January 2012 will see the coming into effect of the provision of Law No 208-FZ ‘On Consolidated Financial Statement’ that makes the use of the International Financial Reporting Standards (IFRS) mandatory for a major part of the Russian companies. IFRS-compliant financial statements will have to be submitted only for 2013. However, to make the transition easier companies are advised to commence using the IFRS as early as from January 1st 2011, said the head of the Accounting and Financial Reporting Methodology unit of the State Financial Supervision Regulation Department at the Ministry for Finance of Russia, Igor Sukharev in his interview for Russian Survey.
- What companies will have to prepare IFRS financial statements and for what time period? And what difficulties may these companies face because of the necessity to follow IFRS requirements?
- The use of IFRS will be mandatory for all banks and insurance companies. Speaking of the real economy sector, this applies to any business having its securities traded publicly. For the time being those are to be the only types of businesses required to prepare IFRS financial statements. There are plans to make the law apply to a broader range of companies but so far those are just plans. Even if we go ahead with these plans, IFRS requirements will only be introduced at a later date so businesses will have enough time for the transition.
The first IFRS annual financial statements must be prepared for the first year following the year when the IFRS are adopted in Russia. This process is now under way and should be over by the end of this year as per the order of the President. The first IFRS statements will have to be prepared for the period ending December 31, 2012. This means we’re going to see them in early 2013.
It should be noted here that the financial statements must have comparative data for at least one previous year. The law on consolidated financial statements came into effect one year ago (August 10th, 2010, editor’s note). If we look at IFRS 1, the standard applicable to the first use of IFRS, it says that the first set of statements as well as all subsequent statements must include data for at least one previous year for comparison. To this end the so called entry IFRS balance sheet must be drawn up for the earliest date preceding the comparative data. And this date is January 1st, 2011. In other words it’s a past date. This means that the later a company starts with IFRS statements, the tougher it is going to be for it to produce 2012 statements. A lot of accounting information for 2011 will have to be reorganised then.
But I believe most of the companies subject to the law have already been preparing IFRS statements for 2011 and 2010 so they shouldn’t have any problems with producing the entry balance sheet.
- Now they do it at their own discretion. What will the difference be for these companies and those using their financial statements when it becomes legally binding?
- I very much hope there will be no difference.
On the other hand, it’s a well known fact that when something is not mandatory it’s usually done in a relaxed fashion with many things getting omitted or glossed over. Most companies today produce IFRS statements by converting their standard financial statements. Normally this approach is used just once, when the company makes transition to the IFRS, but in Russia they’ve been doing it repeatedly over a long period of time. And the quality of such statements is rather poor.
I hope that now they will change their approach and will keep all their accounting records in accordance with IFRS. The quality of their IFRS financial statements will improve as soon as real people and companies start using them to make decisions on their basis. First of all, I’m talking here about actual and prospective investors.
- There have been reports in the mass media that the IFRS will be adapted to the Russian economy. What does it mean? Will such adaptation involve any substantial changes in the standards? Will such adapted financial statements be trusted by foreign investors accustomed to standard IFRS?
- The word adaptation can be used to describe the transitioning process but I personally don’t think it’s a very good term to describe what’s going on. It can mean a lot of things, and all of them can be interpreted in a number of ways.
We’re not talking about creating some sort of Russian IFRS. In this context adaptation means integration of the IFRS into the Russian law.
Potentially some differences are possible, even difference in the actual content. For instance, here in Russia we would never start using foreign documents without first amending them to better reflect local realities. Otherwise it would imply loss of sovereignty. There are a lot of technical issues, for example, those having to do with the dates when the requirements go into effect. We have our own procedures for that. The same applies to the types of companies that have to use the IFRS, which we already talked about. There can be quite a large number of such technicalities all of which will result in financial statements prepared by Russian companies being different from those prepared by their foreign counterparts. But such differences must be allowed, the question is to what extent our companies will take advantage of this opportunity.
To tell you the truth we’re not in the least interested in making even these technical differences. We’ve got national accounting standards, then, there are the standard IFRS and if we have any Russian IFRS on top that, it would pretty much defeat the purpose of the transition to the IFRS. The easiest thing to do would be to take the whole IFRS package and start preparing financial statements accordingly. As long as it is in Russian. The experience of many nations, especially those in the EU, clearly demonstrates that IFRS can be easily applied in any kind of national economy. It would be rather strange if Russia was suddenly to come up with reasons why it can’t use IFRS as is. Even though at the moment the applicability of IFRS in Russia is being looked into, and so far no definite answer has been provided. It is expected that a verdict on this one should be out in a matter of weeks.
- So what if the examination of the applicability of IFRS in Russia finds that amendments must be made to IFRS before they can be used in Russia, does this mean that such amendments would have to be formally approved before the end of the year?
- I wouldn’t want to discuss something that is very improbable. If the experts find that some standard is inapplicable then we’ll discuss what sort of amendments will have to be made to the standards and in what form. A lot will depend on the nature of the differences. A paragraph can be changed in the IFRS, but on the other hand the procedure defined in an instruction of the Ministry of Finance for way the paragraph in question must go into effect can be changed. And in all probability the second option will be preferred whenever possible so that issues related to the IFRS going into effect and their applicability to specific types of businesses will be regulated by separate regulatory documents.
In reality, though, even translating the standards into Russia is going to create a whole host of problems; often times the meaning changes as words are translated into Russian because for a lot of accounting terms in English there are no 100% equivalents in Russian. In terms of content, since most companies that the law will apply to have already been preparing IFRS statements for quite some time, they’ve settled on some interpretations of IFRS requirements. Now these interpretations must be made a legal requirement in Russia.
- The companies that already make IFRS statements, have they been using the same translation of the standards?
- As far as I know many of those haven’t used a Russian translation at all. Now they will have to closely re-examine the interpretations of IFRS requirements they’ve been using. So far there’s been a lot of leeway in how the various IFRS and disclosure requirements could be interpreted. I personally know that quite a few companies rely on interpretations that don’t exactly conform to IFRS. Some don’t really much care about the end product that comes out and draw up the statements as a mere formality. For example, the requirements of a bank to a potential borrower may include IFRS financial statements somewhere down the list.
- Will companies be able to keep only IFRS accounting records?
- No, it’s a whole other issue. It would be great if the Russian and international accounting practices were the same or at least very similar, but in Russia financial accounting has a lot of functions not included in what is understood by international standards.
- Who’s going to be conducting IFRS audits? Will there be any legal restrictions for audit firms? Who’s going to control the submission of IFRS statements?
- According to Law No 208-FZ IFRS financial statements must be audited in the same way as the Russian financial statements of a number of companies must be audited. Audits will be conducted in accordance with the law on audits. As of now there are no different requirements to RAS and IFRS audit procedures.
It is assumed that IFRS financial statements will be supervised by the Federal Service for Financial Markets. The functions that this organisation already has best match this task. No regulatory document has been passed to that effect yet, though. A draft government resolution is currently being prepared by the Federal Service for Financial Markets.
Interview prepared by Andrei Susarov,
Tax columnist for the Moscow news
Exclusively for Russian Survey