Vera F. Massarygina
Introduction
In recent years the Russian accounting and audit environment progressed significantly towards international standards. But until now rather many differences between international and Russian accounting and auditing standards exist. The most important of them and some of the current changes in accounting and audit environment in Russia are being considered below.
The accounting reform program towards International Accounting Standards was adopted by the Russian Government In March 1998.
Since that time several Russian accounting standards have been adopted (for example, on financial statements, subsequent events, contingencies, revenues, expenses and so on). More than 20 national accounting standards are planned for adoption and we now have12 of them.
But until now many rather significant differences between IAS and Russian accounting standards exist. Among the main problems of Russian accounting practice which could be hard to understand for foreign accountants are the following:
- the special sense of the term «fair presentation»;
- the existence of so-called «low-value assets»;
- measurement of assets, the principles of depreciation accounting and impairment of assets;
- failure to consider hyperinflation;
- the problem of disclosures.
Fair Presentation
In accordance with Russian accounting standards, fair presentation means presentation of financial information in financial statements in accordance with Russian accounting legislation. It also allows that, if financial statements prepared on the basis of Russian accounting legislation do not present financial information fairly, the entity could use another basis and disclose the reasons for doing so.
However, in practice entities do not use this possibility and almost always prepare their financial statements on the basis of Russian accounting legislation. So the auditor’s report phrase that an «entity’s financial position and the results of its operations are presented fairly, in all material respects, in accordance with the law of Russia on accounting» does not mean that it’s financial position is presented fairly in the IAS context and it doesn’t mean that it is presented in accordance with IAS.
Low-Value Assets
Until now the Russian accounting standard on inventories includes the term «low-value assets» (it may be some objects of furniture and fixtures, computer equipment, instruments and so on). In spite of the fact that their useful lives may equal several years (3, 5 or even more), their value may be written off in accordance with the entity’s accounting policy, for example, at the moment of putting them in production.
It may seem ridiculous, but the IAS balance sheet may include a rather large amount of fixed assets while the Russian balance sheet may include a very small amount or even nothing. This is because of the significant accumulated depreciation and immediate expensing of low-value assets. Initial value of low-value assets cannot be revalued and so they can’t be impaired.
Asset Measurement
According to Russian accounting principles, assets should initially be measured at their cost, that is on historical basis. Their historical measurement can’t be changed except for the following: capitalizing of subsequent expenditures for property, plant and equipment or diminishing their initial value in a case when part of the equipment is put out of use, tangible fixed assets (except low-value assets) and their depreciation might be (or might not be) revalued annually and using lower of cost or market value for inventories, except for low-value assets. So, property, plant and equipment may not be impaired. In addition, as mentioned above, typically this category of assets excludes «low-value assets» normally included in this category of assets under IAS. As a matter of fact, throughout the 1990s property, plant and equipment and their depreciation were revalued several times on the basis of adopted indexes. So, without revaluation on the replacement basis, their balance-sheet value cannot be considered as fair. These are some of the reasons presentation in accordance with accounting legislation of Russia does not mean fair presentation.
IAS 4 and IAS 16 stipulate that, depending on circumstances , useful lives and depreciation methods should be changed . Those are impossible in Russia and, in addition, until now there is no special standard on intangible assets. So, intangible assets could not be revalued, their amortization could not be changed, they could not be estimated annually and there could be no recognition of impairment of intangible assets.
In addition, fixed assets’ useful lives cannot be changed and depreciation costs and the net book value are usually being formed on the basis of their useful lives, as set by the Government of Russia. Though Russian accounting standards would allow companies to use other fixed asset lives, they use those mentioned above as these must be used for tax returns. So, useful lives and accumulated depreciation, disclosed in the entity’s financial statements, may not give a true and fair presentation of the enterprise’s probabilities of getting future economic benefits associated with these assets. For example, according to the governmental regulations, useful life for computer equipment is equal to 10 years, but in reality it should be much lower and this type of equipment is usually being written off faster under IAS.
Hyperinflation and Lack of Adequate Disclosure
Being prepared on historical cost basis of accounting, Russian financial statements ignore the effect of inflation and there is no standard equal to IAS 29 in Russia, though the Russian economy falls within the definition of hyperinflationary. As mentioned above, only property, plant and equipment could (but usually would not) be revalued.
Finally, there are very many differences between Russian accounting practices and standards and the IAS, concerning disclosures. First of all, Russian accounting legislation does not contain such a wide range of items requiring disclosure. Secondly, disclosure regulations are often not complied within financial statements.
This is especially important for related parties for preparing consolidated statements on segment information of a group although methodological recommendations on consolidating financial statements and accounting for investments in subsidiaries were adopted in Russia in 1996 and the standard on segment information was adopted this year.
Other Accounting Issues
Failure to follow already established accounting standards results largely from compliance measures not being undertaken by the relevant authorities and from the fact that taxable bases are traditionally derived from the accounting records.
Until now there is no special standard on accounting and disclosure of government grants and government assistance in Russia. So, in financial statements entities must indicate only amounts of government grants, if any, and monetary grants, not other forms of government assistance. The legislation doesn’t differentiate grants related to assets and grants related to income and government grants are not recognized in the income statement.
Traditionally, financial statements in Russia include sheets of figures, without a description of the facts being considered significant for users. Nor are our accountants used to considering the entity’s statements in relation to events after the balance date (or «subsequent events»), though accounting standards on those issues do in fact exist.
