Financial Environment in Russia - Essay Example

International Accounting: Russia RUSSIAN: AN OVERVIEW Russia, a well-known country, is the largest country inthe whole world. Its area is twice bigger than the territory the US covers. The country is full of large cities as well as highly modernized modes of communication. It is also a culturally rich country which initially was under a powerful dynasty and had its own cruel leader. However, now it is a stable economy with its own Constitution. The head of the state is called the President and that of the Government is known as the Premier. Russia borders on the Arctic Ocean, the North Pacific Ocean, and Europe. The neighbouring countries are China, North Korea, Finland, Georgia, etc. (Russia: Introduction n.pag.). It is an independent economy having a budget expenditure of around $372 billion and the unemployment rate being 6.6% (Russia: Statistics n.pag.). In the year of 1990, the economy changed itself from being a centrally planned to that of a free market economy (Russia: Economy n.pag.). FINANCIAL ENVIRONMENT IN RUSSIA\ According to Vladimir Putin, the Prime Minister of the Russian Federation, Russia has been ranked among the top five economies for alluring foreign direct investment (FDI) (Doing Business in Russia n.pag.). The country has shown a good figure in terms of GDP (Gross Domestic Product) in 2011 where the Government debt was around 10% of GDP and the inflation rate being 6%. The Government is also planning to invest around $1.5 trillion for developing the country’s economy for the upcoming three years. However, the figure of FDI has not grown substantially as it is just accounting to an amount nearly $40 billion coming to the third year. And that means there are not many multinationals or foreign companies investing in the country (Doing Business in Russia n.pag.). BUSINESS ENVIRONMENT For doing business in Russia, there are certain accounting principles that one needs to follow. Each and every registered company or firm is required to prepare individual RAS financial statements for each financial year ending on the 31st of December. The framing of the financial statements are prescribed by the Ministry of Finance, and it includes a two-year’ comparative balance sheet, profit and loss accounts, a statement for equity changes, and a one-year’s comparative cash-flow statement. Supplementary notes are also required (Financial Reporting Framework in Russia n.pag.). Various international organizations like the World Bank and IMF are giving their supporting hand to the Russian Federation in order to improve the GDP rate. According to a study by the World Bank, the following data has been figured out (World Bank n.pag.). Figure one. Graph showing the growth of GDP over the years in comparison with Europe & Central Asia: Source: World Bank Here we can see that in Russia, the growth of GDP was very low in 2003 and gradually became somewhat consistent over the years of 2006 and 2007. There were no production in 2009, but it came to a considerable position in 2010 and 2011. According to IMF, this has also been found that Russia has been the largest borrower. Hence IMF is examining what Russia, in return, has produced or improved before sanctioning any more funds (Russia: The IMF’s biggest failure n.pag.). LEGAL ENVIRONMENT Taking the legal environment into consideration, if a person gets engaged into a tax or commercials dispute in Russia, according to the Court of Law, he/she will have to approach the arbitrazh courts. The procedure starts with filling in a form, and the whole procedure, in original, takes around 9 to 12 months to get completed. There are also some business regulations that are practiced in Russia which are the competition policy and the policy of price controlling (Business Environment in Russia n.pag.). Russia adopted the Civil Law for its jurisdiction in order to compete with the Western-European nation states by strengthening political and economic power (The Common Law and Civil Law Traditions n.pag.). Investor protection and corporate governance are at the top position in the economic agenda of the Government. There have been various amendments in the acts for joint stock companies as well. Care has been taken to protect the risk of the shareholders regarding the suspension of the companies and also to assure the right of the existing shareholders regarding the first refusal (Principal Laws Governing Business Operations in Russia n.pag.). CAPITAL MARKETS The chief stock exchange is Russia is MICEX-RTX which was formed in 2011 by the merging of two previous stock exchanges, MICES and RTX. It deals with shares, equity, derivatives, bonds, and currencies. To consider the capital and equity markets, in 2011 there was a mixed equity offerings. The Initial Public Offerings (IPO) in the beginning of the year was in a better position as compared to the later part. The reason might be the unfavorable market conditions. Some of the companies that came for the IPO are HMS Group, Utinet.ru, etc. Only Utinet.ru was MICEX-RTS listed, and the others were subsidiaries to distant holding companies. Apart from these there were some Russian companies too attempting for IPOs, but those were mostly cancelled or postponed for the adverse market conditions (Broad, Dashko and Strizh n.pag.). ACCOUNTING REGULATION In Russia, the financial reporting structure is controlled by the state. The direct users of the statutory financial statements of Russia which are based on the Russian Accounting Standards (RAS) are the state authorities. They are not used by the normal third party companies. The International Financial Reporting Standards (IFRS) are recently becoming more crucial for further strengthening of RAS as well as making it compulsory for some of the Russian entities (Financial Reporting Framework in Russia n.pag.). As discussed earlier, in order to compile by the accounting regulation in Russia, every company which is registered in Russia needs to prepare the financial statements as prescribed. After preparing, it is required to get them audited too (Financial Reporting Framework in Russia n.pag.). Now if IFRS is compared to Russian Accounting Principles (RAP) also called RAS, unlike IFRS, RAP is used by all the organizations. IFRS has got an approach of a plain and bold type of paragraphs which is not a requisite of RAP. However, both of these approaches strive to give a clear picture of the accounting figures. Still it can be said that IFRS is a vast concept in comparison to RAP, because in case of RAP the exemptions are limited for small or medium-sized businesses (Munnings 7). FEATURES OF ACCOUNTING MEASUREMENTS Some of the features of Russian Accounting Principles are briefed below: In RAS, there is a prescribed format of Profit & Loss Account and a balance sheet, which is required to be followed accordingly. Accrued costs, i.e., cost already incurred, but payment needs to be made in future, are not taken into account. There are mainly three divisions of costs - ‘costs of goods sold’, ‘administrative expenses’, and ‘other expenses’. Expenses are shown only if the relevant documents are provided by the suppliers and if they are correct. Revenue is accounted only after the legal right pertaining to the goods or services has been conveyed to the buyer and after the buyer accepts the same or the buyer has felt some economic benefit after the transaction is over (Schneider and Bitzi 5 - 6) CONNECTING TAX TO ACCOUNTING In Russia, the tax period is according to the calendar year, i.e., the 31st of December. Tax has to be paid by the 28th of March next year. It can be paid either on a monthly or quarterly basis. Tax is applied in various facets like dividends, income related to dispersion of profit, income from debentures or other debt instruments, royalties, income from the share selling if at least 50% of the assets of the company are in Russia, revenue from the sales of properties in Russia, etc. Expenses deducted from profits (to some extent) for tax calculations are advertising expenses, entertainment, insurance, research & development, reserves, loss carry forward, taxation of dividends, etc. Apart from the profit tax, the value added tax also applies to the companies in Russia (Doing Business in Russia 29). AUDITING ENVIRONMENT There are mainly two types of taxation audits in Russia – Chamber Audits and On-site Tax Audit. The first one is conducted in the tax authority’s office and the other one in the premises of the tax payer. The former method is an auditing system where the auditor studies various filed documents of the concerned person. It may cause some harassment to the tax-payer as the auditor might ask for various explanations regarding the papers or might ask for some other papers too. More problematic from the tax-payer’s