The history of accounting in Russia can go back at least to thirteenth century. After experienced the times of tsars and the era of Soviet Union, it has series dramatic changes in the past 20 years, the times of Russia Federation.
In the Union of Soviet Socialist Republics (USSR), accounting was used to implement control activities in the whole society to fulfill the central plan of government. Accounting standards and relevant laws were constituted to satisfy this basis function and maximum the value which Soviet government believed in.
After the collapse of USSR, essential changes occurred to Russian Accounting contingently. "Regulation on Accounting and Reporting in the Russian Federation", the principal documentation, was approved by the government in February 1992. This regulation published the new chart of accounts, the new format of financial statements and other prime changes in accounting and auditing field.
In 1998, in order to establish a set of accounting standards accord with IFRS, Russian government approved the "Accounting Reform Program". This program defined that Russian accounting standards should consist with IFRS in the following main respects:
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Employing double entry bookkeeping system.
Keeping balance sheet continuity.
Recording assets on the basis of its historical cost.
Adopting going concern principle
Using dominant exchange rate to value foreign currency assets and liabilities.
In 2002, the Russian Prime Minister required all Russian banks and companies to prepare financial statements comply with IFRS since fiscal year 2004. A detail timeline for IFRS adoption entitled "Concept of Mid-Term Development of Accounting and Financial Reporting in the Russian Federation for the period 2004 - 2010" was announced by Ministry of Finance (MOF) in 2004. However, the legal procedures made Russia fell behind it plan.
Nevertheless, promoted by the government, increasing numbers of Russian corporations are switching from traditional RAS to IFRS. It's common for big Russian companies to prepare two editions of financial statement, based on RAS and IFRS respectively. The former is prepared for tax return purpose while the latter is issued to satisfy the need of investors from global capital market.
Similar to western countries, Russian accounting regulations are based on various enterprise categories, which based on companies ownership and size. Those categories include:
Public companies and enterprises listed on Russian trade organizations and international capital markets. Companies belong to this category are required to issue financial statements not only base on RAS, but also base on either IFRS or US GAAP.
Not listed public companies. Not listed public enterprises in Russia are entitled to use RAS only for financial reporting purpose. At the same time, the Russian government is still trying to improve RAS to make it more comparable with IFRS.
Small businesses. This type of enterprises is free to choose simplified form of financial reporting and bookkeeping method.
Limited liability companies and closely held joint stock companies other than small businesses. Enterprises in this category either have no outside owner or whose outside owners are related parties. In this case, they are allowed to use RAS and can disclose less information because of the lack of public interests.
Accounting legal framework
Accounting in Russia is basically regulated by the Federal Law on Accounting and Russian Accounting Standards (RAS), which supplement the requirements set forth in the legislation and are the base of rules, principles, and methods set by other relative government departments.
The chart below shows the basic legal framework for Russian GAAP:
The auditing standards went through even bigger changes than accounting standards. The word "auditor" was not even included in former Soviet Union's accounting glossaries. Before that, the auditing in times of Trars considered more on inspection and control, which are not main targets of auditing according to the western sense.
The current Russian auditing standards are based on the 1999 version of International Standards of Auditing (ISA) and several special audit rules adopted by Russian audit community.
Using the 1999 translated edition of ISA means the standards that Russia borrowed from ISA not only have several years lag behind the latest edition of ISA, but also have potential misleading caused by translation. In order to solve this problem, some scholars started to write their own textbook in Russian base on their own understandings.
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Marked to Standard
The particular rules involved in Russian auditing standards actually enhance the applicability of standards, since they are made for certain circumstance of Russia. A good example of these rules is "Rights and Obligations", which complement the standards that some entities believe don't apply to them under a widespread comprehension.
Since 2002, because the Russian finance Ministry approved these drafts of audit standards that are close to ISA, the audit procedures in Russia became tighter. More and More Russian auditors implement ISA instead of creating their own procedures and judgment standards.
