Accounting for Securities
In the annual report, a company’s management is required to properly recognise and measure financial instruments, assessing their impact on financial results and the structure of equity. As the number and complexity of transactions increase, the practice of the State Revenue Service and financial statement audits also indicates heightened requirements for transparency and documentation of investments in financial accounting.
Given the complexity of accounting, increasing market volatility, and the requirement for transparent accounting of financial instruments, it is important for management, together with accounting staff, to develop from the outset a high-quality and consistent accounting policy.
This policy should include both clear classification of financial instruments and an appropriate fair value measurement policy. An internal control system for risk monitoring and proper accounting ensures not only accurate presentation of financial results in the accounting records and financial statements, but also allows identification of situations where investments in securities require additional measurement and, if necessary, timely consultation with experienced specialists.
Company investments in securities may significantly affect financial statement line items and tax liabilities. Therefore, when commencing such activities, it is essential to define a clear investment strategy, evaluating the classification, measurement, and accounting principles of financial instruments, as well as their tax consequences. The topic is complex and will undoubtedly require time to implement proper accounting procedures.
The Annual Reports and Consolidated Annual Reports Law (ARL) sets out the basic principles for accounting for securities – the use of fair value and the obligation to disclose fair value information in the notes to the financial statements. Detailed classification of financial instruments, however, is established in International Financial Reporting Standard (IFRS) 9 “Financial Instruments”, which makes this accounting area particularly challenging for accountants.
Thus, the ARL establishes only general principles rather than detailed methods. Cabinet Regulation No. 775 “Regulations on the Application of the Annual Reports and Consolidated Annual Reports Law” sets out the technical requirements – detailed accounting of financial instruments, methods for determining fair value, and disclosure requirements in the notes to the financial statements.
Latvian Law and International Standards
A company operating in the securities market must compare and assess the requirements of the ARL and IFRS, particularly if it plans to implement IFRS in its accounting. If a company intends to prepare its annual report in accordance with IFRS and holds financial instruments such as securities, shares, bonds, etc., the requirements for data collection, accounting, and disclosure in the annual report are very strict, and accurate presentation requires careful and thorough work.
The table below provides a brief overview linking IFRS and International Accounting Standards (IAS) requirements with Latvian regulatory enactments.
| SFPS/SGS | Nozīmīgākās uzskaites jomas | GPL | MK noteikumi Nr.775 |
|---|---|---|---|
|
SFPS Nr.9 “Finanšu instrumenti” |
Klasifikācija (amortised cost, fair value through other comprehensive income, fair value through profit or loss), vērtēšana, vērtības samazinājums (expected credit loss), hedžēšana, pārklasifikācija |
106.–112.punkts – finanšu instrumentu uzskaite, patiesās vērtības noteikšana 118.–123.punkts – vērtības samazinājums |
|
|
SFPS Nr.7 “Finanšu instrumenti: informācijas atklāšana” |
Informācijas atklāšana par riskiem, patiesās vērtības hierarhiju (fair value hierarchy), pieņēmumiem, metodēm, jūtīgumu, nodrošinājumu |
173.–188.punkts – informācijas atklāšana par finanšu instrumentiem, riskiem un patiesās vērtības metodēm |
|
|
SFPS Nr.13 “Patiesās vērtības noteikšana” |
Patiesās vērtības metodes, patiesās vērtības hierarhija, tirgus pieņēmumi |
106.–112.punkts – patiesās vērtības metodes 176.–183.punkts – patiesās vērtības hierarhija pielikumā |
|
|
SGS Nr.32 “Finanšu instrumenti: uzrādīšana” |
Saistību un kapitāla klasifikācija, neto uzrādīšana, juridiskā forma vai ekonomiskā būtība |
91.–105.punkts – kapitāla un saistību klasifikācija |
|
|
SGS Nr.1 “Finanšu pārskatu sniegšana” |
Uzrādīšanas principi, būtiskums, posteņu klasifikācija, piezīmju struktūra |
||
|
SGS Nr.12 “Ienākuma nodokļi” |
Atliktā nodokļa aprēķins patiesās vērtības izmaiņām, nodokļu ietekme, kapitāla pieaugums |
147.–155.punkts – atliktā nodokļa uzskaite un aprēķins |
|
|
SGS Nr.8 “Grāmatvedības politika, izmaiņas grāmatvedības aplēsēs un kļūdas” |
Politikas izvēle, aplēses, kļūdu labojumi, konsekvence finanšu instrumentu uzskaitē |
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|
SGS Nr.7 “Naudas plūsmu pārskats” |
Naudas plūsmas klasifikācija darījumos ar vērtspapīriem (ieguldījumu/finansēšanas darbības) |
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|
SGS Nr.10 “Notikumi pēc pārskata perioda beigām” |
Notikumi, kas ietekmē patieso vērtību pēc pārskata datuma, piemēram, tirgus cenu izmaiņas |
12.pants – notikumi pēc bilances datuma |
156.–164.punkts – notikumu pēc bilances datuma uzskaite |
The ARL and Cabinet Regulation No. 775 ensure only partial and thematic compliance with the complex IFRS requirements on financial instruments, especially regarding IFRS 9, IFRS 7, and IFRS 13. Therefore, companies with significant investments in securities must develop sufficiently detailed accounting methodologies. A consistent accounting policy and thorough disclosure are essential to ensure that financial statements accurately reflect the risks, value, and impact of financial instruments on the company’s operating results.
Example for an Annual Report
If the annual report is prepared in accordance with the Accounting Law and the ARL, the section “Significant Accounting Policies” should include the following information regarding financial instruments.
Long-term loans and receivables
A financial asset created by the company by providing money or services directly to a debtor and not created with the intention of selling it immediately or in the short term. Loans are initially recognised at their initial value – the fair value of the loan amount plus costs directly attributable to issuing the loan. After initial recognition, loans are measured at amortised cost using the effective interest rate method.
Amortised cost is calculated taking into account loan issuance costs as well as any discounts or premiums related to the loan. Gains or losses arising from amortisation are recognised in the profit or loss statement as interest income and expenses. If the asset’s value has decreased, appropriate impairment allowances are recognised.
Other Long-term Financial Investments
Held-to-maturity investments are financial assets with fixed or determinable payments and fixed maturity that the company has the positive intention and ability to hold to maturity. They are initially recognised at fair value plus costs directly attributable to acquisition. After initial recognition, they are measured at amortised cost using the effective interest rate method.
Available-for-sale financial assets are financial assets that are not loans issued, receivables, or held-to-maturity investments and may be sold to increase liquidity or in response to changes in interest rates, exchange rates, or equity prices. Available-for-sale financial assets are measured at fair value, and changes in value are recognised in equity under the revaluation reserve in the period in which they arise. If there is objective evidence of impairment, an impairment allowance is recognised.
Short-term financial investments
These are financial assets held for trading, acquired or incurred principally for the purpose of generating profit from short-term fluctuations in price or margin. Financial assets held for trading are measured at fair value, and changes in value are recognised in profit or loss in the period in which they arise.
Companies must ensure consistent accounting policies and transparent disclosures, as incorrect accounting of financial instruments may significantly affect the reliability of information presented in the annual report. Undoubtedly, a professional approach to accounting for securities contributes to the preparation of a high-quality annual report.
The article was prepared for the journal iFinanses.lv.
