According to a 2004 World Bank assessment of Ecuadorian accounting and auditing practices, domestic companies follow the Ecuadorian Accounting Standards (NECs), which are based on the International Financial Reporting Standards (IFRSs) as they existed in 1999-2000. IFRSs have been revised since then and, consequently, the Ecuadorian standards fail to provide guidance in a number of sensitive accounting areas, thus undermining the quality of the available financial information. Banks and insurance companies follow accounting requirements set by the Superintendency of Banks and Insurance (SBS). These requirements, according to the World Bank, differ from IFRSs. It was therefore recommended that all public interest entities adopt and require mandatory application of IFRSs, and that the accounting principles for financial institutions and insurance companies be harmonized with the rest of the corporate sector. Furthermore, the World Bank suggested providing simplified accounting standards for small and medium sized enterprises. As far as the enforcement of accounting and auditing standards is concerned, the World Bank observed that both the Superintendency of Companies and the SBS, each of which is tasked with ensuring compliance with the financial reporting requirements, need to improve their practices in this regard.

General Overview

Accounting and auditing requirements for corporate entities in Ecuador are governed by the Companies Law of 1999. This law mandates that the financial statements be prepared in accordance with the standards issued by the Superintendency of Companies (SCE). The SCE adopted the Ecuadorian Accounting Standards (NECs) issued in 1999-2000 by the National Federation of Accountants of Ecuador (FNCE) as a result of a collective undertaking of a group of seven audit firms to develop national reporting standards. In 2004, the World Bank conducted a review of the accounting and auditing environment in Ecuador. International Financial Reporting Standards (IFRSs) (formerly known as International Accounting Standards, or IASs) and International Standards on Auditing (ISAs) were used as the benchmarks for assessing national standards. The Report on the Observance of Standards and Codes (ROSC) published as a result of the review concluded that, in Ecuador, "the standards were developed on the basis of respectively IAS and ISA, through the translation into Spanish of the original text in English" (p. 9). Since Ecuadorian translations were done without any international cooperation, the World Bank found differences between the text of the Ecuadorian standards and other existing translations of IFRSs into Spanish. Most importantly, the World Bank assessment noted that, despite being based on IFRSs, the NECs are "significantly less complete" as there is no continuing process for updating accounting or auditing standards in Ecuador. The World Bank, therefore, recommended the adoption and mandatory application of IFRSs by all public interest entities.

In addition to the requirements of the Companies Law, listed companies in Ecuador follow requirements laid out in the Securities Market Law (LMV). Empowered by the LMV, the National Securities Council (CNV) is the official securities market regulator and is responsible for issuing the chart of accounts and accounting standards for market registrants. However, ensuring compliance with the LMV or the CNV regulations is delegated to the SCE, which has the authority to conduct inspections and impose sanctions on auditors found in violation of these requirements. Banks and insurance companies adhere to separate financial reporting regulation. Governed by the General Law of the Financial System Institutions (LGISF) of 2001, banks, investment funds, savings and loans institutions must prepare their financial statements in line with the accounting requirements issued by the Superintendency of Banks and Insurance (SBS). These entities are required to submit monthly, quarterly, and annual financial reports to the SBS in the specified format and following certain accounting policies. Similarly, insurance companies follow specific financial reporting requirements set out by the SBS under the General Law on Insurance (LGS). The World Bank noted that "the accounting principles applicable to general-purpose financial statements of banks or insurance companies differ significantly from IFRSs" (p. 4). The assessment recommended harmonizing accounting principles for financial institutions and insurance companies with the enterprise sector. In addition, the World Bank assessment pointed out that, unlike the international requirement on consolidated financial statements, the Superintendency of Companies does not enforce this obligation on reporting entities. Although the national standard on consolidated financial statements was officially adopted in 2002, its application was postponed. As a result, only banks and insurance companies issue consolidated financial statements in Ecuador. Overall, the World Bank observed that Ecuador's existing legal framework provides an adequate basis for strengthening financial reporting practices. However, reforms maybe required in the longer term.

There is no legally established accounting standard-setting body in Ecuador. Empowered by various pieces of legislation, the SCE, SBS, and the Internal Revenue Service (SRI) are authorized to set their own accounting rules. While the SBS issues specific requirements for banks and insurance companies, the SCE, as the supervisor of all companies incorporated in Ecuador, adopt NECs for all the entities it regulates. Although the World Bank observed that the Institute of Accounting Research of Ecuador (IICE) - a non-profit accounting body - has been established for the development of accounting standards in Ecuador, it recommended establishing an independent, accounting standard-setting body.

