According to the assessment conducted in 2003 by the World Bank on the accounting and auditing practices in Colombia, the Colombian government, in an attempt to improve the corporate financial reporting regime, proposed a new law which, among other things, would fully adopt the International Financial Reporting Standards (IFRSs), formerly the International Accounting Standards (IASs). However, in 2005, the IMF noted that the accounting requirements in Colombia still had not been aligned with IFRSs which represented a serious departure from international best practices for financial reporting and transparency. Although based on the IFRSs and US GAAP, Colombian GAAP fails to incorporate many areas covered by the international standards and it has not been updated to reflect IFRSs and US GAAP requirements since 1993.

General Overview

According to the assessment conducted in 2003 by the World Bank on the accounting and auditing practices in Colombia, the Colombian government has embarked on implementation of number structural economic reforms. As of 2003, one of the government's reform proposals involved a project to improve the corporate financial reporting regime. This project included enacting a new law which, among other things, would fully adopt the International Financial Reporting Standards (IFRSs), formerly the International Accounting Standards (IASs). (ROSC 2003)

However, in 2005, the IMF completed an update on the Financial System Stability Assessment (FSSA) conducted by the Fund in 1999. The IMF noted that the accounting requirements in Colombia still had not been aligned with International Accounting Standards which represented a serious departure from international best practices for financial reporting and transparency. Hence, one of the main recommendations of the IMF was full adoption of the IFRSs. (FSSA Update 2005)

Colombia's legal and regulatory requirements on accounting are not conducive to high-quality financial reporting. Colombia has multiple legally established sources of accounting standards and rules, and some of the accounting requirements conflict with each other. As a result, preparers and auditors are often confused about the applicability of particular accounting treatments and disclosure obligations, and the quality of financial statements suffers. (ROSC 2003)

The legal requirements on accounting can be found in the following sources. The Code of Commerce sets forth the general accounting requirements that commercial enterprises must follow in maintaining books of account, recording transactions, and preparing financial statements. (ROSC 2003)

aw 43 of 1990 provides a general legal framework authorizing the government to issue detailed Colombian accounting and auditing standards, and to regulate the practice of public accounting as a profession. (ROSC 2003)

Decree 2649 promulgates Colombian generally accepted accounting principles (Colombian GAAP). (ROSC 2003)

Under the Colombian Constitution, only Congress has the authority to issue generally accepted accounting principles (GAAP). Congress can delegate this authority to the executive branch and other institutions through an act of law. Law 43 of 1990 created the Technical Council for Public Accounting under the Central Board of Accountancy to issue technical guidance on accounting standards. The Council developed a set of accounting principles that they termed Colombian GAAP. The President of Colombia issued Decree 2649 of 1993, which mandated Colombian GAAP as the accounting standards for all enterprises in Colombia. (ROSC 2003)

There are many differences between Colombian GAAP and IASs (now International Fiancial Reporting Standards (IFRSs). Colombian GAAP fails to incorporate many areas covered by IAS. The Colombian GAAP has not been updated to reflect IAS requirements since 1993, when Decree 2649 was enacted. Disclosure is not addressed at all in the Colombian GAAP. Moreover, because the Colombian GAAP only briefly covers some complicated accounting issues, different parties interpret accounting and reporting requirements in different ways, exacerbating the large gap between Colombian GAAP and IAS. (ROSC 2003)

In Law 222 of 1995, Congress allowed governmental agencies and regulators to issue the accounting standards necessary to perform their regulatory duties. At present there are approximately 43 different sets of accounting standards in Colombia, including those issued by the Superintendent of Banking and the Superintendent of Securities. (ROSC 2003)

The accounting rules issued by the tax authorities influence the accounting policies used in preparing the annual audited financial statements for external users. Law 222 of 1995 provides tax authorities, known as DIAN (Direccion de Impuestos y Aduanas Nacionales), with legal authority to issue accounting rules. Unfortunately, the tax accounting rules are generally not consistent with the Colombian GAAP or with internationally accepted accounting principles. In many cases, tax accounting rules require accounting treatments that conflict with financial reporting requirements in such areas as inventory costing, valuation of inventories under the retail method, accounting for leasing contracts, depreciation of fixed assets, provision for bad debt, and inflation adjustments. To avoid triggering a difference of opinion and misunderstanding with the taxation authorities, both preparers and auditors of such financial statements tend to favor the accounting policies that were used to determine taxable profits. As a result, users of financial statements may not always receive market-oriented information from the published financial statements. (ROSC 2003)

Regulators concentrate more on issuing than on enforcing accounting standards. The regulatory bodies lack capacity to monitor compliance with accounting and financial reporting requirements, and have not put in place an efficient and effective mechanism to monitor and enforce accounting and auditing requirements. (ROSC 2003)