Cash vs. Accrual Basis
As mention above, in Russia only "small businesses" are entitled to choose simplified bookkeeping method, like cash basis. Other kinds of enterprises are all supposed to use accrual basis. There is no difference on this point between RAS and IFRS.
Fair-Value vs. Historical
Fair value is defined by US. GAAP as an amount at which an asset can be bought or sell or a liability can be incurred or settled, in a transaction between willing parties. Disclosure of fair value could provide useful information about the accurate value of assets or liabilities to financial statements users. Those information would help users evaluate companies' value and risk, and make further decisions accordingly. That is why more countries tend to adopt accounting policies that require companies to present the fair value of their assets and liabilities in financial reporting.
In order to bring RAS closer to IFRS on the fair value points, RAS 19/02 "Accounting for financial investments" was published in December 2002. According to this, financial investments are requested to be recognized at their fair values initially in all financial statements prepared in fiscal year 2003 and thereafter. If it's possible for companies to assess the fair value of the financial instrument acquired before 2003, a revaluation in 2003 is also required by RAS 19/02.
The assessment and revaluation should take place at least once a year. Companies can also do that on quarterly or monthly base if they feel necessary. The changes in fair value should be recognized in "other income" of income statement.
Though the RAS 19/02 was established to consist with the relevant policies of IFRS, it has two specific rules go beyond IFRS:
Corporations should match investments to subsidiaries to their fair value.
The total amount of unrealized fair value adjustments should be disclosed in the notes of financial statements.
Besides the investment instruments, property, plant and equipment (PPE) are also permitted to be revalued to their replacement costs. However, different from IFRS, RAS doesn't allowed intangible assets to be measured to fair value.
Other than PPE and investment instruments, items in financial statements will be recorded at their historical cost.
Russian Accounting Standards (RAS), whose status is similar to the Generally Accepted Accounting Principles (GAAP) in the US, is the fundamental accounting standards of Russia. It is a term used unofficially to indicate the whole body of Russian regulatory documents governing accounting and reporting. The information prepared based on RAS is mandatory and the only documents that Russian tax authorities would accept.
Though RAS comply fully or partly with IFRS, its major tax return function limits the form of financial statements, as well as the information they disclose. Lack of detail disclosure requirement influences the comparability, reliability, and transparency of the financial statements. It also gives Russian accountants many chances to provide the information less important, not material, or even has potential misleading risks. All these disadvantages of RAS encourage more and more big companies to work on financial statements base on IFRS.
Now, RAS is still the most widespread standards used in Russia. Enterprises that have no plan to attract investments from international capital market prefer to prepare financial statements based on RAS and for tax purpose only. On the other hand, companies that intend to finance from global capital market must satisfy the needs of foreign investors, who don't know RAS very well and only accept financial statements based on US. GAAP or IFRS.
One big problem met by the second type companies is that they are under pressure from international investor to have their statements audited by a large foreign audit firm, such as one of the Big-Four. The auditing service offered by Big-Fours usually cost more money and time than that from local firms. The reason why foreign investors don't believe the auditing job of Russian accounting firms are:
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Most local firms are not capable enough to do the audit based on the standards they are not familiar with.
There is no accounting organization in Russia like the American Institute of Certified Public Accountants (AICPA), who can police its members and offer moral support to audit firms who don't want to sign the unqualified reports. Some existing small organizations have either no authority or incentive to do the similar job.
Adopting IFRS in Russia is difficult because of the fundamental differences between national and international language, attitude, culture and governance structure.
The language challenge
Till now, neither IFRS nor US GAAP has original Russian edition. Even accounting experts and professional translator found hard time to translate certain English words into Russian. Unprecise translation will lead to inaccurate interpretation and comprehension, which would weaken the implementation of standards. Significant misunderstandings between Russian standards users and English users may even cause loss in international trade.