The Law on Accountants passed by the Congress in 1966 lays down rules for the various aspects of the accounting profession. In 1991, the FNCE in collaboration with the IICE issued the Accountant's Code of Ethics. However, the World Bank noted that the code of ethics is not actively enforced and recommended amending the existing code in line with the International Federation of Accountants (IFAC) code of ethics. The World Bank also advised Ecuadorian authorities to establish an Audit Oversight Board for regulating the profession of public accountants. The FNCE is not listed as a member on the IFAC website.

The Principles

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

NC

According to the list of NECs available on the FNCE website, there is no corresponding standard in Ecuador.

IFRS 2: Share-based Payment (effective 2005)

NC

According to the list of NECs available on the FNCE website, there is no corresponding standard in Ecuador.

IFRS 3: Business Combinations (effective 2004)

NC

According to the text of NEC 21, Business Combinations, the corresponding Ecuadorian standard, the standard has been effective for periods beginning on or after January 1, 2001. NEC 21 is based on IAS 22 (later superseded by IFRS3) as revised in 1998.

IFRS 4: Insurance Contracts (effective 2006)

NC

According to the list of NECs available on the FNCE website, there is no corresponding standard in Ecuador.

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

NC

According to the list of NECs available on the FNCE website, there is no corresponding standard in Ecuador.

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

NC

According to the list of NECs available on the FNCE website, there is no corresponding standard in Ecuador.

IFRS 7: Financial Instruments: Disclosures (effective 2007)

NC

According to the text of NEC 2, the corresponding Ecuadorian standard, the standard has been effective for periods beginning on or after January 1, 1999. NEC 2 is based on IAS 30 (later superseded by IFRS 7) as revised in 1994.

IAS 1: Presentation of Financial Statements (effective 2007)

NC

According to the text of NEC 1, the corresponding Ecuadorian standard, the standard has been effective for periods beginning on or after January 1, 1999. NEC 1 is based on IAS 1 revised in 1997 and IAS 5 (later withdrawn) revised in 1994. However, the above mentioned international standards differfrom the version in effect as of August 2008.

IAS 2: Inventories (effective 2005)

NC

According to the text of NEC 11, the corresponding Ecuadorian standard, the standard has been effective for periods beginning on or after January 1, 1999. NEC 11 is based on IAS 2 revised in 1993. However, the above mentioned international standard differs from the version in effect as of August 2008.

IAS 7: Cash Flow Statements (effective 1994)

II

According to the text of NEC 3, the corresponding Ecuadorian standard, the standard has been effective for periods beginning on or after January 1, 1999. NEC 3 is based on IAS 7 revised in 1993. No information on the extent of compliance of NEC 3 with IAS 7 is publicly available.

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

NC

According to the text of NEC 5, the corresponding Ecuadorian standard, the standard has been effective for periods beginning on or after January 1, 1999. NEC 5 is based on IAS 8 revised in 1993. However, the above mentioned international standard differs from the version in effect as of August 2008.

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

NC

According to the text of NEC 4, the corresponding Ecuadorian standard, the standard has been effective for periods beginning on or after January 1, 1999. NEC 4 is based on IAS 10 reformatted in 1994. However, the above mentioned international standard differs from the version in effect as of August 2008.

IAS 11: Construction Contracts (effective 1995)

II

According to the text of NEC 15, at the time of adoption it was based on IAS 11 as revised in 1993. NEC 15 has been effective for periods beginning on or after January 1, 1999. No information on the extent of compliance of NEC 15 with IAS 11 is publicly available.

IAS 12: Income Taxes (effective 2001)

NC

According to the World Bank assessment, as of 2004, accounting for income taxes was not covered under NECs. .

IAS 14: Segment Reporting (effective 1998)

II

NEC 8 deals with the issue of segment reporting. However, there is insufficient information publicly available as to the extent of compliance of NEC8 with IAS 14.

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

NC

According to the text of NEC 12, at the time of adoption it was based on IAS 16 as revised in 1993. NEC 12 has been effective for periods beginning on or after January 1, 1999. However, the above mentioned international standard differs from the version in effect as of August 2008.

