Current trends of implementation and application of IFRS standards in Russia
By Dmitry Sklyarov, ADE Professional Solutions
The national transition to the IFRS programme started in Russia in 1998. It was initiated and driven by the National Council on the financial standards. The significant step towards the convergence and implementation of International Financial Reporting Standards (IFRS) in Russia was enforced in 2010 by Federal Law #208 concerning “consolidated financial statements”. The law obliges public companies and their sub-holdings to prepare consolidated financial statements in accordance with IFRS and disclose them publicly within 120 days of the reporting date with the audit opinion enclosed.
The majority of financial institutions (banks, insurance companies, investment companies) had already been obliged to report on IFRS due to previously accepted Russian Central Bank regulation, so this was not a big issue for financial companies.
However, this law was a big issue for many non-financial industrial companies and groups of companies which have publicly traded obligations on the Russian stock exchange market or shares traded on the Russian stock exchange (MICEX). The problem with such companies was that they were completely unprepared to produce consolidated financial statements, to undergo independent audit of these statements and, most importantly, are reluctant to disclose the group’s figures in their entirety (all entities which are controlled, consolidated revenues and cash flows and consolidated tax outcomes). In addition, 90% of these companies faced difficulties in disclosing their consolidated IFRS results and organising an independent audit on time because the Russian statutory fast closing requirements are not very severe – companies have until 31 March in the following year to disclose their annual statutory financial statements.
Based on ADE Professional Solutions statistics, almost half of Russian industrial public or semi-public groups which were obliged to disclose IFRS consolidated financial statements in 2012 and 2013 were two to three months late. For 40% of companies, 2012 was the year of transition to IFRS.
In 2011, the Russian Government officially accepted 63 IAS and IFRS standards and corresponding interpretations on the territory of Russia. Every IAS standard was translated into the Russian language and disclosed on the Ministry of Finance’s website.
In reality, most Russian companies who are not legally obliged to prepare and disclose consolidated financial statements, apply statutory rules of accounting; IFRS principles are only partially included in their accounting policies.
The most typical or significant problems which Russian companies faced during their transition to IFRS were:
1. Recognition of non-current assets
Statutory historical cost of property, plant and equipment (PP&E) cannot be utilised as deemed cost in accordance with IFRS 1 due to PP&E being purchased or constructed before 2002 and containing significant items classed as “very old” (average age equal 30-40 years and often exceeds normative economic useful life age based on their technical documents). In this case an independent appraisal is required. Many companies tried to use their valuation reports which were prepared for banks in connection with borrowings, attracted loans and collateral provision, but the value per these reports could not ordinarily be used as deemed cost for an IFRS application due to improper valuation methods applied by the appraiser (in most cases the cost approach was used, while the comparative and discounted cash flow approach were not applied).
2. Accruals and matching concept
In statutory Russian accounting, the application of accruals, provisions and conditional obligations became mandatory from 2011 onwards. However, 99% of statutory accounting policies do not apply to Russian firms and adjustments cannot be made without the primary documents being available, i.e. accruals and provisions are very rarely made. The reason is very simple and relates to the simplification of accounting and minimisation of differences with tax accounting, which is more significant in Russia compared to financial accounting. In tax accounting, all income and expenses recorded without primary document are not tax deductible or taxable. When the conversion to IFRS is completed, these adjustments may have a significant impact, most likely resulting in companies posting decreased financial results.
3. Group structure
The real problem for Russian holdings is to define which entities should be included in the group in accordance with the 2010 IFRS “consolidated financial statements” regulations. Typical problems include the following: no direct shareholding, but existence of control (for example, chief accountant of the Group holds shares in the name of the real beneficiary) and complex joint ventures with non-transparent decision-making process (not clear who makes critical decisions and whether to account this entity as subsidiary or JV).
4. Related parties disclosure
Business dealings often lack transparency in Russia due to inconsistent governmental policies in relation to private business, as well as the general corporate culture. This leads to significant risk of non-disclosure of relations with related parties. It can sometimes be a very sensitive issue as special disclosures of related party transactions may attract the attention of various governmental bodies (tax, customs and other authorities) or competitors.
5. Other accounting issues
The other difficult accounting areas include accounting for share options, pension plans, asset impairment analysis and amortised cost of financial assets and liabilities calculation, i.e. the areas where Russian accountants and finance-related employees lack competence
The penalties or negative consequences from the regulatory bodies for non-compliance with IFRS in relation to disclosure of financial statements are poorly defined. This explains the fact that only financial organisations and legal entities with public debt or who are active internationally have fully completed the transition to IFRS.
IFRS financial statements are generally published on a biannual or quarterly basis and using conversion on the reporting date method. Very rarely do companies perform parallel or daily accounting in accordance with IFRS.
Taking into account the current trends seen in Russia, it may well be another five to ten years before IFRA is adopted fully in Russia. The situation could change with an increase of foreign investments inflow in Russia and stricter statutory policies towards non-compliance of financial statements to IFRS.
ADE Professional Solutions, Moscow, Russian Federation
published: July 2014