Accounting in Russia - Coursework Example

ACCOUNTING IN RUSSIA 16-Feb-2009 INTRODUCTION After the fall of the Berlin Wall that symbolized the end of communism, the erstwhile USSR brokeup into the Russian Federation and other republics. This was the time for western style capitalism that was introduced in Russia. During the early 1990’s, the Russian Federation was further split into Russia and other republics that were allied with it. With the advent of laissez faire economic systems or a variant of it, since the country made a transition to the market economy in stages, there was a need for western style systems of governance. This necessitated a movement away from the earlier era of accounting standards that were in tune with the centrally planned economy of the USSR but were outdated with the introduction of capitalism. This paper discusses the history of accounting in Russia and the recent developments in formulating accounting standards and governance. Due to the large number of corporate scandals that rocked Russia in the first few years of the 21st century, the Russian government has hastened the move to accounting regulation and corporate governance. SIGNIFICANCE OF RUSSIA IN THE GLOBAL MARKET Russia matters to the global economy. As a country with significant proven and unproven natural resources, mainly oil among them, it is one of the world’s leading suppliers of oil and commodities. With the spike in Oil prices in the latter parts of 2007 and continuing into 2008, the geo-strategic importance of Russia increased dramatically with the result that the world was dependant on the supply of Russian oil and gas. With regards to the supply of gas to Western Europe, Russia flexed its muscles and ensured that the terms set by it were followed at all times. In some instances, it even threatened to cut off the supply of gas to Europe as a retaliatory measure. Thus, Russia is in a position to dictate terms to the West. It has to be qualified that this is a recent development given the state of affairs in the 1990’s and the first few years of this decade as the West had the upper hand in its dealings with Russia. Further, Russia is an attractive destination for foreign capital and as a captive market among the emerging economies that go by the acronym BRIC (Brazil, Russia, India and China). It is in the interest of the western multinational corporations to have Russia adopt an integrated accounting system in line with their expectations. And the sense of nationalism that characterizes the Russian attitude towards the west has resulted in its own set of priorities for both sides. It is in this context that the move towards transparent accounting system has to be viewed. The twin sets of competing pulls and pressures play their own part in this story. Thus, this is not an isolated phenomenon but one that is inextricably interlinked with the changing geo politics of the region. ACCOUNTING STANDARDS AND PRACTICES IN RUSSIA Accounting as a practice was very well developed in Russia prior to the communist revolution in 1917. And the practice reflected and was in line with the European standards of that era. The emphasis changed with the revolution and the system of accounting was viewed as a means to control the ownership of assets and the factors of production. A crucial difference between the western and Russian accounting standards is that accounting in Russia from the historical perspective was never viewed as a tool for decision making. Whereas the western models view the accounting and financial statements as a means of measuring the financial health of the company and take appropriate decisions. The “revolution in transformation of Russian accounting” is being primarily led by the Ministry of Finance. The proposal is to have a multi tier system of accounting that takes into account the top down approach from accounting and auditing laws to guidelines and manuals for practitioners. This was a process set in motion in the 1990’s with the introduction of the bill to create a new system of accounting in Russia. We take a look at the constituents of the tiered system of accounting that is now being put in place. The first tier would be the set of laws on accounting and auditing codified in the constitution and guaranteed by decree to be followed. This would be the basis for the tiers down the ladder to follow. The next tier would be the mandatory regulations that would be the conceptual underpinning of the system. These would include definitions on what and how the accounting standards that are proposed would be. After the standards have been defined and the laws for the same to be implemented passed, the next tier would be the standards themselves. Thus, the actual nuts and bolts of how the new accounting system would work would be defined here. The last tier would comprise of the practitioners guide to accounting that would be the manuals and guides for the companies and accountants to follow. FINANICAL REPORTING AND AUDITING REQUIREMENTS IN RUSSIA As with all things that prevail in Russia, the system of auditing is an alien concept for most Russian companies. In the west, it is natural for publicly listed companies to divulge details of their financial position by reporting and declaring audited results for the fiscal year gone by. In a system that was driven centrally and where openness was something that had to be introduced as a political measure, auditing of financial statements is one of the least understood of the whole accounting paradigm. This situation has been rectified partly with the adoption of auditing standards and making it mandatory for companies to produce their financial statements. The prevalence of state control made auditing of accounts virtually non-existent and whatever the politburo wanted to portray was given as statistics. This explains the fact that although there were more than 3 million accountants in Russia during the communist era, there were not too many auditors. As has been discussed elsewhere in this paper, the absence of management accounting has resulted in lack of proper financial reporting regulations. The move towards a unified accounting system