About the Author
Yulia Mazur holds a degree from the Ryazan State Radio Technical Academy in Accounting, Financial Control, and Business Analysis. She has advised the Ryazan Duma on tax legislation on several occasions.
With more than ten years experience, Yulia has worked as a chief accountant for construction, entertainment, and retail companies. She has been with Alinga for more than five years.
Ms. Mazur is a Certified Professional Accountant.
 
Alinga Consulting Group
+7 (495) 988-21-91
consult@acg.ru
 
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Russia's markets are growing – and are already twenty years old. Or perhaps we should say they are only twenty years old. In these two decades, management methods have changed drastically – more than once. In our lifetime, such things, concepts, and events like investment, stock quotes, goodwill, foreign trade operations and the like have arrived and solidly entrenched themselves in Russia. Business presses on, taking long strides and not looking back. Behind it chases our good old accounting, sweating, limping, and gasping for breath. While it is supposed to be an impartial mirror of business, as well as an instrument of it and its judge, accounting in Russia today looks more like a ceremonial bystander, a distinguished old guy who is already a bit senile, but for whom you feel too bad to chase away. No one stands with him, but everybody tries to show at least a semblance of respect: they prepare balances, send them to the tax office…as if someone there actually reads them. In other words, it is unfortunate to state that accounting in Russia today does not sufficiently fulfill its functions to reflect a company’s financial situation, but is essentially useless for its main audience – business owners, potential investors, and managers.
Every accountant in Russia has heard or seen the abbreviations IFRS and RAS during their professional careers, but probably not everyone knows what they mean. The differences in maintaining accounting records by International Financial Reporting Standards (IFRS) and by Russian Accounting Standards (RAS) are currently quite significant although one shouldn’t lose sight of the efforts undertaken by our Ministry of Finance to reform RAS to make it more closely conform with IFRS. Over the last ten years, we have gradually created new RAS standards with which we have started to calculate assets and obligations expressed in foreign currencies, differences between profit for accounting and tax purposes, and much more. Nevertheless, the wide gulf between RAS and IFRS remains. At the end of 2010 and beginning of 2011, the Ministry of Finance threw a few more planks between this gulf: a few more RAS standards were developed and immediately confirmed, and significant changes were introduced to the existing RAS standards with the following documents:
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RAS 8/2010 “Estimated Liabilities, Contingent Liabilities, and Contingent Assets;”
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RAS 23/2011 “Cash Flow Statements;”
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Russian Ministry of Finance Order #66n from 02.07.2010 “On Accounting Forms for Organizations;”
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RAS 22/2010 “Correcting Mistakes in Accounting Records and Reports;”
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Ministry of Finance Order #186n from 24.12.2010 introduced changes to existing RAS standards.
This has changed much – for example:
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There is now a new concept similar to “Significant Errors” and correspondingly, materiality guidelines in the context of correcting errors in the accounting books and reports;
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The rule on accumulating reserves has changed: accumulating reserves on doubtful debts has ceased to be a rule, and is now an obligation;
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New concepts have been introduced: estimated liabilities, contingent liabilities, and contingent assets instead of contingencies and reserves for future expenses;
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The role of the “explanatory note” to accounting reports has changed.
And so forth.
Besides new obligations, what do the new accounting standards contain?
New rights and rules. And using them properly is our professional obligation.
What are the implications?
First of all, it will mean introducing significant changes into organizations’ accounting policies. As a legal instrument, accounting policy is necessary to make an informed decision from a number of options established by law. The correct decision will allow you to regulate many processes of your business, increase the effectiveness of the company’s resources, avoid easily-preventable mistakes, and it will make your accounting report more transparent and your business more attractive for investors. The accounting methods chosen to a large extent depend upon the specifics of a company’s activities and the accounting policy, among other things, contains information about such specifics.
However, most of the methods to choose from are universal and available to all.
An accounting policy is developed only once – like a start-up procedure when an organization begins its work - and should be established no later than 90 days from the day the legal entity is registered. However, if there are significant changes in the business operational environment, in Russian legislation, and/or in the normative legal acts affecting the organization’s accounting policy, then changes must be added to the accounting policy.
In conjunction with this – be careful! – because of the changes in accounting legislation in 2011, all organizations are obligated to make changes to their accounting policies in 2011.
What should a business’s accounting policy contain?
An accounting policy should regulate the maintenance of both the bookkeeping and tax accounts. Therefore it’s convenient to divide it up into two corresponding parts.
In terms of the accounting records, this part of the policy should contain:
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A working plan for the organization’s accounts.
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Classifications for the organization’s income and expenses on income (expenses) from everyday business activities and other income (or expenses) from other specific activities that the organization performs.
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A value threshold, above which assets are recorded as fixed assets, and below which as inventory. In accordance with Point 5 of RAS 6/01 “Fixed Asset Account,” such a threshold is determined in accordance with the technological features of the assets in question, but shall not be more than 40,000 rubles per unit.
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The procedure for revaluating fixed assets should be in conformity with Point 15 of RAS 6/01 “Fixed Asset Account.”
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Methods for accruing depreciation on fixed assets should be in conformity with Point 18 of RAS 6/01 “Fixed Asset Account”: (i.e. straight line method; declining balance method; depreciation method according to the number of years of useful life; depreciation method proportional to the volume of production (work).
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The useful life of a fixed asset is determined according to the Classification established by Government Resolution #1 from 01.01.2002.
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The method for determining the useful life of intangible assets can be chosen based on: the term of the patent/license; the expected term of use for the object, during which the organization can receive economic benefits (income); the production quantity or other natural indicator of the volume of work expected to be received as a result of using this object. Otherwise, it can be established that the object is an intangible asset with an undefined term of use.