Registered public accountants are not required to follow a code of ethics comparable to the one issued by IFAC. The requirements on professional ethics can be found in a few articles of Law 43 of 1990, but do not include guidelines on independence principles. There is a large gap between these requirements and the prescriptions in the IFAC Code of Ethics for Professional Accountants (revised in November 2001). Because the requirements are included in the law, it is difficult to update them to reflect changes in the IFAC Code. It would be easy to reduce the gap if the law would empower a body to issue a code of ethics for observance by all registered public accountants. The National Institute of Public Accountants has adopted the IFAC Code for its members--but compliance is voluntary. (ROSC 2003)

The National Institute of Public Accountants of Colombia is a member of the International Federation of Accountants (IFAC). (IFAC website)

The Principles

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

II

There is no information publicly available that directly addresses this principle.

IFRS 2: Share-based Payment (effective 2005)

II

There is no information publicly available that directly addresses this principle.

IFRS 3: Business Combinations (effective 2004)

NC

Colombian GAAP lacks clear-cut accounting rules and detailed disclosure requirements in the area of business combinations. (ROSC 2003)

IFRS 4: Insurance Contracts (effective 2006)

II

There is no information publicly available that directly addresses this principle.

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

II

There is no information publicly available that directly addresses this principle.

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

IFRS 7: Financial Instruments: Disclosures (effective 2007)

II

There is no information publicly available that directly addresses this principle.

IAS 1: Presentation of Financial Statements (effective 2007)

II

There is no information publicly available that directly addresses this principle.

The review of 20 samples of financial statements of listed companies conducted by the World Bank and the IMF in a joint ROSC initiative revealed that many companies did not disclose the number of shares authorized, issued, and fully paid-in, and issued and not fully paid-in. Also, there was no mention of the rights, preferences, and restrictions attached to the class of share, including restrictions on distributions of dividends and repayment of capital. (ROSC 2003)

IAS 2: Inventories (effective 2005)

NC

Colombian GAAP fails to provide guiding principles on inventory valuation and related disclosures (ROSC 2003)

The review of 20 samples of financial statements of listed companies conducted by the World Bank and the IMF in a joint ROSC initiative revealed that some financial statements did not disclose the method of inventory valuation. The provision for obsolete and slow-moving inventory was not reported by any sample companies. (ROSC 2003)

IAS 7: Cash Flow Statements (effective 1994)

II

There is no information publicly available that directly addresses this principle.

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

II

There is no information publicly available that directly addresses this principle.

The review of 20 samples of financial statements of listed companies conducted by the World Bank and the IMF in a joint ROSC initiative revealed that many companies did not disclose the required accounting policies in various areas, including consolidation, deferred expenses, valuation of assets, inventories, earnings per share, and provisions for bad debt. (ROSC 2003)

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

II

There is no information publicly available that directly addresses this principle.

The review of 20 samples of financial statements of listed companies conducted by the World Bank and the IMF in a joint ROSC initiative revealed that most companies failed to report information pertinent to events subsequent to the balance sheet date. (ROSC 2003)

IAS 11: Construction Contracts (effective 1995)

NC

Colombian GAAP fails to discuss accounting for construction contracts. (ROSC 2003)

IAS 12: Income Taxes (effective 2001)

NC

Colombian GAAP provides contradictory approaches to recognizing deferred taxation. (ROSC 2003)

The review of 20 samples of financial statements of listed companies conducted by the World Bank and the IMF in a joint ROSC initiative revealed that most financial statements did not report deferred taxes in the balance sheet. (ROSC 2003)

IAS 14: Segment Reporting (effective 1998)

NC

Colombian GAAP does not cover segment reporting requirements. (ROSC 2003)

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

II

There is no information publicly available that directly addresses this principle.

The review of 20 samples of financial statements of listed companies conducted by the World Bank and the IMF in a joint ROSC initiative revealed that most companies failed to provide information concerning restricted fixed assets that had been pledged as security. (ROSC 2003)

IAS 17: Leases (effective 2005)

NC

Colombian GAAP lacks clear-cut accounting rules and detailed disclosure requirements in the area of finance leases. (ROSC 2003)

IAS 18: Revenue (effective 1995)

II

There is no information publicly available that directly addresses this principle.

IAS 19: Employee Benefits (effective 2006)

NC

Colombian GAAP lacks clear-cut accounting rules and detailed disclosure requirements in the area of employee benefits. (ROSC 2003)

The review of 20 samples of financial statements of listed companies conducted by the World Bank and the IMF in a joint ROSC initiative revealed that several companies did not disclose the accounting policy used to account for employee benefit costs, or the legal nature and terms of the employee benefit costs, including vesting provisions, actuarial gains and losses, and the amounts recognized in the financial statements. (ROSC 2003)

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

II

There is no information publicly available that directly addresses this principle.

