Last year, the international standards for small and medium-sized entities were updated. These standards also form the basis for Estonian accounting guidelines. Local rules will soon change as well. The most significant amendment relates to the accounting treatment of returned goods.
Although Estonia adopts only what is strictly necessary from international standards to avoid excessive bureaucracy, changes to financial reporting will take effect from the new year.
Upcoming amendments were discussed on the programme Kasvukursil by members of the Accounting Standards Board, Riina Alt and Ago Vilu, and by Mart Nõmper, Head of Audit and Partner at Grant Thornton Baltic.
“One substantive amendment to be incorporated into Estonian guidelines concerns companies that sell goods subject to a right of return,” said Riina Alt, Head of Financial Accounting Advisory Services at EY in the Baltics.
When selling goods with a right of return, companies will in future need to estimate the proportion of goods expected to be returned. That portion of revenue must not be recognised. Instead, a liability must be recorded on the balance sheet for the obligation to repurchase those goods if the customer decides to return them.
In addition, companies will no longer recognise the cost of goods sold relating to items expected to be returned. Instead, they must recognise an asset representing the right to recover the returned inventory. A new subcategory will be added within inventories, and certain amounts related to it must be disclosed in the financial statements.
The Board also introduced a clarification reminding preparers that accounting follows the principle of “substance over form”.
“We amended one revenue recognition example and clarified that if goods are manufactured according to the customer’s specifications, the seller has no alternative use for them, and the contract obliges the buyer to pay for work performed to date, then the transaction is not a sale of goods. Instead, it is the provision of a manufacturing service, and the related revenue should be recognised over the production period using stage-of-completion methods. One cannot wait until the goods are completed and delivered from the warehouse,” Alt explained.
According to her, revenue recognition will in some cases occur slightly earlier. “This should already have been the case. One must always consider the economic substance of the transaction,” she added.
It will also no longer be necessary to assess whether and to what extent costs directly related to obtaining a sales contract should be capitalised and recognised in the balance sheet before being expensed later through profit or loss. Such costs will now be recognised as an expense when incurred. In Alt’s view, this should simplify the work of accountants.
Direction set by the expert committee
The Accounting Standards Board is a seven-member expert committee that directs financial reporting in Estonia. The Board develops and updates accounting guidelines that together form the Estonian financial reporting standard. A new composition of the expert committee began its term at the end of last year. Ago Vilu was elected Chair and Riina Alt Vice-Chair.
Alt noted that, going forward, costs related to the acquisition of an ownership interest will be recognised directly in profit or loss rather than included in the acquisition cost of the investment.
In some cases, acquisitions involve contingent consideration, which depends on the acquired company’s performance over a specified period after the acquisition and is paid once results are known.
“At the acquisition date, the fair value of such consideration must be included in the acquisition cost of the investment, provided it can be determined without undue cost or effort,” Alt explained.
If the fair value of the contingent consideration needs to be adjusted later, the adjustment will be recognised in profit or loss. The acquisition cost of the investment will no longer be revised, as has been done previously.
According to Alt, some changes were also made to disclosure requirements. One relates to the previously mentioned expected returns and the disclosure of the related amounts.
At the same time, certain disclosure requirements have been reduced. Companies will no longer need to disclose the maximum potential corporate income tax liability that would arise if all retained earnings were distributed as dividends.
The board welcomes feedback
Feedback on the updated Accounting Standards Board guidelines (RTJ) can be submitted until the end of February via email at easb@fin.ee.
The new version of the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) was issued in 2025 and will become effective from 2027. IFRS for SMEs is based on full IFRS. The two frameworks were last aligned nearly ten years ago.
The most significant change in IFRS for SMEs concerns revenue recognition. A five-step revenue recognition model has been introduced, mirroring the requirements of full IFRS. In certain cases, this may change the timing of when revenue can be recognised in accounting.
However, the Estonian Board decided not to adopt this model, as despite the fundamentally revised approach, it is expected to affect very few Estonian companies in practice and would add complexity to accountants’ work without materially changing outcomes. “We do not want to fix what works or introduce changes for the sake of change,” said Ago Vilu, long-time Managing Partner at PwC.
From the new year, full IFRS will also introduce changes to the presentation of financial statements to improve comparability. These changes apply to all companies regardless of their industry.
“In short, the presentation of information in the income statement will change. The income statement will become somewhat more similar to the cash flow statement. Income and expenses must be presented in several categories: operating activities, investing activities, financing activities, and at the bottom, income tax and discontinued operations,” Alt explained.
According to her, companies will need to map which income and expenses belong to which section. “For entities whose core activity is, for example, investing or financing, there will be some additional analysis required,” she noted.
In Estonia, full IFRS is mandatory for listed companies, credit institutions, banks and insurance companies. Others may apply it voluntarily. Large groups planning international expansion or seeking significant foreign investment or financing typically apply full IFRS.
Simplicity, simplicity, simplicity
The Accounting Standards Board aims to keep Estonian accounting guidelines as simple as possible and focus on areas that are important locally. Therefore, Estonia does not automatically adopt everything from international standards.
One international amendment is specifically designed to simplify reporting for subsidiaries within large groups. Subsidiaries whose securities are not publicly traded and whose parent prepares consolidated financial statements under full IFRS will be allowed to apply the same accounting policies as the parent, but with significantly reduced disclosure requirements compared to a standard IFRS report.
The objective is to reduce duplicate accounting and administrative burden. Currently, many subsidiaries must prepare one set of financial statements under local guidelines and another, under entirely different rules, for the parent company to enable consolidation.
“Audit reports contain increasingly more remarks. A typical comment is that a particular aspect of the Accounting Standards Board guidelines has not been followed,” said Mart Nõmper, Head of Audit and Leading Partner at Grant Thornton Baltic.
According to Nõmper, this may also reflect improved audit quality. In the past, certain issues might have been overlooked in haste; today, errors are more likely to be identified, resulting in more remarks.
Audit remarks are, in essence, recommendations. “The auditor is independent. Half-jokingly, one might say that nothing depends on us. However, readers of the financial statements may decide to act on the information included in the auditor’s opinion,” he noted.
Nõmper also emphasised that an audit remark is not always negative. For example, management’s assessment of an asset’s value may sometimes be difficult to measure or verify clearly. In such cases, the auditor may be unable to express an opinion. “This indicates a limitation in the scope of the audit rather than an obvious error in the client’s report.”
According to Mart Nõmper, in many countries it is common practice to present the auditor’s opinion at the very beginning of the annual report. “If it is stated upfront that everything is correct, the annual report can be read with greater ease. If there is a qualification, it is better to know this at the outset rather than after having read the entire report,” he said.
In addition to changes to the Accounting Standards Board’s standards, the programme Kasvukursil also covers reporting quality, the work of the Accounting Standards Board and the shortage of auditors.
In the photo from left to right: Mai Kroonmäe, Ago Vilu, Riina Alt ja Mart Nõmper.
Photo credit: Äripäev
To stay informed about economic developments, legal updates, and key trends in our services, subscribe to our newsletter.
