The worldwide tendency towards a common economic space leads to a fair need for unified requirements for financial reporting. Having entered into the WTO Russia, as one of the largest members of the international trade, faced the implementation of the International Financial Reporting Standards.
In order to comprehensively embrace the importance of this matter it is necessary to understand what the International Financial Reporting Standards are. While the Russian legislation mainly regulates the accuracy of transactions in bookkeeping, the IFRS set out the rules for preparation of financial statements. Even the widely accepted term the RAP reads as the Russian Accounting Principles and the IFRS reads as the International Financial Reporting Standards.
The International Financial Reporting Standards allow to increase transparency of the companies’ activities, broaden the opportunities for analysis of their financial details, simplify the procedure for accessing the international markets. All the above is required in order to eventually increase the financial attractiveness of the Russian economy and to simultaneously allow Russian companies to be equal members of the international business community.
The idea of implementation of the IFRS in Russia first appeared in early 90s. Ever since the government has been on its way to a complete transition to financial reporting in accordance with the international financial reporting standards. One cannot say that implementation of the international reporting standards in Russia is smooth and easy. The difficulties of the transition to the IFRS are caused by a number of fair reasons: the significant differences between the requirements of the RAP and the IFRS, contradictory Russian legislation, high cost of the transformation process.
In December 2011 there was a crucial event for the financial experts – in accordance with the Order of the Ministry of Finance of the Russian Federation dated 25/11/2011№ 160н and upon confirmation with the Federal Department for Financial Markets and the Central Bank of the Russian Federation after its official publication the International Financial Reporting Standards and the Interpretations thereof have come into force in the territory of the Russian Federation.
According to the Resolution of the Government of the Russian Federation dated 25.02.2011 № 107, prior to the enactment of the IFRS documents there had been the assessment for the implementation thereof in the Russian Federation, it had been carried out by the expert committee – the NOIFRS Fund (the National Organization for the International Financial Reporting Standards). The assessment was completed on October 10, 2011.
The copies of the IFRS were registered at the Ministry of Finance of Russia on 05/12/2011 and published in the annex to the journal “Accounting” («Бухгалтерский учет») № 12, 2011. By with the Order of the Ministry of Finance of the Russian Federation dated 22.11.2011 г. № 156н they have been defined as the official publication in order to publish the Standards and the Interpretations. The copies of the IFRS are also made available on the web site of the Ministry of Finance and in the reference databases.
On the one hand this event is viewed as a formal one due to the fact that it was a few years late. The official translation into Russian was made available on the web site of the IFRS Fund and many Russian companies have started regularly to apply the IFRS for preparation of the financial statements.
Some companies are already preparing their accounting in accordance with the IFRS as their head office is a foreign holding company. Others began using the IFRS due to their presence in the IPO market or receipt of overseas loans. The credit organizations have been making accounting under the IFRS since 2005. On the other hand this is a legally important event that influenced dramatically the whole Russian system of accounting and financial reporting.
Firstly, the IFRS are, eventually, introduced into the Russian legislation system and in cases provided for by the respective legal acts, they have a direct legal action. Besides, in certain cases the IFRS will replace the Russian provisions on accounting and reporting, to be used in development and shaping of the accounting policy of the company.
Secondly, the official enactment of the IFRS in Russia automatically launches the enactment of the Federal Law № 208-ФЗ dated 27.07.2010 "On Consolidated Reporting", according to which a company shall prepare, submit and publish its consolidated financial statements under the IFRS, starting from reporting for the year following the year when the IFRS had become applicable on the territory of the Russian Federation, i.e. starting from reporting in 2012. Considering the fact that the required Standards for reporting the data for one year minimum, the obligation to prepare reporting under the IFRS in fact is retrospective i.e. as from the year of 2011.
The consolidated financial statements must be prepared in full compliance with the IFRS. That is the standards must be applied directly and in all the aspects of reporting, including: the choice and application of reporting policy; defining the members of the group, consolidation methods, the rules of recognition, classification and assessment; compliance with the structure of submission and requirements on disclosure of information and the like.
Currently the law is mandatory for credit and insurance organizations as well as the companies whose securities are listed for public trading; in future it is planned to increase the application thereof. For companies preparing consolidated financial statements under US GAAP, there is a scheduled extension until 2015. It also should be taken in consideration that in case a Russian company on different grounds prepared consolidated accounts, it should as from 2012 comply with the IFRS.
