Applying IAS in Financial Reporting by Russian Enterprises

Vitaliy Paliy

Editor’s Note: This article was extracted from a comprehensive and carefully-researched paper by Prof. Paliy and given as a speech to a recent conference on implementation of International Standards of Auditing. The article consists of Prof. Paliy’s introduction to the development of IAS, a summary of the main points of his text, and his conclusion. Readers who would like a copy of the full article can obtain it from ICAR or directly from Prof. Paliy.

Introduction

Russian economic reforms require assessment of the current accounting model as to whether it meets the needs of the market economy. There is a discussion about the necessity and possibility of applying International Accounting Standards (IAS) in Russian accounting. Some say that Russian accounting should be unique, others think it necessary to move promptly to a full IAS basis.

There have been two conflicting concepts of accounting model for a century and a half in different countries. The first concept provides information about a company’s liquidity, adequacy of its assets (measured at market values) to meet all outstanding liabilities. The second concept provides information that enables its users to assess whether assets are efficiently used, measure return on equity and loan capital.

These concepts were affected by differences in economic environment of different countries. The first concept was applied where companies raised most of their outside capital through borrowings and bank loans. The second concept was common where firms raised their capital primarily through equity on stock exchanges by attracting direct investors. There were significant differences in the reporting methodology of these models, which are summarized in the following table:

Russian (and Soviet) accounting traditions are based primarily on the first concept whereas Anglo-American traditions are based on the second concept. However, neither concept is applied fully in either country. The bias of accounting methodologies flows from the bias of different types of capital raising (either through stock exchanges or banks).

For the past few years there has been strong interest in cash flow information. A cash flow statement was included in the set of financial statements, which is not typical for these concepts. The continued globalization results in the need for elimination of unique national accounting treatments, move to a single accounting concept that brings together best-demonstrated practices of accounting traditions. IASs provide such a concept.

Summary Of Main Discussion Points

These include information familiar to many readers of Accounting Report, such as the early history of IAS, beginning in the 1970s and the objectives of the International Accounting Standards Committee (IASC) in developing IAS. These included serving the needs of investors, creditors, and other stakeholders in enterprises to have transparent, understandable, and complete financial statements; facilitating the market economy and its extensive capital markets; and providing for accountability of enterprise management and boards of directors. Also discussed is the potential conflict between transparency and confidentiality of financial information, which can be eliminated by strict compliance with IAS disclosure requirements.

There is also further interesting information, developed in considerable detail in this paper, such as:

• the extent of worldwide application of IAS (40,000+ large enterprises) and trading securities on stock exchanges ($360 trillion or ten times annual world GDP);
• evolution of acceptance of IAS, including this being driven by G-7, adoption by EC countries, and merging of US GAAP into IAS;
• completion of the «core standards» and progress in non-core areas, such as banking, insurance, extractive industries, agriculture, etc., as well as expected changes and amendments to the reporting of financial performance;
• history of accounting development in Russia, along with comments on why «moving towards IAS» rather than adoption of IAS has not resulted in workable accounting standards and systems in Russia and how the focus on tax-basis accounting creates obstacles and difficulties;
• the cumbersome processes of converting Russian accounts to IAS or developing extensive sub-accounts, parallel systems, and referencing, to produce both tax-basis and IAS financial statements, which often result in a costly dependence on independent audit firms;
• recent progress such as the May 2000 hearings of the Duma, the Government’s 2001-2010 plan for economic policy, and similar indications of a greater commitment to IAS; and

Two specific and important assertions by Prof. Paliy relate to the impact of MinTax’s dominant position in decisions on accounting policy:

• Tax-driven accounting results in distorted financial information, from which it is difficult to ascertain market value or determine whether or not a true and fair view is presented. Investors are cautious because they do not receive complete and transparent financial statements.
• The conservative stance of MinTax towards IAS cuts down investment, increases the cost of capital, and, in the end, does not increase the tax base.

Conclusions

IAS accounting can be regarded as a factor that increases completeness and transparency of financial statements. Those enterprises that will move to IAS accounting should be not be required to keep dual accounting records (i.e. RAS and IAS) and or to prepare RAS financials. Government agencies seem to be ready to take this step but additional organizational and legal measures are required:

• It is necessary to cancel a tax rule whereby companies must file financial statements to tax authorities;
• Enterprises should be permitted to prepare tax returns, schedules and calculations based on accurate analytical accounting records [i.e. sub-accounts]. Also, unreasonable tax sanctions for departures from accounting treatments should be canceled if there are no breaches and errors in tax returns;
• Some regulations on documentation of economic events should be canceled or streamlined;
• Enterprises should be permitted to move to an advanced European-style chart of accounts that records all necessary information for IAS financial reporting purposes;
• Enterprises should have an option not to keep RAS accounting records if they keep accounting records based on an IAS-compliant accounting policy;
• A Higher School for International Accounting should be set up to provide IAS training for qualified experts.

«Soyuzaudit» has developed a chart of accounts that records, aggregates and disaggregates information in full compliance with IAS. This work has been commissioned by the Russian Ministry of Finance, which permits enterprises to use it if they request it. The French Order of Accountants assisted in developing the chart of accounts.

However, Russian companies that seek IAS accounting seem, so far, to be unwilling to use the advanced chart of accounts. They believe that the current condensed Chart of Accounts can be adapted [to IAS] by using additional subaccounts. The MinFin’s Chart of Accounts has 60 synthetic accounts whereas the proposed advanced Chart of Accounts has up to 450 synthetic accounts (let alone subaccounts) and up to 150 management accounts, which is several times as much!

The advanced Chart of Accounts has separate classes of accounts for income and expenses (up to 80 accounts in each class), which provides additional opportunity to obtain necessary classifications of data for taxable profit assessment purposes. Tax reconciliation techniques have already been developed for some large Russian companies.

Techniques have been developed that enable companies to prepare extensive IAS disclosures based on underlying accounting data and these can be tailor-made for a specific company. This would help large Russian companies implement the Government Accounting Reform Program.

Our experience proves that there are so many difficulties in implementing IAS accounting in Russian companies even when there are qualified experts. It is necessary to retrain accountants in order to change their attitude to international standards, and help them to avoid focusing solely on tax aspects of financial accounting and their fear of giving up a chart of accounts that they have gotten used to. I think that Russian professional accounting and auditing bodies must undertake to bring the mentality of accountants in line with the requirements of the market economy at its globalization stage.

V.F. Paliy is Professor of at and a Senior Consultant for the firm, ZAO Soyuzaudit. He can be contacted by e-mail saudit@aha.ru or by telephone (095) 263 9941.