A regular meeting of the Financial Reporting Council (FRC) took place on February 13, 2002. The results of the meeting were presented to the Standards Advisory Council (SAC) at IASC Board. The SAC meeting was held in London on 18 – 19 February 2002.
Besides the organizational part the following issues were discussed during the FRC meeting:
- Certain aspects of the IASC Board projects on the Improvement of the Existing IFRS and First Application of IFRS, that had been brought for discussion by the Board during the SAC meeting in February of 2002;
- Procedures and composition of the working group on Financial Reporting in extractive industries that was established in accordance with the FRC decision at its previous meeting in December of 2001;
- Amendments to the Provisional FRC Regulation concerning the appointment of the FRC Chairperson and members, and also termination of their authorities.
A meeting of the section International Financial Reporting Standards: application practices and perspectives in Russia was held within the Council on Corporate Governance on 4 April 2002. Representatives of companies that prepare financial reporting in compliance with IFRS, professional participants of the securities market and auditors participated in the meeting.
Necessity to transfer to the reporting according to IFRS was repeatedly discussed at high-ranking meetings, within the professional community and mass media. Any investor is primarily interested in obtaining adequate and fair information about the object of his investment. Unfortunately, today information about Russian companies in many cases fails to give a clear picture. According to certain international audit companies such gaps and problems regarding disclosures happen due to the accounting standards that are legging behind market needs very much rather than the audit itself. It should be noted that reporting data issued for «internal usage» and «for export» could have significant differences on the same positions. For instance, profit determined in accordance with the Russian rules in many instances is transformed into losses when determined in accordance with IFRS.
Similarly, amount and type of information disclosed for foreign users may several times exceed the information contained in the reports issued for Russian shareholders and regulatory authorities (for instance, in accordance with the IFRS it is required to provide detailed disclosure of transactions with affiliates, i.e. related parties).
Notwithstanding the fact that the Government does not provide direct support with respect to application of IFRS, a number of Russian companies have been using them for a long time already, and some companies intend to apply the standards. In the process of practical IFRS usage Russian companies face problems, which could be defined as following:
- Double costs burden in case of reporting under the Russian standards and IFRS; with adoption of chapter 25 of the Tax Code of the Russian Federation the burden has tripled, since the reporting requirements for taxation purposes have been added.
- Lack of qualified personnel, lack of the market of IFRS specialists; lack of the certification program for IFRS specialists in the Russian language, IPB certification program does not include IFRS.
- Difficulty when selecting a consultant on IFRS application as well as an auditor, inadequate IFRS specialists service market;
- Lack of practical guidance on the IFRS application, absence of a professional body that could provide qualified consultation on IFRS application.
Based on the discussion of the above listed problems during the meeting of the section on IFRS within the Council on Corporate Governance, the participants worked out certain proposals regarding the development of a supporting mechanism for IFRS application in Russia to provide assistance both to companies that are already applying IFRS, and also Russian investors in terms of their ability to obtain reliable information prepared under IFRS from the securities market participants by means of introducing relevant requirements regarding disclosures.
Proposals of the participants of the meeting on certain directions regarding the creation of such supporting mechanism for Russian companies in applying IFRS, are listed below:
Coverage of companies:
- Listed companies in the securities market or international capital markets;
- Financial institutions (banks, professional participants of the securities market, investment funds);
- Medium size companies that are already applying or willing to apply IFRS with intentions not related to entering the organized securities market;
- Special purpose charitable funds.
Legal support:
To cover the first stage of IFRS implementation in Russia (for more details see below) when presenting consolidated reporting in compliance with IFRS the legal support shall include:
- Changes and amendments to the legislation about joint-stock companies and securities market as to disclosure and consolidated reporting audit in accordance with the international standards and also in terms of securities listing requirements established by the organized market.
- Creation of mechanism of enforcing IFRS in the Russian Federation similar to the one being established in the EU «IFRS support». Create a body consisting of specialists, however, supported by the government bodies. This is the way the European Union has chosen for its development, i.e. it established the EFRAG organization in July 2001, which has proved the necessity to involve the administrative resource to promote IFRS in the West.
- Introduction of changes to the Auditing Law in terms of enforcing auditing of reporting prepared in compliance with IFRS.
To cover the following stages in IFRS implementation in Russia when presenting individual reporting in compliance with IFRS the legal support shall include:
- Ability to apply IFSR as an unified basis for financial reporting for the purpose of disclosing the financial situation of a company and of its corporate events; disclosing any significant facts of its business activity, using the IFRS data, for the purpose of corporate law (net assets evaluation and dividends),
- Legalizing of IFRS application on the matters not currently included in the Russian Accounting Regulation.
- Introduction of changes and amendments to the accounting legislation in terms of cancellation of mandatory audit of reporting provided under the Russian regulation in instances when IFRS compliant financials are audited.
- Settlement of the matters with regard to presenting of statistical data under IFRS to the statistical authorities.
- Development of regulations related to the tax base on the basis of IFRS.
Practical support
Practical support implies the development of practical recommendations on IFRS application by Russian companies. Such recommendations must be based on case-studies related to Russia, prepared within the projects promoting IFRS in Russia. It is necessary to publish and enforce the official translation of IFRS into the Russian language. Both translation and recommendations on IFRS application must be revised on a regular basis.
Personnel assistance implies
- The development of qualification requirements system for IFRS specialists including mechanism for certification of specialists;
- The adoption of a training concept for IFRS specialists (for instance, CPA, ACCA or other programs) and the development of relevant training courses based on Russian examples.
- The organization of a training system for specialists from investment companies and the business community in the overall on using reporting prepared in compliance with IFRS.
- To include IFRS topics into the certification program for professional accountants provided by the Institute of Professional Accountants in Russia.
- To develop a mechanism of recognition of international certificates for IFRS specialists (for instance, ACCA) in Russia.
IFRS implementation monitoring
- The creation of assurance mechanism or IFRS implementation on the basis of professional institutions and large audit companies. Government involvement to the extent of assuring compliance with established disclosure requirements in compliance with the legislation on joint-stock companies and the securities market.
- Recent scandals with certain very large audit companies may affect the global and the Russian markets for audit services. Still remaining an administrative country Russia certainly needs «a governmental» regulatory mechanism.
- In this regard the role of FCSM must be enhanced in terms of supervising auditors’ activity in the securities market. In order to ensure high professional level of regulating IFRS implementation in the securities market it is required to establish a professional body under the FCSM on the matters of practical implementation of IFRS .
IFRS Implementation Stages
First Stage. To require all listed companies to present their consolidated reporting in compliance with IFRS (US GAAP) beginning with 2004/2005. To require from companies submitting consolidated reports according to IFRS to do so in the Russian language starting from the 2002.
Second stage. To allow companies to make their choice between IFRS and Russian standards for the purpose of individual company reporting. To allow those companies that report in compliance with IFRS not to have their Russian reports been audited provided that IFRS reporting is audited.
It was also decided to set up a working group under FCSM of Russia to develop a supporting mechanism for IFRS application. Such group will be based on the FRC and the IFRS section of the Council on Corporate Governance.
For more detailed information on the activity of the Financial Reporting Council, please, refer to the ICAR website at http://www.icar.ru.