The Israel Accounting Standards Board is expected to determine that Israeli companies that transact mainly in foreign currency may continue reporting in dollars even after transition to financial reporting in nominal shekel terms.
However, senior officials at the Institute of Certified Public Accountants in Israel and at the Israel Securities Authority are divided as to how far-reaching the permit will be in practice.
Clause 29 of Public Statement 36 issued by the Institute of Certified Public Accountants, which deals with adjustment of financial reports to the CPI, states: "Financial reports may be adjusted according to changes in the foreign currency exchange rate (the representative rate) only under special circumstances justifying such presentation."
"In general, the circumstances would include one of two conditions A) All or most income was received in foreign currency, and all or most fixed assets were purchased in foreign currency; B) The reporting company's securities are traded on a foreign stock exchange."
Over the 15 years since Public Statement 36 was issued, severe criticism has been leveled at Clause 29, mainly due to the obscure language used in section A.
The Israel Securities Authority claims that this clause in fact permits almost any company the choice of reporting in dollars resulting in "chaos, and the loss of accounting's most important foundation: Comparability."
Given this, the original version of Accounting Standard 13 on the transition from inflation-adjusted to nominal reporting reads: "This accounting standard does not cite the currency in which a corporation presents its financial reports.
However, in most cases, a corporation uses the currency of the country in which it resides."
"If the corporation presents its financial reports in another currency, this Accounting Standard requires a statement of the reason for reporting in another currency.
Additionally, this Accounting Standard requires a statement of the reason for any change in the reported currency."
The clause's significance was the almost total elimination of dollar reporting, and an obligation for the vast majority of public companies to report in nominal shekel values.
And yet, in a public hearing last month, Clause 13 was criticized harshly, particularly by representatives of companies whose activity is transacted mostly in dollars
These included companies in the fields of high-tech, defense industries, aviation and diamonds.
However, it should be noted that the Clause relates in practical terms only to public companies, with only a partial effect on diamonds and defense.
Following the hearing, the professional committee of the Israel Accounting Standards Board decided on an addendum to the clause.
The addendum stated that the committee "recognizes the possibility of certain cases in which the functional currency of the corporation might be different from that of the country in which it resides."
"As soon as possible, the committee intends to issue guidelines for identifying the functional currency. The guidelines will be based on international, and other, accounting standards."
"Until those guidelines are issued, companies may continue reporting in currencies other than that of the country in which they reside only if they meet the circumstances and fulfill the requirements set out in Public Statement Clause 29 A which is still in force."
The committee's statement is mainly intended as a clarification of International Accounting Standard 21, upon which Israel's Accounting Standard 13 is based.
The clarification states in detail the circumstances under which a company may report in a foreign currency.
According to Adir Inbar (CPA), chairman of the professional committee at the Institute of Certified Public Accountants, the clarification grants Israeli companies a large scope for financial reporting in dollars.
"My interpretation is that financial reports in dollars will be done by those companies whose activities are mainly in dollars," Inbar said.
"The Public Statement 36 criteria will remain in effect for 3-6 more months, with all its problems, after which international criteria will be implemented."
This coming Wednesday, the professional committee of the Institute of Certified Public Accountants is scheduled to debate the matter of whether companies meeting these criteria will be permitted to report in dollars, or will be obliged to convert their financial reports to shekels.
Inbar believes that there is no sense in preparing financial reports in dollars and then converting them to shekels, and will move to have the Board support dollar reporting.
On the other hand, Dr. Eyal Sulgenik, chief examiner at the Israel Securities Authority belives in a narrow definitions only.
"Clause 29 is intended as a solution to the problem of adjustment for inflation, and applies to a specific group of companies. From the outset, its existence was justified only in cases of adjustment for inflation.
The Securities Authority's position was that when adjustment for inflation through CPI linkage is abolished, then other forms of adjustment must also be terminated," said Sulgenik.
"Because I believe that the cost of capital for investors in Israel is in shekels, and as adjustment is made in shekels, financial reporting should also be made in shekels."
"If you open the door to conversion to other currencies, there is no basis for comparison and this degrades the value of reporting," Sulgenik added.
"Today, no company operates solely in one currency. Even those who export all their goods still pay salalries and overhead in shekels."
Nonetheless, Yehuda Elgarisi (CPA, Isr.), the Securities Authority representative on the Israel Accounting Standards Board, agreed to allow for financial reporting in foreign currencies under limited conditions, while certainly not expanding on the existing possibilities listed in Clause 29.
Elgarisi pointed out that the Securities Authority has strict standards that must be met for a company to report in dollars.
"We believed that income that is all or mostly in foreign currency meant 90% of all income. In practice, the provision was interpreted as meaning 75%, which we agreed to."
"Sales counted as sales for in foreign currency are defined as sales abroad in hard currency, and not as dollar linked sales by building contractors."
Sulgenik believes that the Securities Authority will vehemently oppose a situtation whereby financial reporting in dollars will be broader-based than today.
It is worth noting that, according to Israel Accounting Standards Board bylaws, the Securities Authority and the Institute of Certified Public Accountants have veto power on standards they dislike.
It is believed, however, that matters will not reach a point of conflict and that, in the end, a way will be found to ensure the shekel's place as the primary currency for financial reporting, while the definition for dollar reporting will remain narrow.
Institute of Certified Public Accountants president Ofer Minirav, refused to comment on the matter until it had been formally discussed.
A response from Israel Accounting Standards Board chairman Eli Amir was unavailable as of web-posting.
Published by Israel's Business Arena on April 17, 2001.