Recently, in conformity with IAS 33, «Earnings per share» there were adopted methodological recommendations for calculation and disclosure of per share profit – for the period ending 31 December, 2000 and previous periods for historical comparability. But issuing the document in the form of recommendations, not a standard, and the complexity of the document for Russian accountants make it impossible to hope that the ideas of this IAS will be soon implemented in financial statements of Russian enterprises.
Auditors’ experience shows that the only way to have sound financial reporting on Russian entities is to do either a restatement of financial statements from those prepared according to Russian accounting principles to IAS or to maintain a double (ie second) set of accounting records in compliance with IAS.
Russian Auditing Standards – Comparable to ISA
Although there still exist very many significant differences between Russian and international accounting standards, Russian auditing standards are rather close to international standards on auditing (ISA). Their history is not very long: the first Russian auditing standard was on the auditor’s report, adopted in February 1996. The draftsmen of our auditing standards prepared them on the basis of the corresponding ISA. That is why there are not so many significant differences between our auditing standards and ISA as there are between Russian accounting standards and IAS. Now there are more than thirty principal Russian auditing standards, along with the glossary of terms, which are nearly the same as ISA.
Some of the main differences between Russian auditing standards and ISA are connected with the auditor’s report and the practical application of standards in other areas. These will now be discussed.
First of all, while some of Russian auditing standards were being drafted, IFAC approved new modern concepts, so ours turned to be close to older versions of ISA.
For example, these are ISA 320 and 400 on audit materiality and risk assessments and internal control. So, in Russia there exists a standard on materiality and audit risk and another standard on the study of the internal control system.
Auditors’ Reporting Issues
Some Russian auditing standards contain much more detail than ISA and vice versa. For example, the Russian standard on Planning suggests a preplanning stage which is not contained in ISA. ISA 700 «The auditor’s report on financial statements» contains many examples of the situations which illustrate the reasons for modified reports. Our standard on the auditor’s report neither includes so many illustrations of the matters that may lead the auditor to modify the report, nor envisages using an emphasis of matter paragraph, though it is mentioned in other paragraphs of Russian auditing standards.
The opinion paragraph of the Russian auditor’s report does not include mentioning an entity’s cash flows, but this is not of very much significance as they are included in financial statements as a whole in a format largely different from IAS.
The opinion paragraph of the Russian auditor’s report may be in a form that is unusual for foreign accountants. For example, a qualified opinion may be not expressed as being «except for» the effects of the matter to which qualification relates. Auditors often use words «with consideration of matters» or some others. This does not conform to our standard on the auditor’s report, but in practice auditors use the above-mentioned phrase even for non-material matters, though in that case the auditor’s report should be unqualified to conform with ISA.
ISA Without Russian Equivalents
Secondly, there are some standards that have no equivalents in ISA and several more of that kind are being drafted. The most important among those standards is on related services. The point is that the term «related services» in Russia means accounting, consulting, tax planning and so on, but does not include review, agreed-upon procedures or compilation. There are no standards on these three kinds of services so far, and they are now being drafted and going to be called «Engagements».
In addition, standards on internal auditing, internal quality control and some others are coming up in near future. These are almost all standards known to international auditing practice (along with the above-mentioned engagements to review financial statements, to perform agreed-upon procedures and to compile financial information). If there is no standard for some sphere in Russia, the legislation lets the auditor use the relevant ISA.
But the most important thing is that until now there is no standard on audit evidence – additional consideration for specific items, and this really creates a problem.
Lack of Application of Standards and Related Audit Issues
A lot of small Russian audit firms do not implement such necessary procedures as attendance at physical inventory counting or sending letters requesting confirmation of receivables. They often do not inquire into litigation and claims involving the client or the intentions of clients to continue to hold long-term investments. Many of these auditors do not pay any attention to disclosures, opening balances, comparatives, audit procedures regarding segment information, and so on.
Another specific item is that auditors in Russia traditionally pay too much attention to entities’ tax situations, rather to than their financial positions, results of operations, and related disclosures. Also, until now, there are no standards on auditing entities using service organizations, and on comparatives.
In addition, in spite of that fact that Russian auditing standards proclaim communications between predecessor and current auditor, we have no such practice yet. There are very many auditors and audit organizations in Russia which do not comply with procedures that auditing standards require. They also do not use the concepts of risk and materiality while planning and often have no plan and no documentation at all.
Until now, the existing system of Russian auditing standards includes neither the public sector perspectives of ISA, nor special standards for the government sector such as the US GAGAS. However, in January 2000, the Russian Government approved Regulation N81 on auditing governmental entities with significant amounts of total assets and/or revenue. Several thousand governmental entities must be audited under this Regulation and some governmental authorities suggest that there must be special rules adopted for auditing such entities.
But rather soon, maybe even this year or next, a lot of the problems mentioned above will be solved with the adoption of the Federal Law «On auditing» which is now under consideration in State Duma. With the approval of the Law we hope the practice of many Russian auditors of failure to comply with the standards will be over.
Summary
In summary, there are three main problem areas relating to Russian accounting and audit principles:
- Incompleteness and inconsistencies of Russian accounting standards as compared to IAS.
- Lack of understanding and application of such accounting standards as presently exist, with a continued undue emphasis on taxation as the primary purpose of accounting.
- In spite of the existence of Russian audit standards similar to ISA, failure of some auditors to understand and apply those Russian standards in the practice.
Promptly addressing these three standards areas, along with the necessary large-scale training effort, can lead to significant improvement in the quality of both accounting and audits in Russia.
Ph.D. Vera F. Massarygina, Russaudit Dornhof Evseev & Partner. She can be contacted by tel. (095) 217 2329.