1C As A Platform For Parallel Accounting
Alexey Spirikhin, Auditor, Alinga Consulting Group
Today nobody questions the necessity of applying international accounting standards. It is also obvious that the process of preparing financial records according to the specific requirements of International Financial Reporting Standards (IFRS) demands that a specialist have special training and a significant amount of time. Maintaining IFRS compliant accounting, as well as transitioning to this accounting system, can also use up a significant amount of company time and resources.
The following three methods are particularly popular in Russia for maintaining accounting records according to IFRS:
- Manually entering all business transactions into specialized accounting programs such as Navision, SAP, Quick Books, etc.
- This means that one accountant registers all business transactions into one accounting program that operates based on IFRS, while another accountant maintains the RAS accounting using another program (such as 1C).
- Maintaining records using one unified program for IFRS and RAS.
- 1C accounting software, most often used for Russian accounting, has features for maintaining IFRS records. Its IFRS accounting unit accommodates any configuration or accounting base.
- Conversion (transformation) of RAS into IFRS.
- This is done by an accountant most often using Microsoft Excel. As 1C is not optimal for this process, this third option will not be discussed in this article,
Both options above using 1C have advantages and disadvantages.
The first, manually entering transactions into separate RAS and IFRS accounting programs, has the following advantages:
- transparency and smooth operational control for management and/or group controllers (or parent companies);
- ability to organize accounting according to the parent company's accounting policies;
- wider assortment of analytical tools;
- faster preparation of reports –
- as both RAS and IFRS are independently maintained, reports in either format can always be obtained at the click of a mouse. If only one is maintained more time must be spent to convert and correct the data before the report can be formed.
On the other hand, maintaining two sets of books has several disadvantages:
- high cost in additional labor expenses and program support;
- a relatively long process of implementation;
- maintaining parallel accounts is methodologically complicated and each book in the set be accurate and reflective;
The second option, maintaining records using 1C as a unified program for IFRS and RAS, is the usually the most preferable option, especially for SMEs, whose data flow can be effectively managed within the efficient 1C program.
The advantages, if compared with the first option, include:
- relatively little time and expense (the accounting can be done by head accountant alone (if qualified in IFRS) or with the periodic support of a consultant);
- a large part of the business transactions for IFRS is assembled automatically from RAS, reducing the risk of human error;
- separate accounting policies can be used for the very different systems of RAS and IFRS;
- the RAS chart of accounts can be mapped against the IFRS chart of accounts based on company needs;
- 1C offers a standard IFRS chart of accounts with many options for customization, including to add or change accounts or sub-accounts.
This approach also has several disadvantages:
- additional monitoring is required for the conversion process, for example, to ensure accurate entry of information, and assuring that information is not lost in the transfer, and in applying Central Bank rates properlyd (if the company has transactions in currencies other than in rubles), and other technical factors;
- transfer of transactions is carried out according to the exchange rate on the actual day of completion, which could lead to discrepancies with IFRS 21 “The Influence of Changes In the Exchange Rate” (IAS 21); that is, if the functional currency is different from that used in the presentation of the financial reports, a conflict with Standard 21 could arise;
- some transactions must still be entered manually, such as the treatment of deferred taxes or financial leases;
- standard reporting forms built into the system may not correspond to the requirements of the group (parent company) accounting policies (reporting forms can be adjusted according to such requirements, but that entails additional financial expenditure);
Let’s discuss in more detail how IFRS works using IC version 8.
The process of generating information according to IFRS can be divided into two parts:
- setting program preferences;
- information processing.
The most important stage from the point of view of the performance ability (efficiency) of the system is setting the program preferences (entering the company’s banking details, setting the user directory and registers, etc).
You can make the following customized settings:
- organization of the chart of accounts, mapping the RAS and IFRS accounts to coincide with each other;
- adjusting the accounting policy parameters (they directly influence the work of the program), meaning the choice of means and methods for maintaining the accounting for the following: evaluation procedure (revaluation) of the fixed assets and immaterial assets (according to acquisition value or fair market value), method of amortization (linear, declining balance, or proportional to volume of production), method of evaluating investment property, method of evaluating inventory (according to the average or first-in first-out), method of reporting a business combination (purchasing method or pooling of interests – the latter does not apply at the moment due to a law passed a few years ago), method of reporting the progress on the fulfillment of construction contracts;
- choosing the currency that IFRS will be maintained in; RAS is maintained in rubles, whereas IFRS can be maintained in dollars or Euros;
- adjustment of the conversion norms, which is one of the main elements of the program’s efficiency. Conversion is completed in three stages – transfer posting, data transfer of the inventory accounting (only acquisition) and data transfer of the expense ledgers. The last two stages are affected by the difference in the way international accounting is maintained (for example, different methods for evaluating inventory are used for IFRS in comparison to RAS).
Information processing can only be begun after the program preferences are set.
Such procedures include all transactions that, according to the chosen accounting policy, do not convert from RAS, as well as special transactions whose recognition is required in accordance with IFRS (for example, recognition of financial leases):
- accounting of fixed and immaterial assets: entry of fixed assets (if for some reason it is undesirable to convert the entry from RAS), the choice of the amortization method, the basic parameters of calculating amortization, a change to the parameters of the fixed assets, asset retirement, reevaluation, etc.;
- inventory accounting: their evaluation, reevaluation, writing off, sale (entry is translated from RAS);
- expense accrual (expenses have been incurred, but the documentation has not yet been received) with the option of their subsequent reversal;
- accrual of reserves;
- reevaluation of monetary assets and obligations;
- cost calculation of the finished product output.
It is obvious that a more detailed list of working procedures will depend on the individual settings of the accounting, related to the specific type of business (which transactions are necessary to convert, which are not) and on the complexity of the business transactions.
The program allows one to avoid entering data manually for all above-mentioned procedures in IFRS. For example, according to RAS, one cannot enter expenses into the accounting until their documentation is factually received. This program, however, allows one to enter such expenses (that are incurred but are still missing the documentation – so-called “accruals”) with the possibility of their reversal in the future.
Finally, note that automation of the process of preparing the accounting according to IFRS with the use of the program 1C is not the ideal variant – it is only one of the methods of lowering expenses on accounting in regard to time and resources. Do not expect that after this module is implemented everything will run like clockwork. Every stage demands technical and methodological support, as well as inspection measures on the part of specialists and management. Mistakes are bound to occur especially in the beginning (for example, technical mistakes or human error due to inexperience with the program), and one needs to be prepared to efficiently detect and correct such errors.
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