IFRS challenges for Russian companies in 2015
By Svetlana Krapiventseva, Delovoy Profil
As of this year, it will be obligatory for certain new types of Russian companies to use IFRS for annual financial reporting. This article aims to answer questions related to which companies should switch to IFRS when and according to which legislative acts and what measures can be taken to ensure the appropriate and efficient transformations, avoiding critical financial and time expenditures in preparing new financial statements.
Which companies are to use IFRS for annual financial reporting from 2015?
According to Federal Law № 208 dated 27 July 2010 “About consolidated financial statements”, the following types of Russian companies are to use IFRS starting from 2015:
- Credit organisations
- Insurance companies
- Other companies which have shares included in the stock exchange quotation list
- Organisations (not mentioned above) whose charter documents provide presentation and/or publication of consolidated financial statements
- Other companies which provide preparation, presentation or publication of consolidated financial statements in accordance with Federal Law (for federal corporations Rostech, Rosatom and Russian Highways; according to Federal Law № 39 involving the procedure of listing prospectus registration etc.)
Starting from 2014, IFRS would be obligatory for companies that issued bonds or have shares included in the stock exchange quotation list and which prepare consolidated financial statements according to US GAAP.
Amendments to Federal Law № 208, dated 5 May 2014, widened the range of organisations that were to use IFRS starting from 2015. It now includes:
- Non-state pension funds
- Management companies of investment funds, mutual funds and non-state pension funds
- Clearing organisations
- Federal unitary enterprises according to the list approved by the Government of the Russian Federation
- Joint stock companies with shares in federal ownership according to the list approved by the Government of the Russian Federation
Medical insurance organisations which only conduct activities in the field of obligatory medical insurance are excluded from the list.
Incorporation of non-state pension funds and management companies in the list aims to tighten control over their activities and tighten security of non-qualified investors.
Interim IFRS: non-mandatory and obligatory preparation
Federal Law № 208 has no obligatory condition for presenting interim financial statements prepared in accordance with IFRS, referring to charter documents (Article 4 of Federal Law № 208). At the same time, Federal Law № 39 requires interim IFRS to be presented to the parties involved three days after the date of their preparation, but no later than 60 days after Q2 of the reporting year and their inclusion in the report for Q3 (Article 12 of Federal Law № 39). Companies subject to Federal Law № 39 are therefore obliged to prepare and present H1 financial statements in accordance with IFRS.
Recipients and schedule for IFRS presentation
Consolidated financial statements prepared at year-end have to be presented to charter members and shareholders or owners of the organisation’s property. In addition, all companies included in the list subject to Federal Law № 208 (excluding Federal unitary enterprises and joint stock companies with shares in federal ownership according to the list approved by the Government of the Russian Federation) also have to present financial statements to the Central Bank of Russian Federation (Article 4 of Federal Law № 208).
As outlined above, if mentioned in charter documents and presented to the Central Bank of the Russian Federation, interim financial statements are prepared only in case of a special bank order (Article 5 of Federal Law № 208).
The procedure for presentation of consolidated financial statements to the bank is only approved for those prepared at the year-end (Direction of the Central Bank of the Russian Federation as at 1 September 2014, № 3374-D). Financial statements are only to be presented online accompanied by a special electronic signature from personal accounts.
Consolidated financial statements prepared at year-end are to be presented before the general shareholders meeting, but no later than 120 days after the end of the reporting year.
Consolidated financial statements are to be signed by the company’s chief executive or other authorised persons in the organisation’s charter documents (Article 4 of Federal Law № 208).
Obligatory publishing of financial statements
Consolidated financial statements prepared in accordance with IFRS should be published. This means that consolidated financial statements should be placed in public information systems and/or in mass media or by other means in order to facilitate easy access for the parties involved, regardless of their aims. Consolidated financial statements should be published no later than 30 days after the date of their presentation (Article 3 of Federal Law № 208).
Organisation of IFRS preparation
As 2015 is only just beginning, preparation of financial statements in accordance with IFRS may seem like a far-off activity today. The first financial statements for companies obliged to use IFRS for annual financial reporting starting from 2015 will be presented in April 2016 (Point 7 Article 4 of Federal Law № 208). Companies should also choose the duty-holder, verifying their professional competence and the adequacy of current information that will be used for the preparation of financial statements from now on.
These questions still remain unanswered for many companies obliged to use IFRS for annual financial reporting from 2015 onward. Moreover, situations may occur in which decision-makers lack adequate understanding of IFRS, making it impossible to organise IFRS preparation correctly. Proactive managers will attempt to find solutions to these questions in advance.
When preparing 2015 financial statements, companies should follow (IFRS) 1 “First IFRS application” according to which the first financial statements prepared in accordance with IFRS should include: balance sheets as at 31 December 2013, 31 December 2014 and 31 December 2015, as well as consolidated income statements, capital statements and cash flow statements for 2014 and 2015. The preparation of financial statements should therefore start in 2014 from the opening balance and the switch to IFRS for 2014 may be carried out during 2015.
Those responsible for the switch to IFRS should answer the following questions:
- Will financial statements be prepared using the company’s own resources or will a contractor be involved?
- Will a special IFRS preparation department be formed or will external resources be used?
- What key factors may influence IFRS? To which factors must strong attention be paid when preparing financial statements in accordance with IFRS?
- Who will audit the consolidated financial statements?
- What is the budget for preparing financial statements in accordance with IFRS?
The answer to the last question often defines and shapes answers to all other questions. At the same time, excessive penny-pinching may do harm to a company’s financials in future.
When choosing individuals to handle the IFRS preparation, professional competence of existing employees and their respective workloads should be taken into account. If the company already has employees who are IFRS specialists, they should be responsible for preparing the consolidated financial statements in accordance with IFRS.
Auditing is the final step in IFRS preparation. The audit is conducted before financial statements are presented and published. In practice, auditors are at times able to influence methods and estimates used by a company’s management and can sometimes even prepare the auditee’s financial statements. With this in mind, a cooperation with the auditing firm should be established beforehand.
In conclusion, the obligation to prepare, present and publish financial statements in accordance with IFRS means companies must change their approach towards not only financial accounting and reporting, but also budgeting and business planning. In addition, this puts a greater focus on requirements related to increasing employees’ familiarity with IFRS and investments in IT. Consequently, despite a kind of legislative turmoil and lack of specialists in IFRS methodology, IFRS has become ingrained in the day-to-day operations of Russian companies.
Delovoy Profil, Moscow, Russia
published: Januar 2015