point of view is the following method –an on-site tax audit. In this case the auditor visits the place of the organization or the firm and scrutinizes things. This creates hassles to the tax-payers because, in this case, the auditor almost forgets the law sometimes (Larina n.pag.). CREDENTIALS FOR ACCOUNTANTS The role of accountants is very vital in any country. In case of Russia, where there are some strict principles to follow, accountants play a very significant role. There is a number of associations of accountants working in Russia. Some of them are ‘The Institute of Professional Accountants of Russia (IPAR)’ and ‘Russian Collegium of Auditors (RCA)’ (Accounting Associations – International n.pag.). IPAR is a non-profit organization which assists in accounting, auditing, training, retraining, etc. of accountants in order to serve an organization in an expertise manner (Institute of Professional Accountants of Russia n.pag.). RCA is working in the field for over 17 years in order to serve the accounting needs of an organization in Russia. RCA works in accounting with its qualified force along with the Executive Directorate (RCA) as well as the Regional Councils. It maintains its unique qualities like consistency and professionalism in order to give its best to the Russian organizations (Russian Collegium of Auditors). IASB & IFRS IASB stands for International Accounting Standard Board. It is an independent body of IFRS. It supports IFRS’ objectives by various activities. Some of them are creating of XBRL taxonomy, supporting the daily operations of IFRS, maintaining and improving internal and external relationships, etc (About the IFRS Foundation and the IASB n.pag.). It is said that Russia will finally transit to IFRS by 2018. Various important measures have been included in the IFRS and it is expected that from 2012 onwards every organization and company will start to adopt the new principles of IFRS. IFRS is turning to be the universal accounting language so that the principles are easily maintained by every economy. Russia has already started to adapt the principles with its general accounting standards since 1998 (Novosti n.pag.). CONCLUSION After studying the business environment in Russia it can be concluded that Russia is healing up well with its economy abiding the standard taxation and business policies. Further if the IFRS can be made globalized, along with Russia, other countries will be equally benefited as it will ease the inter-country trades. References About the IFRS Foundation and the IASB, IFRS, n.d., n.pag. Web. 20 May 2013. . Accounting Associations – International, UTM, 2007, n.pag. Web. 20 May 2013. . Broad, Carter, Dashko, Roman & Strizh, Vasilisa. Russian Federation, Practical Law Company, 2013, n.pag. Web. 20 May 2013. . Business Environment in Russia, S&G International Business Partnership, n.d., n.pag. Web. 20 May 2013. < http://www.sg-sg.com/eng/articles/4.html>. Doing Business in Russia 2012, Deloitte, 2012, n.pag. Web. 20 May 2013. . Financial Reporting Framework in Russia, IAS Plus, 2013, n.pag. Web. 20 May 2013. . Institute of Professional Accountants of Russia, QFinance, 2012, n.pag. Web. 20 May 2013. . Larina, Nataliya. “An Overview of Tax Audits in Russia.” The CPA Journal, 2005, n.pag. Web. 20 May 2013. . Munnings, Roger. “IFRS compared to Russian GAAP: An overview.” KPMG, 2005, n.pag. Web. 20 May 2013. . Novosti, Ria. “Russia to Adopt IFRS by 2018.” The Moscow News, 2013, n.pag. Web. 20 May 2013. < http://themoscownews.com/business/20130225/191268900/Russia-to-adopt-IFRS-by-2018.html>. Principal Laws Governing Business Operations in Russia, Russian-European Chamber of Commerce, n.d., n.pag. Web. 20 May 2013. . Russian Collegium of Auditors, WAccounting, 2009-2012, n.d., n.pag. Web. 20 May 2013. . Russia: Economy, Global Edge, 2013, n.pag. Web. 20 May 2013. . Russian Federation, The World Bank, 2012, n.pag. Web. 20 May 2013. . Russia: Introduction, Global Edge, n.d., n.pag. Web. 20 May 2013. . Russia: Statistics, Global Edge, 2011, n.pag. Web. 20 May 2013. . Russia: The IMF’s Biggest Failure. Business: The Economy, 1999, n.pag. Web. 20 May 2013. . Schneider, Ulf and Adeas Bitzi. Comparing Russian Accounting Standards with U.S. GAAP, Understanding Russian Accounting Principles, 2010, n.pag. Web. 20 May 2013. . The Common Law and Civil law traditions, The Robbins Collection, n.pag. Web. 20 May 2013. . Read More