Vitaly Paly
On March 1998, the Russian Government decided to reform the national accounting system towards IAS. The first 12 standards have already been approved. Last summer, M. Zadornov, the then Russian Finance Minister, said in his interview to the Accounting Report that in 1999 «there has been a lot of progress in terms of these regulations. Once again, these will not be a complete copy of IASs … This [ full adoption of IAS ] cannot be done because an accounting system is not to be considered isolated.» First of all, it [ the accounting system ] should not be separated from national accounting traditions and legislation. «The charts of accounts have not been changed for ages …» This was reasonable in the planned economy but cannot be tolerated in the current market environment. The new national standards and current chart of accounts do not allow to prepare financial statements on a full IAS basis, which is not a must for most Russian enterprises.
Companies listed on international stock exchanges or those planning to promote their financial instruments in international securities markets must prepare and present their financial statements in full compliance with IAS requirements. In May 1999, the Russian Finance Ministry permitted such enterprises to produce consolidated financial statements for groups of companies on a full IAS basis without filing such [consolidated] financials according to Russian standards and rules. However, it is not quite easy to make use of this permission because the current condensed Russian Chart of Accounts does not allow enterprises to prepare IAS-based unambiguous detailed information and provide necessary data for required disclosures.
Companies prepare their financial statements according to Russian rules and then hire expensive accounting firms to restate their accounts to IAS. But they fail to achieve required transparency of the restated financial statements due to the lack of accounting data, which has always been subject to complaints of foreign users of financial statements. Russian companies find themselves at a disadvantage in international stock markets and come across unreasonable difficulties in dealing with investors.
According to our estimates, there are some 200 large Russian enterprises and holding companies (many of them are already multinational) that have to adopt full IAS. Their number taken together with their subsidiaries and other separate companies is unlikely to exceed 2.5 or 3 thousand. The Ministry of Finance and Ministry of Trade and Economic Development have recognized the need to allow these enterprises to prepare financial statements and keep accounting records only on an IAS basis. Such enterprises do not need Russian statutory accounts. The data required for tax returns can be obtained from any properly organized accounting system. The most serious obstacle to full IAS accounting is an imperfect outdated chart of accounts that was adopted in 1959 and has not been materially changed ever since, even during the transition to the market economy. Only 10-12% of accounts were changed.
Chart of accounts. Soyuzaudit firm experts have been drafting a conceptual chart of accounts for commercial, financial and manufacturing activities for three years. Numerous discussions at meetings of the MinFin’s Accounting Methodology Council resulted in a European approach towards the chart of accounts for Russian enterprises. Three sessions of the Franco – Russian Expert Commission that included representatives from the Supreme Council of the French Order of Accountants, French Ministry of Economy and Finance, Russian Ministry of Finance, leading Russian and foreign experts discussed the concept and substance of the draft chart of accounts. They were approved on the whole.
The chart of accounts has separate sections for financial (both balance sheet and off-balance sheet) accounts and management accounts. The latter can be used to obtain confidential (undisclosed) accounting data for internal management purposes.
All accounts are broken down into ten classes. The first seven classes (from class 0 to class 6) include financial accounts while classes seven and eight include management accounts. The ninth (last) class brings together off-balance sheet accounts. All the classes are divided into groups of accounts. Each group includes up to nine homogeneous accounts, which enables to increase substantially the number of accounts as compared to the current chart of accounts.
The extended set of synthetic accounts enables to obtain transparent and detailed information for the purpose of preparing reliable and useful financial statements on a full IAS basis. Separate classes of accounts for expenses and revenues allow to use financial accounts in producing data for tax reporting. The chart of accounts also provides opportunities to file US GAAP financial statements if this is in line with the enterprise’s accounting policy.
The chart of accounts developed by the Soyuzaudit firm neither replaces nor supersedes accounting and financial reporting standards. It represents a tool for harmonized records and aggregation of data in accounts, defines the substance of specific accounts, indicates their possible correspondences and interprets account balances.
The IASC pronouncements state that enterprises cannot be on an incomplete IAS basis. The IASC stresses that «financial statements should not be described as complying with International Accounting Standards unless they comply with all the requirements of each applicable Standard». So in addition to a new chart of accounts, every company should have a complete and clear accounting policy that complies with requirements of all IASs applicable to the enterprise in question.
Accounting policies specify the substance and measurement of entries to be made in accounts and provide material, understandable and reliable data for the purpose of preparing financial statements with all the notes and disclosures required by IAS. Accounting policies should envisage the content and structure of statements as well as a set of projected indicators and other data to be disclosed in the notes to financial statements.
At the Parliamentary Hearing in the Russian State Duma, some speakers suggested that all Russian enterprises should move to full IAS accounting and financial reporting within 3-5 years time. Others suggested giving up the Accounting Reform Program and adopting IAS as of next January. Such approach cannot be accepted. Most of the Duma Hearing participants spoke in favor of a phased and voluntary move to IAS whereby different enterprise sectors and types can become mature enough [for adopting IAS]. The International Center for Accounting Reform recommended that the process should begin with the implementation of IAS at banks and other financial institutions, and for consolidated financial statements from enterprises the securities of which are publicly traded.
In Russia, like in many other countries, there are quite few enterprises that are interested in presenting financial statements in full compliance with IAS or US GAAP. But those enterprises that wish to prepare such financial statements should be allowed to use relevant accounting policies and an adequate chart of accounts. They should be free not to keep accounting records and prepare financial statements under Russian rules provided that they file tax returns in compliance with Russian tax legislation. I believe that the Russian Ministry of Finance is ready to take this step. The only thing to do is to convince the Tax Ministry. Most Russian enterprises will be operating according to Russian accounting standards that are based on IAS. Such companies will be moving to a new chart of accounts on their own as their needs change over time. The Russian Ministry of Finance has prepared a revised Chart of accounts that is based on the current Chart of Accounts and enables enterprises to keep accounting records in full compliance with new Russian accounting standards. The revised Chart of Accounts will facilitate operations of Russian enterprises in the new environment.
Vitaly Paly, Doctor of Economics, Professor, is Senior Advisor at ZAO Soyuzaudit. He can be reached by tel. (095) 263 9986 or by e – mail saudit@aha.ru.