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

NC

Colombian GAAP lacks clear-cut accounting rules and detailed disclosure requirements in the area of foreign currency transaction and translation. (ROSC 2003)

The review of 20 samples of financial statements of listed companies conducted by the World Bank and the IMF in a joint ROSC initiative revealed that several companies did not recognize differences arising on the settlement of monetary items or on reporting the company's monetary items at rates different from those at which they were initially recorded, as income or expense in the income statement. (ROSC 2003)

IAS 23: Borrowing Costs (effective 1995)

II

There is no information publicly available that directly addresses this principle.

IAS 24: Related Party Disclosures (effective 2005)

II

There is no information publicly available that directly addresses this principle.

In Colombia, financial entities are required to present individual and consolidated financial statements at the end of the fiscal year. In the individual financial statements, the only information that is required to be disclosed refers to investments (ownership) or intercompany transactions or transactions with affiliates or with related parties. (KPMG/FELABAN 2002)

Related parties are considered to be the main shareholders, members of the Board of Directors and companies in which the bank has investments in excess of 10% or where there are economic, management or financial interests. In addition, companies where the shareholders or members of the board of directors have an interest exceeding 10%. (KPMG/FELABAN 2002)

The review of 20 samples of financial statements of listed companies conducted by the World Bank and the IMF in a joint ROSC initiative revealed that few companies that had related parties provided full information on related-party relationships and transactions in their financial statements. Most companies did not disclose the volume of transactions, outstanding amounts, or the pricing policies to determine arms-length dealings among the related parties. (ROSC 2003)

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

II

There is no information publicly available that directly addresses this principle.

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

II

There is no information publicly available that directly addresses this principle.

The Code of Commerce and Law 222 of 1995 require enterprises, which own more than 50 percent of the capital of other enterprises, to prepare consolidated financial statements in accordance with Colombian GAAP. The Superintendent of Banking issued Circular No. 100 that requires banks to prepare consolidated financial statements. The Superintendent of Securities issued Circular No. 1 of 1996 that requires listed companies to prepare consolidated financial statements. Because of some shortcomings of these legislative requirements, banks do not consolidate the financial statements of nonbanking subsidiaries, and vice versa. (ROSC 2003)

The review of 20 samples of financial statements of listed companies conducted by the World Bank and the IMF in a joint ROSC initiative revealed that some companies did not prepare consolidated financial statements in accordance with the requirements of the securities market regulator and the Colombian GAAP. Investments in subsidiaries were reported using the equity method of accounting. (ROSC 2003)

IAS 28: Investments in Associates (effective 2005)

NC

Colombian GAAP lacks clear-cut accounting rules and detailed disclosure requirements in the area of investments in associates. (ROSC 2003)

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

II

There is no information publicly available that directly addresses this principle.

IAS 31: Interests in Joint Ventures (effective 2005)

NC

Colombian GAAP lacks clear-cut accounting rules and detailed disclosure requirements in the area of joint ventures. (ROSC 2003)

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

NC

Colombian GAAP lacks clear-cut accounting rules and detailed disclosure requirements in the area of financial instruments. (ROSC 2003)

The review of 20 samples of financial statements of listed companies conducted by the World Bank and the IMF in a joint ROSC initiative revealed that several companies did not disclose required information for each class of financial asset, both recognized and unrecognized, including information about the company's exposure to credit risk. Many also failed to comply with various other disclosure requirements relating to financial instruments. (ROSC 2003)

IAS 33: Earnings per Share (effective 2005)

NC

Colombian GAAP lacks clear-cut accounting rules and detailed disclosure requirements in the area of earnings per share. (ROSC 2003)

The review of 20 samples of financial statements of listed companies conducted by the World Bank and the IMF in a joint ROSC initiative revealed that several financial statements failed to report earnings per share. (ROSC 2003)

IAS 34: Interim Financial Reporting (effective 1999)

II

There is no information publicly available that directly addresses this principle.

IAS 36: Impairment of Assets (effective 2004)

II

There is no information publicly available that directly addresses this principle.

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

NC

Colombian GAAP lacks clear-cut accounting rules and detailed disclosure requirements in the area of provisions and contingencies. (ROSC 2003)

The review of 20 samples of financial statements of listed companies conducted by the World Bank and the IMF in a joint ROSC initiative revealed that most companies failed to provide information concerning the existence of contingent liabilities and provisions. (ROSC 2003)

IAS 38: Intangible Assets (effective 2004)

II

There is no information publicly available that directly addresses this principle.

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

NC

Colombian GAAP lacks clear-cut accounting rules and detailed disclosure requirements in the area of financial instruments. (ROSC 2003)

IAS 40: Investment Property (effective 2005)

II

There is no information publicly available that directly addresses this principle.

IAS 41: Agriculture (effective 2003)

II

There is no information publicly available that directly addresses this principle.