ACCOUNTING STANDARDS AND SMEs IN RUSSIA
BY OLGA SOLOVYEVA Associate Professor Accounting Department, Economic Faculty, Moscow State University Milan, 6 February, 2007
THREE ISSUES
WHAT ARE SMEs IN RUSSIA? WHAT ARE ACCOUNTING AND REPORTING REQUIREMENTS IN RUSSIA? WHAT ABOUT TRANSITION TO IFRS IN RUSSIA?
* banks and insurance companies will not be touched as they are governed by separate rules
DEFINITION OF SME
EUROPEAN DEFINITION (thresholds in accordance with amendments by Directive 2006/46/EC):
Company meets 2 of the 3 criteria: Turnover – less then 8 800 000/35 000 000 €; Total assets – less then 4 400 000/17 500 000 €; # of employees – less then 50/250 people.
IASB DEFINITION:
Do not have public accountability; Publish general purpose financial statements for external users (for example, owners not involved in management, creditors, etc.)
DEFINITION OF SME
RUSSIAN DEFINITION:
DIFFERS FROM BOTH EUROPEAN AND IASB DEFINITION; ONLY SMALL ENTITIES ARE DEFINED – NO DEFINITION OF MEDIUM-SIZED; SOPHISTICATED SYSTEM OF REGULATION.
Who can conduct business activity in Russia? (Civil Code)
Individuals
Entrepreneurs (NOT LEGAL ENTITIES)
Legal Entities
Main features: Owner=manager Cash concern Tax concern
Can be treated like small enterprises (Law on state supports for small entrepreneurship in RF); do not need to follow accounting and reporting rules (Law on Accounting); keep records for tax payment in accordance with particular tax requirements
Can be treated like SME in Europe
Are not covered by IASB project (second criterion)
Commercial Legal Entities Economic partnerships Economic companies
Full partnerships
Partnerships on trust
Joint stock companies
Companies with additional liability
Unitary enterprises
Limited liability companies
Manufacturing cooperatives
Open joint stock companies
Closed joint stock companies
GENERAL RULE (Law on accounting)
ALL COMMERCIAL BUSINESS ENTITIES MUST KEEP ACCOUNTING RECORDS AND PRODUCE FULL SET OF FINANCIAL STATEMENTS IN ACCORDANCE WITH THE RUSSIAN ACCOUNTING AND REPORTING RULES Some exceptions: see later
Commercial Legal Entities
Small enterprises (Law on state supports for small entrepreneurship in RF) All others
Criteria: •Number of employees (varies from industry; 30100); •Structure of equity (share of particular participants <25%) Can be treated like SME in Europe
Can use simplified system of accounting; may not apply some of the accounting standards; limited number of financial statements (B/S, P&L)* Can be covered by IASB project
Some of them can be treated like SME in Europe
Some of them can be covered by IASB project
*if are not subject for obligatory audit (subject for obligatory audit: OJSC, or sale more then approx.1,450,000 euro, or total assets more then approx. 580,000 euro, and some others)
BUT
There are some exceptions from the point of view of tax regulations (also there is cross reference in the Law on accounting): tax accounting and financial accounting are separated in Russia.
Commercial Legal Entities
Can use simplified taxation system (Tax code) Must use general taxation system
2 possibilities of taxation: •6% on cash income; •15% on difference between income and expenses. Income and expenses prescribed by the code Allowed not to keep accounting records (except particular items) and not to present financial statements.
Criterion - income is less then approx. 435,000 euro. Some entities are not allowed to use it at all (examples: banks, investment funds, entities that have rep offices, if # of employees >100, etc.)
Some of them can be treated like SME in Europe
Some of them can be covered by IASB project
Can be treated like SME in Europe
Can be covered by IASB project
PROBLEMS: If it does not keep accounting records and does not file financial statements – what about dividends for owners?
SOME STATISTICS
Beginning of 2006 (source: www.opora.ru):
# of SE (legal entities) – 1 029 thousands # of SE (individual entrepreneurs)- 2 600 thousands Increase for the first quarter of 2006 – 5% # of SE employees – more then 25% of total # of employees More then half of SE work in trade.
CONCLUSIONS
Russian small enterprises have a variety of choices from the point of view of accounting and reporting (full requirements, simplified requirements, exemptions); Russian small enterprises, as well as a lot of non-small enterprises, can be treated as SMEs from the European and IASB points of view.
WHAT ARE RUSSIAN ACCOUNTING AND REPORTING RULES?
LEVEL 1 Laws and other Legislative Acts (Civil Code, Law on Accounting, Law on Audit, Law on Joint Stock Companies, Decrees of the President, Statements of the Government of the RF, etc); LEVEL 2 Accounting Standards – Statements on Accounting (named PBU; 20 developed, 13 expected; are developed by the Ministry of Finance); LEVEL 3 Normative Regulations of Ministries (more then 300; are developed by different Ministries; for example: Chart of Accounts, Branch Methodical Recommendations on Planning and Calculation of the Cost of Production, etc.); LEVEL 4 Internal accounting policy documents.