Besides, it should be noted that companies are not relieved from the obligation to do book-keeping and preparing individual reporting under the Russian rules. They are vested with additional obligation to prepare an extra set of consolidated report which requires the mandatory auditing.
Preparation of financial statements in compliance with the IFRS is a time-consuming process requiring serious analysis of the reporting policy and a massive amount of data. The IFRS required the companies to carry out additional calculations that are based on analytic characteristics related to assessment of business in general, usually not used in book-keeping practice (calculation of the discount rate for various transaction groups, assessment of the possibility and of the amount of future expenses and the like).
The International Financial Reporting Standards do not mention the connection between the initial document and execution of a transaction. The priority purpose is the maximum objective financial result; this is one of the key principles of the IFRS. Thus, under the IFRS, the accrual basis is used more consistently than under the RAP (Russian Accounting Principles).
The IFRS provide for the analysis of the quintessence of the transaction made via a single or several documents, for the purposes of reporting it in the financial statements. In Russian accounting principles, as a rule, the character of the transaction in reporting corresponds to the name of the agreement entered into.
Transformation of the financial statements (reports) into the IFRS format in practice means preparation of statements on the basis of another accounting policy and this is followed by a large volume of additional calculations and carrying out great analytical work.
The labor-output ratio of transformation of reporting under the IFRS for companies that prepare such reports for the first time is particularly noticeable. Such companies usually come across temporary difficulties as well as with the lack of human resources.
As a rule at this stage it is necessary to outsource the experts which on the one hand can prepare such report via transformation method and on the other hand they can assist with introduction of the system of consolidated reporting under the IFRS rule.
For companies that are in transition towards the IFRS there is First-time Adoption of the International Financial Reporting Standards in force from 2004. It aims at minimizing the costs for preparation of the first time IFRS statements and simplifying re-calculation of data of the comparative periods in financial statements.
The idea of simplifications is that when the IFRS are applied for the first time companies may skip certain complicated retrospective calculations required for transformation of accounts into the new reporting policy.
The international standards are adopted by the IRFS Committee gradually and each one of them contains transitional provisions for application. Companies preparing IFRS accounts for the first time can skip the transitional provisions of the full versions of the existing IFR Standards, and they are allowed to classify the assets, obligations and capital in compliance with the First-time Adoption of the IFRS1.
Application of IFRS 1 First-time adoption is the right of companies that prepare accounts under the IFRS and they can use the full versions of the IFRS. It should be noted, however, that the exceptions contained in IFRS 1 First-time Adoption are acceptable only when preparing the first official reporting under the IFRS.
The first-time reporting under the IFRS shall be only the reporting that contains for the first time a statement of irrevocable application of the IFRS. Application of IFRS 1 First-time Adoption incomplete version does not mean failure to comply with the requirements of the IFRS.
Companies must indicate whether they choose to apply IFRS 1 as well as their choice of certain exceptions in the explanatory notes to the first-time accounts prepared under and in complete compliance with the IFRS.
While preparing the first-time IFRS accounts companies are allowed not to trace back and apply previous versions of the Standards on order to make retrospective adjustments – when working out the accounting policy under the IFRS it is sufficient for companies to apply the version of the Standard in force on the date of transition into the IFRS.
The importance of IFRS 1 for companies preparing their first-time IFRS accounting is hard to exaggerate. In fact application of the IFRS gives companies the opportunity to get ready for the full version of the IFRS, i.e. to assess the necessary human and technical resources for that and the methods of transformation of reports. The First-time Adoption, however, does not free the financial experts of the company from the requirement to study the full version of the existing international standards at the stage of transition to the IFRS.
The Russian legislation does not have a similar document that allows to minimize the human and time resources when preparing the first-time Russian accounts for companies which usually work under other accounting systems.
Comparison of the IFRS and the Russian Accounting Rules, however, is not quite appropriate since the IFRS in its important is above all national standards because it aims at establishing of common universal reporting rules, which allow to form maximum complete fair and transparent financial statements.
When preparing this article the materials of the manual “The IFRS and the RAP: differences and similarities” by Titova S.N. issued by Economics and legal bulletin No. 8 August 2011, were used.