The Accounting Reform Recommendations

International Center for Accounting Reform recently completed a consultation process in which it formulated with nearly 100 Russian and international organisations a series of detailed procedural recommendations for the implementation of accounting reform. These recommendations were intended to represent a goal (for non-governmental enterprise accounting) and to give technical substance to the often-heard simplistic remark from non-specialists that IAS should be adopted.

Legislation

Legislation should create a favourable environment to support IAS adoption by enterprises, and provisions that would otherwise prevent or act as an impediment to IAS adoptions by enterprises should be changed. Therefore (as recognised below) enterprises which prepare IAS financial statements should be permitted not to have the burden of also complying with RAS and the regulatory obligations based thereon; they should be revised to also be based on IAS.

Russian Enterprises should adopt IAS in Full

The Russian economy should adopt as a medium term goal (over ideally 3 to a maximum of 5 years) the replacement of RAS with full IAS for the financial reporting of all enterprises other than small and privately owned companies. The objective should be met by a phased process whereby different enterprise sectors and types be permitted and in some cases be required to adopt full IAS (in place of RAS) in a sequence and according to a definite timetable. Adoption of parts of individual IAS gives misleading results and should not occur.

Immediate IAS Adoption by Banks, Listed Companies and Optionally by Others

The process should begin with the implementation by 31 December 2001 of full IAS financial statements in place of RAS at banks and other financial institutions, and for consolidated IAS financial statements from enterprises the securities of which are publicly traded.

Subsidiaries of listed companies and of banks should have the option to follow full IAS in place of RAS. All other Russian open joint stock companies, and the Russian subsidiaries of groups which prepare IAS consolidated financial statements, should at this stage also be able to elect to prepare their financial statements in full compliance with IAS, in place of RAS.

Whenever state shareholdings of significant value are being sold, IAS financials should be prepared for incorporation in the sales prospectus

Wherever significant state shareholdings are being sold consideration should be given to the preparation and use in sales prospectuses of IAS financials (if possible audited).

Unitary enterprises subject to audit should prepare IAS financial statements

A program should be developed whereby the unitary (ie 100% state owned) enterprises, which have recently become subject to compulsory audit, will also move to an IAS basis of financial reporting in place of RAS.

The Russian accounting standards being prepared by the Government accounting reform program should refocus on the needs of private companies and small companies

The Russian specific enterprise accounting system (ie RAS) now being developed should be streamlined and:

• should be focused on the needs of small enterprises and of privately owned (for example closed joint stock) companies;
• should result in those enterprises facing a simplified and much reduced accounting burden and producing financial statements consistent with a simplified version of IAS, in conformity to the IAS Framework. One example of this is the EU 4th Directive.

Tax Neutral Changes from IAS and Reconciliation Forms Needed

Bookkeeping and (legal entity) financial reporting changes to introduce IAS should be tax neutral (ie they should effect the record keeping system and method of tax calculation but not the actual size of tax liabilities). A system of computer compatible tax reconciliations should be developed under which enterprises reporting IAS financials should report their tax liabilities using the IAS based system, as the starting position in tax calculations. There should, where relevant, be simplified tax reconciliations for small companies and private companies.

The changes should also be neutral for the financial reporting needs of regulatory bodies (for example, the prudential supervision by the Central Bank), which therefore will have to devise reconciliation forms to enable their needs to be addressed. Alternatively these regulatory reporting needs could in due course be refocused using IAS based financial information.

The State statistics system needs to take into account IAS based reporting

The obligatory reporting of statistics should be permitted by IAS reporting enterprises on an IAS basis (for example, costs/revenues calculated on an accruals basis and using substance over form). Therefore the official methods used for processing and using statistical data from enterprises should be revised to cover also statistics prepared on an IAS basis.

The currently obligatory charts of accounts should be revised to facilitate IAS and ideally made optional

The obligatory national charts of accounts should be modified for enterprises using IAS to facilitate their effective use of IAS. It would be preferable also if compliance with the currently obligatory national charts of accounts and accounting registers, by those enterprises which prepare IAS financials and utilise the proposed tax (and regulatory reporting) reconciliation system, should be optional.

Guidance, explanations and model examples of IAS applications for Russian enterprises should be prepared and widely disseminated

Extensive Guidance, model examples and explanations of how Russian enterprises can apply IAS in practice are needed and should be widely disseminated.

A professional association of accountants such as IPA should be developed and empowered to take the lead on IAS training and IAS certification

IPA or a suitable alternative body should be developed expeditiously into an effective, fully funded, independent professional association for, and widely representative of, the accounting profession in Russia. It should take the lead in training, certification and the integration of full IAS in the profession, which should include a high quality internationally recognised IAS competency examination.

Adequate resources should be provided for the reforms particularly in training enterprises’ staff

An adequate quantity of financial and technical staff resources should be provided to implement the reforms, particularly:

• in guiding this staged transfer to IAS;
• in giving guidance and training for Russian enterprises and their staff to apply IAS in practice; and
• in the implementation of the consequential effects for official taxation and other ministerial bodies which currently base their needs on RAS and which will need to develop new procedures based on IAS.

The Parliamentary Commission has provisionally adopted the substance of many of these ICAR recommendations. Further meeting is pending to finalize the Commission’s draft recommendations discussed at its May and July meetings.