Israeli GAAP

Generally accepted accounting principles in Israel

Generally Accepted Accounting Principles (GAAP) is the term commonly used to refer to the standard framework of guidelines for financial accounting used in recording and processing transactions and preparation of financial statements.

Any GAAP, including Israeli GAAP, includes the standards, explanations and clarifications to those  tandards, conventions and commonly accepted rules accountants should follow while preparing financial statements.

Historically different sets of such standards and rules - i.e. different sets of generally accepted accounting principles - were developed throughout the world, and among them Israeli GAAP. However, most of them, if not all, are based on certain basic principles and concepts which are usually referred to as conceptual framework for the preparation and presentation of financial statements. Such a framework's purpose is to establish concepts on which the preparation and presentation of financial statements for external users should be based.

Such comprehensive frameworks were developed both by the International Accounting Standards Board (IASB), which issued in 1989 its "Framework for the Preparation and Presentation of Financial Statements", and by the Financial Accounting Standards Board (FASB) in series of its statements dealing specifically with the framework - Statements of Financial Accounting Concepts.

Due to adoption of the IASB's Framework in Israel, Israeli GAAP is based on this Framework's concepts, which underlying assumptions are: accrual basis of accounting and going concern. Additional important concepts, adopted in Israeli GAAP through the said Framework, are qualitative characteristics of financial statements, such as:

• Understandability
• Materiality
• Relevance
• Reliability
• Comparability

Starting the year 1997, the organization, responsible for issuing new accounting standards and supplement interpretations and rules, which constitute Israeli GAAP, is the Israel Accounting Standards Board (IsASB). IsASB was established following an agreement between the Israel Security Authority and the Institute of Certified Public Accountants in Israel (ICPAs), both of them have agreed not to engage in Israeli GAAP setting after the formation of IsASB and that all Israeli GAAP setting will be made only through the IsASB. Prior the establishment of IsASB, the mission of Israeli GAAP setting was placed on the Institute of Certified Public Accountants in Israel; most of the accounting standards, issued by the Institute prior the formation of IsASB were adopted by IsASB and therefore are still considered to be a part of Israeli GAAP.

Soon after its establishment the IsASB decided to adopt the standards issued by the International Accounting Standards board, both IAS's and IFRS's (hereafter - IFRS's), turning them to the integral part of Israeli GAAP. The initial adoption process was on a standard by standard basis, until May 2005, when the Israel Accounting Standards Board announced about its decision to fully adopt in Israel IFRS for financial reporting of publicly traded entities as of the year 2008. Therefore, starting the year 2008, Israeli GAAP includes a full set of IFRS for public companies, and a set of accounting standards previously issued by the Institute of Certified Public Accountants as mentioned above and those international standards, which were adopted on standard by standard basis by the IsASB for private sector.

It should be mentioned that before the adoption of IFRS, Israeli GAAP was mainly influenced by locally developed rules and practices, including regulations of the Israel Security Authority and/or by the accounting principles generally accepted in the USA (US GAAP) with "home-made" Israeli adjustments to it. Considering the fact, that 2008 is the first year of full IFRS adoption for public companies in Israel, it is not clear yet, what will be happen to Israeli GAAP in respect of private entities, since the IsASB might slow down its process of the adoption of IFRS's on standard by standard basis rather concentrating instead of it on translating IFRS's to Hebrew and clarifying professional issues arising due to application of IFRS's by public entities.

In any case, due to adoption of a large part of IFRS, both as a full set of standards for public entities or on standard by standard basis for the rest, Israeli GAAP in overall seems to moving towards concept based accounting widely accepted in the world; this process should be highly welcomed by both reporting companies, users of financial reports and potential investors due to the increasing understandability and comparability of the Israeli entities' financial reporting for foreign market players and investors.