29.11.06

Seminar Q & A
The Swissotel, Moscow
10 Nov, 2006

Situation: A Russian company has an outstanding debt with a foreign company which owns more than 20% of its authorized capital stock. The total shareholder debt to foreign organizations is more than 3 times greater than the difference between total assets and the amount of the liability.

Questions:

1. How should we account for the positive difference between accrued interest rates and maximum interest rates calculated according to Article 269 paragraph 2 of the Russian Tax Code (the RTC)? What portion of the interest on that debt can be attributed to an increase in the original cost of the fixed assets?
2. What are the specific accounting operations?

Answers:

1. Article 269 paragraph 4 of the RTC states that for taxation purposes, a positive difference between the actual and maximum interest rates calculated in the manner set forth in Article 269 paragraph 2 of the Russian Tax Code shall be treated as dividends. As such, this amount is not included in company expenses when calculating profit tax according to Article 270 paragraph 1 of the RTC.
   
   Moreover, the Tax Code regulations do not provide for including these dividend payments in the original cost of fixed assets. Within these regulations, the interest calculated (within the norms) may be equally apportioned to non-operating expenses (Article 265 paragraph 1 clause 2 of the RTC) and increases in the cost of fixed assets (Article 257 paragraph 1 and Article 254 of the RTC).
   
   In 2006, organizations were given the right to determine how they would report expenses that are equally attributable to several expense groups at once (Article 252 paragraph 4 of the RTC). The selected method must be stipulated in the company’s accounting policy.
   
   Given these circumstances, one may draw the following conclusions:
   
   

   the above-norm interest total paid in accordance with Article 269 paragraph 2 of the RTC shall be treated as dividends and may not be attributed to expenses when calculating profit tax and shall not be included in the original cost of fixed assets; the interest within the norm that was calculated in accordance with the regulations and the method stipulated in the accounting policy for may be attributed to non-operating expenses or may be included in the original cost of fixed assets.

   
   
2. Accounting legislation does not include standards for separating the interest calculated for credit and loans into standard and non-standard.
   
   Paragraph 12 of Accounting Regulation 15/01, approved by Decree No. 60n of the Russian Ministry of Finance on August 2, 2001, deals with loan and credit accounting and the expenditures associated with them. It states that expenses related to loans and credit shall be treated as expenses for the period in which they are made. This does not include any part of the expenses which should be included in the cost of investments.
   
   Paragraph 6 of Accounting Regulation 5/01, approved by Decree No. 44n of the Russian Ministry of Finance on June 9, 2001, deals with inventory accounting. It states that interest on borrowed funds associated with the cost of inventory paid prior to entering the inventory into accounting shall be considered part of the actual cost of the inventory. Thus, the interest associated with the purchase of fixed assets and inventory prior to putting fixed assets into operation and investory into the accounts increases the cost of these assets.
   
   The accounting entries for the calculated interest is as follows: ebit 08, 10; Credit 66, 67 (before the assets are entered into accounting); Debit 91.2; Credit 66, 67 (after assets are entered into accounting).

Situation: A company makes monthly payments for use of a licensed program. The program supplier holds the property right to that program.

Question: How should we account for these payments?

Answer: Paragraph 4 of Accounting Regulation 14/2000, approved by Decree No. 91n of the Russian Ministry of Finance on October 16, 2000, is devoted to intangible asset accounting. It says that a company may include the cost of obtaining exclusive copyrights to computer programs in its list of intangible assets.

Therefore, the monthly payments for use of the licensed program should be included in the company’s expenses (all-purpose business or commercial expenses).

The accounting entries are as follows: Debit 26, 44; Credit 60.

Situation: A foreign counteragent presents a company with documents (invoices) written in a foreign language.

Question: Do these documents have to be translated into Russian?

Answer: Paragraph 9 of the Russian Accounting Regulations approved by Decree No. 34n of the Russian Ministry of Finance on July 29, 1998 states that documentation on property, liabilities, and other business-related facts as well as entries into accounting records should be made in Russian. The original accounting documents provided in foreign languages should have line-by-line translations into Russian.

According to Article 252 paragraph 1 of the RTC, substantiated and documented expenditures paid (incurred) by the taxpayer count as expenses.

Documented expenses are understood as those that are documented in accordance with the legislation of the Russian Federation. This can be done either with documents created in accordance with business customs, or documents approved by the foreign government in the country where the corresponding expense was incurred.

The relevant documents should nevertheless include a line-by-line translation into Russian.

Either a legal entity or an individual may translate these documents. Company employees with the necessary knowledge and qualifications to create a legible and accurate translation may also translate the documents.

The translator’s qualifications must be verified with a special training certificate and other means of proving the necessary level of communication in the languages used in the translation and professional knowledge that corresponds to the content of the translation. Moreover, the translator may be required to produces a certificate proving his/her competence in the foreign language from which he/she is translating.

Thus, if the documents (invoices) are to serve as proof for expenses incurred by the company, they must be accompanied by a line-by-line translation into Russian. If the documents (invoices) are accompanied by any other documents written in Russian (or translated into Russian), they do not need to be translated.

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