders must adhere to its standards and that meant banks effectively had to draft two sets of balance sheets to appease both the central bank and AOI.

This led to last year's chaotic situation where a majority of banks were unable to hold their shareholder's annual general meetings on time, leading to a trading halt of their shares on the stock market.

The issue dragged on for another year meaning that by July 22–by which time bank shareholders' meetings should have ended–only nine banks and credit institutions out of more than 30 had held their meetings.

Landmark Deal

Following the landmark deal reached between Valiollah Seif and Masoud Karbasian, the respective heads of CBI and Economy Ministry, the predicament seems to have come to an end, although banks have yet to fix their balance sheets and clean up their sour debts.

"Based on the current rules and regulations of the country, AOI is the official entity for devising auditing and accounting standards and fundamentals at the national level," reads the directive signed by the two officials.

However, it notes, "CBI, as the supervising entity over banks, assumes legal authority to devise the financial standards for banks' statements and therefore the banks are obligated to adhere to its regulations and directives".

Gholamhossein Davani, a member of the High Council of Iranian Institute of Certified Accountants, noted that the directive makes it clear that AOI is only a standard-setter.

"The Audit Organization and the Securities and Exchange Organization are not governing entities and therefore it is in no way within their framework to tell banks what to do in this regard," he told Financial Tribune.

Davani believes the directive to be an overwhelmingly positive measure that puts an end to the unnecessary dispute that had arisen out of a lack of information on the part of AOI officials.

The senior accountant noted that as a byproduct of the directive, "banks will draft only one set of balance sheets that will lead to timely shareholders' meetings and smooth trading on the stock exchange.

The pundit said that in their current form, the CBI templates are not remotely close to being fully IFRS-compliant, stressing that a time-consuming process awaits lenders before achieving top levels of conformity to the grueling and ever-changing international regulations.

"However, the IFRS-based balance sheets are a positive step and have a 'psychological effect' on the banks and the market to strive for enhanced compatibility," Davani said.

The directive also contains an article that aims to support shareholders and states that dividends due to shareholders should be treated on par with other liabilities of banks and credit institutions.  

It mandates the Audit Organization of Iran to cooperate with CBI to negotiate with the entity that sets IFRS, i.e. the International Accounting Standards Board, so that "[Iranian banks'] statements on long-term deposits would be formally accepted by them as a necessity in the balance sheets of Islamic banks".

As Davani elaborates, these statements are unique components of Islamic banking that are being practiced in a few Muslim countries such as Iraq at present, but are unheard of in other countries because the relationship between the bank and its depositors is defined very differently there.