IMPROVED FINANCIAL REPORTING FOR EASY ACCESS TO FINANCE AND GROWTH OF BUSINESSLaunch of the GGF Project:

CORPORATE FINANCIAL REPORTING FOR IV CATEGORY ENTERPRISES

29 March 2018

Mr. Nikoloz GAGUA, Deputy Minister of Finance of Georgia

Mr. Ben LUCKOCK, Regional Portfolio Manager, UK

Embassy

Mr. Yuri DOLIDZE, Head of Service for Accounting,

Reporting and Auditing Supervision (SARAS)

Welcome Remarks:

Improved Financial Reporting for Easy Access to Finance and Growth of Business | GGF project

IMPROVED FINANCIAL

REPORTING FOR IV CATEGORY

ENTERPRISES

Project overview by:

Mr. Michael WELLS, GGF Project Team Leader

Improved Financial Reporting for Easy Access to Finance and Growth of Business | GGF project

Micro, Small and Medium Enterprises (MSMEs) generate immediate employment opportunities with relatively low investment. In addition, they support entrepreneurship development and innovation.

Rational behind the reform/project

94%

6%

43%

57%

21%

79%

99%

1%

67%

33%

57%

43%

Georgia

EU

2017 May Annual Report on EUROPEAN SMEs 2015/2016

Statistics indicate that Georgia has room for improvement of value added and employment rates in MSMEs.

% of active Enterprise % of employment % value added

4Improved Financial Reporting for Easy Access to Finance and Growth of Business | GGF project

Note: Category IV entities cannot be a sole entrepreneur.

Regulatory Framework – Classification criteria and requirements

for IV category enterprises

Improved Financial Reporting for Easy Access to Finance and Growth of Business | GGF project

Entity Classification

IV Category (Micro)

III Category (Small)

II Category (Medium)

I Category (Large)

Assets

< 1 mil.

< 10 mil.

< 50 mil.

> 50 mil.

< 2 mil.

< 20 mil.

< 100 mil.

Revenue ANE

> 100 mil.

< 10

< 50

< 250

> 250

Standard for Financial Reports

Local Standard

IFRS For SMEs

IFRS For SMEs

IFRS

Management Report

Voluntary

Voluntary

Mandatory

Mandatory

Audit Requirement

Voluntary

Voluntary

Mandatory

Mandatory

5

Category IV enterprises will benefit from:

Having basis to more comprehensive

accounting frameworks

Reduced administrative burden/cost

savings

More complete and accurate financial

information available to:

Credit rating agencies

Banks and Micro-financiers

Tax Office

Support the social and economic development strategy of Georgia

Benefits of the reform/project

Improved Financial Reporting for Easy Access to Finance and Growth of Business | GGF project 6

Process of standard development

Improved Financial Reporting for Easy Access to Finance and Growth of Business | GGF project 7

Assessment Phase

Develop new Standard

Implementation support

• Analysis of Georgian, Estonian, UK, Polish, Irish, Singaporean GAAP

• Online survey of IV Category enterprises

• In-depth interviews with accountants

• Drafting working papers

• Consultative Group meetings

• Kick-off event

• Drafting Standard

• Communicating with SARAS and other stakeholders

• Communicating the draft standard with Consultative Group

• Self-learning material

• Awareness workshops

• Pilot financial statements

• Success stories of 10 IV Category Enterprises

February 2018 March 2018 June 2018 October 2018

Project Team

8

Team Leader

Mike Wells, International expertbringing expertise of financial accounting and reporting

Senior Consultant

Aleksandra Rytko,International expertSupporting team leader in drafting corporate financial accounting and reporting standards

Quality Assurance

Lasha Janelidze,Partner at PwC GeorgiaAudit and AssuranceQuality assurance, beneficiary relationship

Project Manager

Nini Eliashvili,Manager PwC GeorgiaAdvisory ServicesOverseeing the overall project execution

Communications Expert

Nina Beradze,Manager PwC Georgia Advisory ServicesSupporting developing communication channels and campaigns for raising awareness

Senior Consultant

Levan Batiashvili,Senior Consultant PwC GEAdvisory ServicesSupporting team leader in drafting corporate financial accounting and reporting standards

Senior Consultant

Nika Koiava,Senior consultant PMCGSupporting team leader in drafting corporate financial accounting and reporting standards

GESI Consultant

Mariam JaJanidzeGender Equality and Social Inclusion Expert Researcher

Nino Khatisashvili,Consultant PMCGsupporting research and analytics

Improved Financial Reporting for Easy Access to Finance and Growth of Business | GGF project

Results of the Assessment

Improved Financial Reporting for Easy Access to Finance and Growth of Business | GGF project 9

Responses rate: 16,169 out of 80,000 entities (20%)

In-depth in-person interviews: 24 accountants serving more than 60 IV

Category enterprises

Key findings:

• Category IV entities are aware of the forthcoming Standard

• Self-learning material will be useful if detailed; written in simple language; and including examples for a range of industries

• Would also find useful if practical workshops/trainings useful

• Wider stakeholder engagement ensured to support SARAS in developing Category IV Standard.