WHAT SHOULD BE INCLUDED IN THE FULL SET OF FINANCIAL STATEMENTS?
(the following regulations are applied: Law on Accounting, PBU 4, Order of the Ministry of Finance On the Forms of Financial Statements, Methodical Recommendations of the Ministry of Finance On Filling the Forms, etc.)
BALANCE SHEET PROFIT AND LOSS STATEMENT; ENCLOSURES TO B/S AND P&L (including the Statement on Changes in Equity and Cash Flow statement); AUDITORS’ REPORT EXPLANATORY NOTE
WHAT ABOUT ACCOUNTING REFORM TOWARDS IFRS?
First stage – 1998-2001. In 1998 the Program of Accounting Reform in Accordance with IAS (the Statement of the Government of the Russian Federation, #283, 6.03.1998) was adopted. Second stage – 2001-2004. Measures for Realization of the Program of Accounting Reform (the Letter of the Government of the Russian Federation, #KA-P1306573, 13.04.2001) were adopted. Third stage – 2004 – present. Concept of Accounting and Reporting Development in the Russian Federation for Medium-term Perspective (the Order of the Ministry of Finance #180, 1.07.2004) and further Plan of Actions of the Ministry of Finance for 2004-2007 were adopted.
First stage – 1998-2001.
It was supposed that Russian Statements on Accounting (PBU) would be developed on the basis of IAS requirements. In addition in 1999 (Order of the Ministry of Finance) Russian all groups were allowed to prepare the consolidated statements in accordance with IAS instead of Russian accounting norms, with proper disclosure of differences. So the main idea of this stage was to develop Russian standards based on the IAS requirements.
Second stage – 2001-2004.
It was supposed to introduce IAS in Russian practice more actively on the basis of differentiated approach to different types of enterprises. More PBU based on IAS requirements would be developed, but listed open joint stock companies would prepare the consolidated financial statements directly in accordance with IAS from 2005 (unfortunately this plan was not fulfilled). So the main idea of this stage was to go on with development of Russian PBU based on IAS principles, but to oblige some enterprises (listed open joint stock companies) to produce only IAS consolidated financial statements.
Third stage – 2004 – present.
More clear procedure of IAS/IFRS introduction into Russian system of accounting was specified. IFRS should become obligatory for the preparation of consolidated financial statements; Russian PBU’s based on IFRS should be obligatory for individual financial statements. The Law on Consolidated Financial Statements was developed but it is not adopted yet. So the main idea of present stage is:
to distinguish approaches to consolidated and individual financial statements; to go on with development of Russian PBU based on IFRS requirements (obligatory for individual financial statements); to create a mechanism of direct IFRS implementation (obligatory for consolidated financial statements).
WHAT ABOUT ACCOUNTING PROFESSION?
As a result of reform accounting profession was created (professional accountants and auditors – are two separate professions); IAS/IFRS requirements became part of accounting education; BUT there are still a lot of things to do.
Accounting profession
Institute of Professional Accountants (IPA) was founded; system of accredited training centers was established; the professional accountants’ training program for certification (developed on the basis of UNCTAD Module Curriculum) and the programs for qualification improvement were introduced.
Knowledge of IAS/IFRS – part of accounting education
There are programs on IFRS in the system of postqualification improvement; IPA developed program for getting qualification (certification) in IAS/IFRS (professional accountant, IFRS specialist); Training programs for practitioners are on the market for getting the certificate/qualification in IAS/IFRS:
full ACCA (English); Diploma in International Financial Reporting from ACCA (Russian); CIPA (Russian); International Association of Bookkeepers Certificates (Russian).
Targets in accounting education
To orient of the training programs on detailed study of IFRS requirements and issues of practical implementation of IFRS; To ensure the monitoring of the quality of educational programs; To develop the training programs for managers; To reach the compliance of training programs to the corresponding existing international programs, To develop the Russian standards of accounting education on the basis of IFAC standards; To keep updating of learning materials for educational programs.
PROBLEMS OF IFRS IMPLEMENTATION IN RUSSIA
NO official translation of IAS/IFRS Difficulty of IFRS themselves (difficult language to understand; different from local environment notions, such as professional judgment, fair value, etc.; quick change of IFRS; consistency of IFRS implementation); Problems of introduction into Russian legal environment (incorporation in legislation, scope of application); Problems of creation of the enforcement mechanism; Education and training problems (cultural traditions, lack of uniformity in the training programs, lack of trainers, lack of materials/books for the courses); High costs of IFRS implementation; Sometimes lack of interested users (requirements stated in PBU based on IFRS do not fulfill properly as nobody seem interested).
CONCLUSIONS
Experience of SMEs regulation in Russia shows that the proper accounting records and proper financial reporting are users driven; IASB project covers not only small enterprises and does not cover all small enterprises in Russia; If the text of IASB’s Standards for SMEs will be easy and clear it can be used for developing of Russian Accounting Standards with more efficiency then the full text
THANK YOU FOR YOUR ATTENTION