IAS 17: Leases (effective 2005)

NC

According to the World Bank assessment, as of 2004, accounting for leases was not covered under NECs.

IAS 18: Revenue (effective 1995)

II

According to the text of NEC 9, at the time of the adoption the standard was based on IAS 18 revised 1993. NEC 9 has been effective for periods beginning on or after January 1, 1999. However, no further information on the extent of compliance of NEC 9 with IAS 18 is publicly available.

IAS 19: Employee Benefits (effective 2006)

NC

According to the World Bank assessment, as of 2004, accounting for employee benefits was not covered under NECs. .

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

II

According to the text of NEC 24, at the time of the adoption the standard was based on IAS 20 effective 1995. NEC 24 has been effective for periods beginning on or after January 1, 2001. However, no further information on the extent of compliance of NEC 24 with IAS 20 is publicly available.

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

NC

According to the text of NEC 7, at the time of adoption it was based on IAS 21 as revised in 1993. NEC 7 has been effective for periods beginning on or after January 1, 1999. However, the above mentioned international standard differs from the version in effect as of August 2008.

IAS 23: Borrowing Costs (effective 1995)

NC

According to the list of NECs available on the FNCE website, there is no corresponding standard in Ecuador.

IAS 24: Related Party Disclosures (effective 2005)

NC

According to the text of NEC 6, at the time of adoption it was based on IAS 24 as reformatted in 1994. NEC 6 has been effective for periods beginning on or after January 1, 1999. However, the above mentioned international standard differs from the version in effect as of August 2008.

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

NC

According to the list of NECs available on the FNCE website, there is no corresponding standard in Ecuador.

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

NC

According to the World Bank, as of 2004, the obligation to prepare consolidated financial statements was not enforced by the SCE. The report noted that, as of 2004, only banks and insurance companies have issued consolidated financial statements in Ecuador. Furthermore, the assessment explained that "this represents a potentially serious weakness as non-consolidated information provides an incomplete if not distorted presentation of companies' financial position and economic performance" (p. 3).

IAS 28: Investments in Associates (effective 2005)

NC

According to the text of NEC 20, at the time of adoption it was based on IAS 28 (later revised). NEC 20 has been effective for periods beginning on or after January 1, 2001.

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

NC

According to the list of NECs available on the FNCE website, there is no corresponding standard in Ecuador.

IAS 31: Interests in Joint Ventures (effective 2005)

NC

According to the list of NECs available on the FNCE website, there is no corresponding standard in Ecuador.

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

NC

According to the World Bank assessment, as of 2004, NECs did not cover presentation and disclosure of financial instruments.

IAS 33: Earnings per Share (effective 2005)

NC

According to the text of NEC 23, at the time of adoption it was based on IAS 33 (later revised). NEC 23 has been effective for periods beginning on or after January 1, 2001.

IAS 34: Interim Financial Reporting (effective 1999)

NC

According to the World Bank assessment, as of 2004, NECs did not cover interim financial reporting.

IAS 36: Impairment of Assets (effective 2004)

NC

According to the list of NECs available on the FNCE website, there is no corresponding standard in Ecuador.

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

II

According to the text of NEC 21, at the time of adoption it was based on IAS 21, revised in 1998. NEC 21 has been effective for periods beginning on or after January 1, 2001. However, no further information on the extent of compliance of NEC 21 with IAS 37 is publicly available.

IAS 38: Intangible Assets (effective 2004)

NC

According to the text of NEC 25, at the time of adoption it was based on IAS 38 (later revised). NEC 25 has been effective for periods beginning on or after January 1, 2001.

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

NC

According to the World Bank assessment, as of 2004, recognition and measurement of financial instruments was not covered under NECs. With regard to banks, the assessment noted that SBS rules differ from IAS 39 in the accounting for impairment losses

IAS 40: Investment Property (effective 2005)

NC

According to the World Bank assessment, as of 2004, accounting for investment property was not covered by the NECs. With regard to banks, the assessment noted that the SBS rules differ from the international requirements as "IAS 40 offers a different treatment for the measurement of this type of asset, including a cost or a fair value model" (p. 12).

IAS 41: Agriculture (effective 2003)

NC

According to the World Bank assessment, as of 2004, accounting for agriculture was not covered by NECs.