IAS Benefits for Russian Enterprises: Managerial Issues

Vladimir Vorushkin

Then discussing the move of Russian enterprises to International Accounting Standards (IAS), most experts tend to focus on the interests of outside users of financial statements and the need for Russia's integration into the world economy. So there has been a widespread view that only large Russian enterprises seeking access to international capital markets should be on a full IAS basis.

According to the Accounting Reform Program towards IAS, one of the major tasks of the reform is to «develop a set of accounting standards that would enable users, primarily investors, to obtain useful information». So, at the outset of the accounting reform, there has been no proper focus on the needs of internal users of financial information such as enterprise managers. However, operational management also requires information that is understandable, relevant, reliable and comparable. The latter attributes are the qualitative characteristics of IAS-based financial statements.

Management needs under the current Russian accounting system are not properly addressed partly due to the fact that historically Russian accountants have been performing mainly bookkeeping functions (i.e. recording business transactions that occur in the reporting period) as laid down by the central authorities for their needs. As for other countries, accounting is viewed in a much broader context. In addition to merely bookkeeping functions, a Western-style accountant is responsible for communicating financial information that assists managers in the decision-making process, planning and control. Accountants use their own professional judgment in estimating different items such as the useful life of Property, Plant and Equipment, loss on pending litigation, deferred taxes, present value of employee retirement benefits, etc. These examples prove that IAS-based accounting information has predictive value, which is crucial not only for professional securities market participants but also for enterprise managers, in particular, when entering into contracts with foreign counterparties.

The objective of this article is to cover the benefits arising from prompt adoption of IAS not only for large companies but also for management of other Russian enterprises irrespective of their size and ownership structure.

Benefits of IAS for Large Companies

The view that only large Russian companies should be on an IAS basis primarily follows from the fact that multinational enterprises are a driving force in the move towards international harmonization. In this respect, a separate note should be given to the way large Russian companies would benefit from harmonized standards such as IASs. The benefits are as follows:

• The preparation of group accounts would be cheaper and quicker. At the moment, parent companies have to restate RAS accounts of subsidiaries into IAS financials for consolidation purposes. If enterprises within a group are only on an IAS basis, cost reduction in terms of money and time will occur when preparing IAS consolidated financial statements. This is due to the fact that the cost of complying with a single framework would be cheaper than a large number of local regulatory frameworks.

• Accounting expertise within Russian multinationals (e.g. Gasprom) would become transferable between subsidiaries in different countries. This means that it would be easier to train staff to deal with multinational accounting issues.

• The fact that the enterprise, taken as a whole, would operate in a standardized environment should lead to improved internal control.

Benefits of IAS for All Companies

However, it should be noted that not only large Russian companies will benefit from prompt adoption of IASs. The move to IASs is no less advantageous to other Russian companies (including small and medium-sized enterprises). In particular, IAS accounting would enable all Russian enterprises to:

• Obtain improved access to funds and lower cost of capital, which results from increased transparency of operations and harmonization of standards.

• Reduce the cost of upgrading and training in accounting software over time. Given a volatile nature of Russian accounting legislation, companies often have to upgrade their accounting software as new regulations are issued. Unlike RASs, an IAS accounting model has already been established and will not be exposed to such frequent changes.

• Provide less scope for management abuses, i.e. minority shareholder rights would be better protected. This is achieved primarily through extensive disclosures about related party transactions, investments in associates, business combinations and earnings per share.

• Establish equal and trustworthy international business relationships. Foreign counterparties are more likely to deal with Russian economic entities which use the same accounting principles.

• Make better management decisions based on economic reality, thus ensuring more efficient use of capital and improved performance of companies.

The latter bullet requires thorough consideration because poor focus on management needs of Russian enterprises is one of the reasons for slow progress of the accounting reform towards IAS. The accounting reform will not be moving along at a fast pace until Russian managers clearly see what they will gain from IAS accounting in terms of cost-benefit analysis. The article gives below some specific examples of RAS and IAS differences in order to facilitate such analysis and prove that IASs provide better decision-support information as compared to RAS financial statements.

