IFRS Accounting Reform in France

National accounting systems' gradual adjustment to international financial reporting standards (IFRS) is a worldwide trend. France, alongside the other European Union countries, has drawn up a working program encompassing 50 themes of research into how to reform national accounting along IFRS lines.

Among other things this program provides for analysis and projection of French national accounting principles against the IFRS.

It is noteworthy that France«s national accounting rules and the IFRS offer different interpretations of assets depreciation, goodwill and intangible assets. Under French legislation the recognition of the post-employment benefit plan is not mandatory. There are no rules as to how to calculate earnings per share, including diluted earnings per share. Extraordinary items are given a wider definition than the IFRS allow for. Another distinguishing feature of French accounting rules from the IFRS is a lack specific rules of disclosing changes in capital, related parties» transactions, discontinuing operations and segment liabilities.

The FIFO method is not used for inventories valuation and the LIFO method does not imply inventorying at the recovery value.

French accounting lacks certain rules contained in the IFRS. There are some other discrepancies, too. French rules establish no provisions for financial instruments classification, while under the IFRS the issuer is obliged to classify securities shown in the balance sheet and to split compound instruments on this basis.

The treasury stock is shown as an asset on French balances, while under the IFRS it is interpreted as a reduction of capital. In Russian tradition, too, corporate securities bought out from the shareholders were shown as an asset. This discrepancy has been eliminated with the introduction of a new chart of accounts.

In both France and Russia deferred tax accounting either does not exist at all, or disagrees with the IFRS. For instance, under the French rules deferred tax balances are discounted, while under IFRS 12.53 deferred tax claims and liabilities shall not be discounted at all. French rules do not recognize deferred taxes on the basis of temporary differences occurring as a result of revaluation of non-cash assets in financial statements presented by foreign economic entities in the currency of a hyperinflationary economy. Under IFRS 12.15 a deferred tax liability shall be recognized for all taxable temporary differences. Under IFRS 22 business combinations are regarded as combinations of interests, and the shareholders exercise common control of the net assets. No party in that case can be regarded as a buyer.

Under French rules some business combinations are regarded as combinations of interest even though the buyer has been identified. Some assets on French entities' balances are shown as intangible assets, such as marketable securities, and depreciated, while under IFRS 38.7 these assets shall not be regarded as intangible. At the same time, in the process of an affiliate company acquisition part of the transaction concerning the acquired research and development is shown in French accounting as non-recurring expenses.

IFRS 22.27 advises interpreting such accounting articles as intangible assets.

Formation expenses, set-up costs, training and advertising costs under the French rules may be capitalized, while under IFRS 38.56 these costs are regarded as expenses.

There is a certain discrepancy as regards incomes from exchange differences on the settlement of monetary items. Under the French rules these incomes may be deferred, while under the IFRS 21.15 the exchange differences arising on the settlement of monetary items or on reporting an entity's monetary items at rates different from those at which they were initially recorded during the period should be recognized as revenue or as expenses in the period in which they arise. The differences in the formation, presentation and disclosure of financial information under French rules and the IFRS can be summarized as follows.

French companies have certain choices in presenting cash flow statements, while under IFRS 7.45 an entity shall disclose cash and cash equivalents separately.

Under the IFRS entities are expected to present segment statements. This is not done, if the board of directors decides this may cause harm to the entity.

France is a major world investor, with 16,000 entities controlled by financial capital. Alongside this there are 10,000 entities involving foreign investors from the United States, Britain, the Netherlands, Germany and Belgium in telecommunications, electronics, chemicals and pharmaceutical industry, retail trade, hotel business and public catering. For investors French entities translate their financial statements either by the rules of the investor country, or by the IFRS. Research has found that financial statements by subsidiaries using currencies of hyperinflationary economies are converted in France by several methods.

In the meantime, under IFRS 21.36 the financial statements of a foreign entity that reports in the currency of a hyperinflationary economy should be restated in accordance with IFRS 29 before they are translated into the reporting currency of the reporting entity.

It should be noted that the Russian system of accounting has many similarities to the French one. Russia, too, is in the process of reforming its financial reporting system in accordance with the IFRS. Research has been conducted in Russia into differences and discrepancies with the IFRS. There is a great deal of similarity in the ways in which both French and Russian rules are different from the IFRS. Both Russian and French rules lack specific requirements, found in the IFRS, for the disclosure of:

• Changes in capital as the main form of financial accounting;
• Value of inventories calculated by either FIFO or LIFO method at current costs;
• Certain segment reporting data;
• Related parties information.

There is also a lack of rules of how to account for assets depreciation.

Comparative analysis has shown that Russian and French national systems have certain deviations from the IFRS, so there is an urgent need for harmonization of these systems in the context of economic globalization. A great deal will have to be done to eliminate the identified differences and discrepancies either through amendments to national legislations or the transformation of financial reporting in compliance with international standards.

Rosa Kaspina is Head of International Accounting Department of AIKO consulting company. She can be contacted by e-mail kaspin@bancorp.ru.