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Methods of accruing amortization of intangible assets are stipulated in Point 15 of “Intangible Asset Account,” RAS 14/2007 can be chosen from: straight line; declining balance; depreciation method proportional to the volume of production (work).
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The procedure for evaluating inventory (with the exception of goods recorded at their purchase price) when it enters the production process or is otherwise disposed of can be based on the value of units of inventory, or at average cost, or by the value of items first purchased (FIFO). Applying each of the indicated methods by group (type) of inventory is done based on the assumption of accounting continuity.
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Use (or non-use) of the law to record in the accounting balance the balanced (rolled) amount of the deferred tax asset and deferred tax obligations.
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A small business should decide whether to apply or not apply RAS 18/02 “Expense Account on Profit Tax of Organizations.”
In addition to the rules for maintaining accounting records indicated above, which will remain in force in 2011, there is also a number of mostly new rules which should be highlighted in separately:
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The materiality of a mistake is based on both the size as well as the nature of the corresponding article (or articles) of the accounting report.
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Forms for Explanatory Notes to the Accounting Balance Sheet and Profit and Loss Report.
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A small business should determine whether or not to apply RAS 8/2010 “Estimated Liabilities, Contingent Liabilities, and Contingent Assets.”
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The procedure for disclosing (or not disclosing) information in recorded as contingent liabilities if, as of the reporting date, there is an unlikely reduction in the company’s economic benefits as a result of a contingent liability. This is the criteria of “improbability.”
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The procedure for grouping information on estimated liabilities and contingent liabilities.
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The procedure for using the non-disclosure law in exceptional cases for information on estimated liabilities, contingent liabilities, and contingent assets in the capacity stipulated in RAS 2/2010.
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The procedure for classifying liabilities “on the edge” in between estimated and contingent (if it is not possible to unequivocally classify them as either estimated or contingent). Strict criteria for distinguishing between the two.
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Classification of cash flows.
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An organization that is not an issuer of publicly traded stocks should determine whether they will apply RAS 12/2010 “Segment Information.”
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Determining the grounds for segmenting an organization must conform to RAS 12/2010 “Segment Information” (in particular, a basis may be: producing products, buying up goods, executing work, rendering services; major customers (clients); geographic regions in which the activity is performed; or structural subdivision of the organization).
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List of reportable segments if the organization decided to apply RAS 12/2010 “Segment Information.”
The following may be added to the basic rules for maintaining company tax accounting that should be reflected in the internal accounting policy:
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Tax accounting registers developed by the organization itself based on the requirements of the Tax Code of the Russian Federation.
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The chosen method of determining the date when income is received (or expenditures made) and whether by accrual basis or cash basis. Keep in mind the limitations on using the cash basis method.
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Classification criteria for allocation of costs as direct or indirect for the purpose of calculating profit tax, method of assessing inventories.
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The method for evaluating inventories when they enter the production process or are otherwise disposed of, as well as in the sale of purchased goods for tax accounting purposes (on the value of units of inventory, or at average cost, or by the value of items first purchased (FIFO), or the most recent acquisitions (LIFO).
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The procedure for evaluating depreciating property, procedure for assignment of cost value of property of up to 40,000 rubles per unit.
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Methods for property depreciation accrual (linear or non-linear).
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The procedure for using (or not using) special multiplying (or decreasing) coefficients to the depreciation rate.
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The use (or non-use) of the right to include in the cost accounting (tax) period for the purpose of calculating income tax expenses, a capital investment of 10% of the initial cost of fixed assets (for individual pieces of property – 30%).
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The procedure for creation and use of various reserves for the purpose of calculating profits tax (if the decision is made to create them.)
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The procedure for establishing the production cost of goods (or purchased goods) for tax purposes in accordance with the provisions of Articles 319 and 320 of the Tax Code of the Russian Federation.
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Procedure for recognizing costs for the purposes of calculating rationed costs for the profits tax, such as entertainment, costs of voluntary medical insurance, etc. Approved corporate recognition of such costs should be within the limits set by the Tax Code.
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Organizations working in the sphere of IT need to determine whether they will classify computer equipment as depreciating property for tax accounting purposes or use the right to count expenses on acquiring such equipment as material expenses.
This is not a comprehensive list. Not every company is using loan capital, so there may be no need to mention how to handle loan settlement in the internal accounting policy. On the other hand, the Tax Code provides a number of options and admissions depending upon the specific nature of the taxpayer’s field of activity. In this case, it is clear that the options chosen should be designated in the internal accounting policy.
In order for your policy to be truly effective, a systematic approach is necessary, as well as a thorough analysis of tax and accounting legislation. Taking into account the amount of material and specifications of Russian tax legislation, and its complex application in practice, developing an internal accounting policy takes quite a bit of time and energy and should be trusted to specialists.
Alinga Consulting Group’s specialists are ready to develop an internal accounting policy for your business.
Our credo:
An accounting policy should be individualized.
We study the specifics of your business in order to develop an internal accounting policy for your Company: the characteristics of your industry, investor demands, your Company’s long-term and short-term management plans, and a number of other factors.
An accounting policy should be as flexible as possible.
We cite the Company’s local corporate laws (conditions) in the accounting policy and assist in their development.
An accounting policy should make maximum use of rights stipulated by the law.
We describe all conventions of the Accounting Regulations, Chapter 25 (Profit Tax) of the Tax Code, and any other legislative regulations that may affect your business.
An accounting policy should be well-founded.
We always cite the corresponding normative acts when we propose solutions for you. Don’t forget that the rules of the game are established at the beginning – think about your internal accounting policy now.
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08.07.11