The attitude challenge
Until a few years ago, many accountants still believe that the reason why companies prepared financial statements was to fulfill the requirements of tax authorities. This attitude rooted during Soviet period, when accounting is a tool of government central control. After RAS assimilating IFRS in the last few years of 20th century, more and more accountants began to realize the tax authority is not the single user of financial statements. They also recognized eventually that the basic goal of financial statements is to provide information to shareholders for decision making.
Unfortunately, this idea is only popular in big companies who need to get funds from international capital market. Many accountants from local business still share a perception that RAS is either better or as good as IFRS and no change needs to be made. This outdated attitude comes from the lack of desire of their company to implement IFRS, as well as the formal education they accepted long time ago. It's really hard for older accountants and auditors to change their mind.
The culture challenge
Being simple bookkeepers under the old centrally planned system, accountants were not required to make decisions. Therefore, many Russian accountants are accustomed to a high level of certainty and not use to make professional judgment. Even when a decision has to be made, their first reflection is to search for rules tell them how to handle that step by step. IFRS and US GAAP, however, are not based on rules but principles. They require plenty exercise of professional judgment and make quite a lot Russian accountants feel unconfident and uncomfortable. Most of scholars believe this is not a problem met only by accountant but a culture difference between Russia and western country. People living in the Russian culture refuse to take risks and feel uncomfortable with unknown new things because they grow up in an unstable and high speed changing society.
There is no doubt that this challenge to adoption and implementation of IFRS will be worn down with time if the modern Russia state can be more stable, but it could take at least a generation or even more.
The governance structure Challenge
Till now, all the accounting and auditing regulations were published by either government department or accounting and auditing community authorized by Russian government. There is no powerful independent organization has capable to do time principle research, govern members such as audit firms, and update accounting and auditing standards.
The lack of private organization will increase the system corruption risk and hurt the effectiveness of standards. The regulations and laws constituted by government may more intend to fulfill the interests of current government and scarify the fairness and stakeholders' benefit in some extent. Moreover, it usually takes more time for government department to update the standards because the power hierarchy and complicated procedures. A good example of this point is that Russia Civil Code never adopted any new ISA updates after it accepted the 1999 edition. Though several updates may apply to Russia, there is very little chance for Russian Duma to find enough time keeping auditing principle comply this ISA or to allow new ISA become part of the Russian rule immediately, because of the national pride and sovereignty.
Facing the challenges mentioned above, Russia still gained a lot of accomplishment after partly adopting IFRS .
Big companies began to use IFRS or US GAAP voluntarily
In the past 10 years, Russian economy experienced a dramatic growth, which driven by high demand for Russian natural resources. It promoted Russian enterprises to look abroad for access to additional sources of capital for further growth. Many Russian companies in utilities, mining industry, energy, and metal industry have prepared their financial statements in both RAS and IFRS or US GAAP. The adoption and implementation of IFRS or US GAAP enhances their communication with the world and bring them into the key global players in their fields.
The involvement of Big-Fours speeds the implementation of international standards.
Since 2000, International accounting firms like the Big-Fours extended their business in Russia significantly by offering services and expertise relate to new RAS, IFRS, or US GAAP. Though they captured a big percent of market share from local accounting firms and raised resentments, it helped big Russian companies get use to the new standards and developed a series of standard procedures for Russian enterprises audit job. Also, the existence of Big-Four motives local a firms to implement IFRS faster and to increase training to their employees.
Accounting education become more widespread.
During the time of Soviet Union, accountants were just called as bookkeeper, whose position only required trainings and diploma from vocational school. That's why there was only few of university had accounting major. After the perestroika, more and more universities and companies realized the importance of accounting education. Now, there are about 30% universities in Russia have accounting major and about half of them have authority of issuing accounting degree. Moreover, on-the-job trainings are put on the more companies' schedule after they decided to adopt IFRS or US GAAP. Accountants who left school long time ago can still get chance to update their knowledge and get certificate.