• Expert team of accountants, tax authorities, regulators, banks and professional associations formed to discuss Staff Papers, including preliminary views on basis of:

• Experience from other jurisdictions

• Georgian context (stakeholder perspectives analysis)

• EU Accounting Directive

• Opportunity for other interested stakeholders to contribute to the Exposure Draft Standard.

Consultative Group

Improved Financial Reporting for Easy Access to Finance and Growth of Business | GGF project 10

Simplification considerations

• satisfy legal requirements

• Cost or burden < benefits to Georgian Category IV-entities

• Minimise complexities in the accounting

• Do not explicitly specify detailed accounting requirements forinfrequent transactions, conditions and events (next slide).

Consultative Group consensus (1)

Improved Financial Reporting for Easy Access to Finance and Growth of Business | GGF project 11

Consultative Group consensus (2)

Improved Financial Reporting for Easy Access to Finance and Growth of Business | GGF project 12

Infrequent economic phenomena

• long term employee benefits

• investments in associates, joint ventures or subsidiaries

• share-based payment

• complex financial instruments

• business combinations and goodwill

• equipment dismantling and site restoration costs

• service concession arrangements

• sale and lease-back transactions

• hyperinflation

• expenditures on the exploration for and evaluation of mineral resources

• multiple element sales

IV Category simplification

• True and fair view presumption (only 3 notes)

• No consolidated financial statements

• No accounting policy choices and appropriately simplified accounting

• Simplified measurement (no fair value, no actuarial valuation methods, etc.)

Consultative Group consensus (3)

Improved Financial Reporting for Easy Access to Finance and Growth of Business | GGF project 13

Other Categories

• Extensive note disclosures & presentation judgements

• Consolidated and separate financial statements

• Many accounting policy choices and much more complex accounting

• Complex measurements requiring experts and significant judgements

Transition

• Transition principle: retrospective application (apply from01/01/2017)

• However, in first financial statements can choose:

• not to present comparatives (apply from 01/01/2018)

• to present only balance sheet (apply from 31/12/2018)

• to use deemed costs

Consultative Group consensus (4)

Improved Financial Reporting for Easy Access to Finance and Growth of Business | GGF project 14

Level of complexity of IV Category equivalent Standards

Improved Financial Reporting for Easy Access to Finance and Growth of Business | GGF project 15

Le

ve

l o

f C

om

ple

xit

y

EU Directive Minimum Requirements

IFRS for SME / Micro Guide

Georgian IV Category Standard

ASEAN Micro Standard

UK and Ireland FRC 105

Polish Micro Standard (AA)

Estonian Micro GAAPDefunct 2005

Georgian GAAP

Moderated by: Mr. David MCHEDLIDZE, SARAS

Panelists:

Ms. Nino CHIKOVANI, President of Georgian Chamber of Commerce and Industry

Mr. Irakli KHATIASHVILI, Head of Micro Business

Management Division, TBC Bank

Mr. Aleksandre GOMIASHVILI, General Director, CreditInfo

Mr. Shalva Akhrakhadze, Director, Financial Laboratory

Mr. Levan BAINDURASHVILI, Revenue Service

Ms. Mariam JAJANIDZE, Gender Equality Social

Inclusion expert

Panel discussion: Introduction of financial reporting standards, potential benefits and key players

Improved Financial Reporting for Easy Access to Finance and Growth of Business | GGF project 16

• Based on the findings from the IFC’s Enterprise Finance Gap Assessment Database, it

is estimated that globally there are roughly 9.34 formal million women-owned

SMEs in over 140 assessed countries, which is approximately one third of all

formal SMEs;

• IFC estimates that as many as 70 percent of women-owned SMEs in the formal

sector in developing countries are unserved or under-served by financial institutions. This amounts to a financing gap—and a missed business opportunity—of approximately $260 – $320 billion per year.

• SME Policy Index: Eastern Partner Countries 2016 recommends Georgia to introduce targeted support measures for women entrepreneurs

Gender Equality and Social Inclusion

FMC Manual| GGF project 17

Statistical information

• 52.08% percent of Georgian population are women.

• 21.9% of men and 41.1% of women are economically inactive (2015);

• 31% of newly established enterprises are registered by women from 2013 for each year.

Preliminary Findings:

• Challenges in access to finance;

• Lack of awareness on how to start entrepreneurship;

• Available gender statistic is not enough to identify key challenges

Gender Equality and Social Inclusion

FMC Manual| GGF project 18

Questions?

FMC Manual| GGF project 19

THANK YOU

FMC Manual| GGF project 20