Timeliness

Timeliness is one of the features of good decision-support information. Under IAS, bank account transactions are recorded as they occur, thus ensuring accurate current information about the amount of cash available, whereas according to RAS requirements a book entry is made only after a bank account statement is received.

Prudence

According to IAS, Accounts Receivable are reported net of allowances for bad and doubtful debts, whereas RAS financial statements usually show full amounts of receivables. The thing is that under Russian legislation provisions for doubtful debts can be set up but they should be charged against net profit or loss, which serves as a strong disincentive for Russian enterprises.

Faithful representation

Under IAS, General and Administrative expenses must be excluded from the cost of inventories whereas, according to Russian accounting legislation (e.g. Government Resolution #552, dated 5 August 1992, as revised in May 2000), manufacturing enterprises should charge these expenses to production costs.

The above examples prove that, under RAS, correct valuation of current assets (i.e. cash, Accounts Receivable, inventories) does not seem possible. This results in material errors when making projections about working capital requirements. Given that many Russian enterprises finance their working capital through extensive borrowings, this might have an adverse impact on the cost of capital.

In addition, under IAS, Property, Plant and Equipment items are valued using the best estimate of their expected useful life, thus providing accurate information about future investments in replacement of fixed assets. In RAS accounting, statutory useful lives and depreciation rates are still widely used for groups of Property, Plant and Equipment items because they are allowable for tax purposes and Russian accountants are reluctant to keep two sets of records (i.e. financial and tax accounting records) in respect of depreciation expenses. The arbitrary nature of statutory useful lives and depreciation rates cannot serve as a reliable basis for management decisions.

Tax Neutral Effect of the Move to IAS

It should be noted that IAS implementation in Russian enterprises would have no effect on the tax base for computing profits taxes. A principal feature of IASs is their complete separation from tax regulations. Different methods of depreciation, accounting for bad debts, warranties, contingencies and many other differences are reflected in the so-called «temporary differences» between the carrying amount of assets and liabilities and their amount recognized for tax purposes. Under IAS, temporary differences that result in either deferred tax liabilities or deferred tax assets provide accountants with a cost-effective way of reconciling financial and tax accounting records.

IAS Compliance Costs

Prior to comparing costs to benefits of IAS adoption, it might be reasonable to quantify all the benefits as either cost savings or increased revenue. After considering the benefits of IAS compliance, an enterprise manager should analyze costs arising from the move to IAS. The costs are as follows:

• the cost of considering whether a particular standard is applicable to the entity;

• the cost of assembling the information;

• the cost of auditing the information;

• the cost of purchasing, training in IAS accounting software or upgrading existing software; and

• the loss of commercial advantage arising from increased disclosure.

Implementation

In my view, the Russian Chart of Accounts might turn out to be a cost-effective tool for prompt adoption of IAS. Russian enterprises will be able to achieve training cost savings if the Russian Ministry of Finance issues a revised Implementation Guidance on the Chart of Accounts which would establish proper accounting treatment for specific transactions and events in accordance with IAS as well as specify temporary differences in order to reconcile IAS accounting data to Russian statutory requirements. It should be noted that the above proposal does not undermine the importance of training in IAS.

To this end, the following recommendations are suggested:

• Individual Russian legal entities (i.e. not only groups of companies) should be permitted not to prepare Russian statutory accounts if IAS-based financial statements are provided; and

• It is necessary to increase Russian managers' awareness of all the benefits arising from prompt adoption of IAS.

Vladimir Vorushkin is ICAR«s Financial Analyst and is a qualified interpreter and translator specialising in financial, legal and accounting terminology who has helped develop much of the agreed Russian terminology in accounting and audit language. He was formerly with a »big 5« accounting firm and has a Master»s degree in finance.