Accounting Reform in Russia

The American Chamber of Commerce in Russia and the Expert Institute recently published the report on the Economic Situation and Investment Climate in Russia in year 2000, which addressed accounting in the following way.
Reform of financial reporting rules as applied today in the Russian economy is a pre-requisite for the revival of investment activity. Current rules do not enable outside users of financial statements to make timely and adequate conclusions on economic and financial performance of enterprises, which creates additional risks and reduces investment attractiveness of the Russian economy. Existing accounting rules also create unnecessary difficulties and additional costs for economic entities when taking management and investment decisions, as well as when raising foreign investments or loans, because they have to restate their existing accounts into international standards (GAAP, IAS). Besides, publicly traded companies face the problem of inadequate valuation of their market capitalization.
The Russian Government recognizes this problem, and for a number of years has been developing new Russian PBUs (accounting regulations) which comply with international accounting standards* . But the rate of development of new financial reporting rules is not satisfactory. By January 2000, the Accounting Reform Program envisaged the development and adoption of 22 main accounting regulations, however as of today only 14 of them have been adopted. In addition, these documents are not consistent with one another and with other regulations. Some of the approved accounting regulations do not comply, in some key areas, with the principles and objectives of International Accounting Standards.
Gref«s program treats the accounting reform as a prerequisite for modernization of the economy, but it only provides a conceptual description of government policy with regard to this. It seems that within the Government this issue, as it used to be in previous years, may be shifted to the background because an inefficient system of financial reporting does not cause unexpected macroeconomic crises that would require efforts and attention of the whole of the Cabinet. Besides, the Interagency Commission is slow because there is neither pressing demand for not interest in solving this issue. It is not by chance that for a number of years businessmen and investors have been drawing the Government»s attention to the poor quality of Russian PBUs. Each time they receive the same reaction of government officials: it takes a long time to complete methodological work on drafting accounting standards and their explanatory guidance, to develop training programs for accountants and personnel of state supervisory bodies, to create an official system for certification of accountants, etc. Thus, progress in accounting reform is insignificant and looks like a vicious circle.
By not arguing the necessity of all the aforesaid measures and recognizing that it is impossible to solve the problem of transition to IAS immediately, it seems that the completion of the accounting reform must come to the forefront the Government's tasks in 2001-2003. By creating a system of financial reporting fully compliant with IAS, investment attractiveness of the Russian real sector will increase, the range of potential investors will broaden and more intensive cross-flow of investment resources in the economy will be facilitated.
A key task is to amend existing regulations to permit or require banks and public joint stock companies and their subsidiaries to prepare full IAS financial statements in place of the current regulations and to draft the necessary consequential changes to tax and other regulations. This process may be accelerated by intensifying the work of the commission in charge. Experts from the biggest audit firms who have been restating RAS accounts into IAS financials for many years should be involved in this work. Besides, a number of the biggest Russian companies raising foreign capital have qualified experts whose competence would accelerate the drafting of changes in regulations to permit the use of IAS.
The difficulties involved in continuous alteration of tax legislation prove that financial staff of companies operating in Russia quickly grasp innovations in legislation. However, many problems arise when reporting to tax authorities and other supervisory bodies because of the insufficient number of official accessible explanatory guidance which would interpret disputable or unclear positions in regulations. Recent practice has shown that many problems arise when introducing terms borrowed from IAS which have not been previously used in the Russian accounting system.
Since experts have been restating RAS accounts for more than 5 years, experience has been gained in both drafting these new PBUs and developing Russian legislation in other areas (including harmonization and elimination of gaps in the current legislation). It seems that subject to the sufficient number of experts, drafting a legal framework for applying full IAS, the consequential changes and necessary methodological guidance might be completed within 12-18 months.
No doubt, a government program will be required to create necessary institutional and technical infrastructure, to train personnel in supervisory and other government agencies dealing with financial statements. In reality, as practice shows, re-training courses on new standards will last 3-6 months irrespective of the time needed to carry out the accounting reform – 1 year, 3 years, 10 years. The training is to start at the very last stage, which is quite reasonable. It does not make any sense to study rules that are not yet applied anywhere, if they can be changed, cancelled, etc.
Thus, key problem with accounting reform is drafting a legal framework to apply IAS in full at public companies and banks, which should be consistent with other regulations, be complete, clear-cut and non-contradictory. This is an expert task, which does not require substantial capital investment, institutional transformation or favorable exogenous factors, etc. The rate of its solution depends primarily on the interest of the Government.

Source: The American Chamber of Commerce in Russia, Expert Institute.

The complete version of this material is available from AmCham; website: http://www.amcham.ru.