Importance of IFRS in Ecuador
Globalization has an impact on the opening of capital markets around the world. This has been instrumental in increasing the importance and implementation of International Financial Reporting Standards (IFRS). The world’s capital markets, the competitiveness of companies at the international level and others have no borders, both investors and directors and general managers expect to have high quality financial information that is comparable anywhere in the world. This is how the idea of adopting IFRS in Ecuador as of 2008 arises.
In Ecuador for many years the Generally Accepted Accounting Principles (GAAP), presented in the Ecuadorian Accounting Standards (EAS), had been applied, and due to globalization and its adoption worldwide, the Ecuadorian state through the Superintendence of Companies, Securities and Insurance (SCVS) issued Resolution 08. of November 20, 2008, as amended by Resolution No. SCVS-INC-DNCDN-2019-009 for purposes of defining Small and Medium-sized Entities, substitutes numeral 3 of Article 1 of Resolution No. 08.G.DSC.010 of November 20, 2008, which establishes the schedule for the implementation of IFRS for Ecuadorian companies. Such adoption brings about important changes in the financial statement accounts that consequently have an impact on financial ratios.
Structure of Ecuadorian regulations
The complete International Financial Reporting Standards (IFRS) and the International Financial Reporting Standard for Small and Medium-sized Enterprises (IFRS for SMEs) are issued by the International Accounting Standards Board (IASB), a body created in London, and are accounting standards that are mandatory in Ecuador since 2010 for all companies reporting to the Superintendence of Companies. Whereas:
- The Full IFRS have been designed to be applied to the financial statements for general information purposes, as well as in other financial information, of all for-profit entities, for companies with public accountability obligations.
- IFRS for SMEs, are designed to be applied to the financial statements for general information purposes, as well as in other financial information, of all for-profit entities, for companies with no public obligation to render accounts.
Application of Standards
Resolution No. SCVS-INC-DNCDN-2019-009, which issues instructions for the application of the complete International Financial Reporting Standards “IFRS” and the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs), in companies subject to the control and surveillance of the Superintendence of Companies, Securities and Insurance (SCVS), establishes the following:
- The complete International Financial Reporting Standards “IFRS”, will be applied by those companies registered in the Public Cadastre of the Stock Market, as well as the reinsurance intermediary companies, insurance experts and advisors producing insurance, as well as all the companies that exercise external auditing activities.
- Companies with total assets equal to or greater than four million dollars, SMEs, holding companies, mixed economy companies, companies incorporated by the State, public sector entities, branches of foreign companies, foreign companies that exercise their activities in Ecuador, external auditing companies, that are not registered in the Public Cadastre of the Stock Market; may apply the IFRS standard for SMEs, taking advantage of the provisions of section 35 of said standard, which establishes the transition from IFRS for SMEs.
- The other companies not considered in the two previous groups will apply the IFRS for SMEs. Small and Medium-sized Entities (SMEs) are understood to be those companies that meet the following conditions:
- Amount of assets less than US $4,000,000.
- Record a gross annual sales value of up to US $5,000,000.
- Have less than 200 workers (employed personnel). For this calculation the weighted annual average will be taken.
Every company subject to the control of the SCVS, that opts for the inscription in the Public Cadastre of the Stock Market, will apply the complete IFRS.
If a company, regulated by the Law of Companies, which had been applying the complete IFRS, cancels its registration in the Public Registry of the Stock Market and decides to take advantage of the faculty provided in this Resolution, it may opt to apply the IFRS for the SMEs in the following fiscal year, for which it will be subject to the provisions of section 35 of said standard “Transition to the IFRS for the SMEs”.
The transition period for companies that changed their status will be the year of the change.
Classification of companies in Ecuador
Resolution No. SC.INPA.UA.G-10.005 of 2010.11.05, R.O. No. 335 of 2010.12.07, established the following classification of companies in the country:
- Large companies.
Article 294 of the Law of Companies empowers the Superintendence of Companies, Securities and Insurance (SCVS) to determine by means of a resolution the accounting principles of the Companies subject to its control and that they will apply obligatorily in the preparation of their financial statements.
By means of Resolution No. 06.Q.ICI.004 of August 21, 2006, the Superintendence of Companies, Securities and Insurance determined the adoption and mandatory application of International Financial Reporting Standards (IFRS) by the companies subject to the control and surveillance of this entity as of January 1, 2009.