has to concentrate on making the corporate financial reporting transparent and accessible to the investors. It is hoped that auditing and reporting of financial data would be precursors to an effective governance model for the Russian companies. TAX PHILOSOPHY CURRENT TAX PRACTICES IN RUSSIA The basis for taxation in Russia is the Russian Tax Code enacted in 1998. Prior to that the system of taxation was a complicated one with several layers of tax laws that encompassed local, regional and federal tiers each with its own sets of rules and regulations. The system was often referred to as a “patchwork” of rules and regulations with nobody seemingly able to understand the system. Further, the system was incomplete with several loopholes wherein one could manage to evade the system. The new Russian Tax code is an attempt at comprehensive tax reform with structures of taxation at every level of the economy. The present system as it exists today has provisions for taxation right from the corporate ad valorem taxation to VAT (Value Added Tax) at the regional level to the property and local taxes. The underlying philosophy of the tax code is to re-centralize and streamline the tax procedures. The need for a unified tax code was felt acutely in the 1990’s and as with so many aspects of the Russian economy; it was Boris Yelstin who first proposed the centralized code for taxation. RECENT DEVELOPMENTS AND IMPENDING ACCOUNTING ISSUES IN RUSSIA We have discussed the multi-tier system of accounting laws and standards that have been put in place in Russia. These standards have evolved since the late 1980’s beginning with the changes in Russian polity following Gorbachev’s perestroika and glasnost. In this section, we will review some of the recent developments and challenges to the transition as they exist in Russia now. One of the biggest challenges to the new accounting system is the relative newness of the concept. Historically, the decisions as well as the planning came from top down approaches and the high degree of centralization meant that accounting was an arcane science to many. Thus, with the adoption of the new system, the creation of laws to implement the same is still somewhat of a mystery to many Russians. The implementation and the enforcement of standards though codified into laws are still not happening at the desired rate. Next, the accounting standards need to be brought in line with international norms and this would call for greater transparency among the corporations and oligopolies. The latter are crucial as they enjoyed a monopoly over the economy till Putin regulated their activities. However, it is a fact that business in Russia is still opaque to many westerners and greater disclosure norms in the preparation of the chart of accounts needs to be carried out. The other challenges are the slow pace of tax reform and the alignment of management accounting with that of cost accounting. As of now, managerial accounting is not a practice that is widely used in Russia and cost accounting standards are still in their infancy. The major challenge is the reform of the tax laws. The matter of tax reform is a subject for discussion in it and it would suffice to say that given the complicated sets of taxation prevalent in Russia, it is both an accountant’s headache as well as more outgo for taxes for the companies operating in Russia. DIFFERENCE BETWEEN ACCOUNTING STANDARDS IN RUSSIA AND THE US The RAR (Russian Accounting Regulations) and the IAS (International Accounting Standards) differ in many respects. Due to the widely differing nature of the standards, it is often difficult for western businessmen to understand the way in which business is transacted in Russia. It has to be pointed out that until Russia makes the transition to IAS, there are bound to be differences in the way financial statements are interpreted by the standards of western accounting. First, the difference in valuation of the asset is a feature of the Russian accounting system. The value is taken at historical cost and not at economic value or fair value. In other words, depreciation of the asset is not taken into consideration. Next, the revenues can be shown on an accrual basis as well as on a cash basis. And the method of reporting of loan reserves is rather lenient under RAR. The main obstacle to adopting western IAS norms is the fact that in Russia, there still exist a barter system of transactions and hence it is difficult to price the value of goods effectively. In the absence of a market mechanism for pricing and transactions and in an economy where exchange of goods is the norm in some places, western norms may not be applicable to a large extent. CONCLUSION This paper has described a high-level overview of the accounting practices in Russia as they evolved with the transition of the economy from a centrally controlled one to a market driven one. As has been pointed out throughout the paper, the transition is still in progress and there have been many hurdles along the way. And the people in charge of Russia since the 1980’s, from Gorbachev and Yelstin to Putin have realized the importance of moving to a western notion of economic and political structure. In conclusion, it is evident that though much progress has been made, there still needs a lot to be done to bring Russian accounting systems in line with international practices. It is hoped that this transition would be fast and smooth paving the way for a full integration of Russia into the global economy. Sources Leon, Philip. “Russia’s Accounting Transition”. The ICAR website. 15 Nov 1999. 16 Feb 2009. http://permanent.access.gpo.gov/lps3997/9902icar.htm Enthoven, Adolf. “The Russian Revolution in Accounting and Auditing”. The World Bank Website. 20 Mar 2001. 16 Feb 2009. http://www.worldbank.org/html/prddr/trans/janfeb99/pgs22-25.htm “Differences between US GAAP and IAS”. Science Direct.com. 17 Feb 2005. 16 Feb 2009. http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B7GWN-4FH4V43-2&_user=10&_rdoc=1&_fmt=&_orig=search&_sort=d&view=c&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=3e1e808745960b566f196a8db70cf967 “Lessons from Russia’s 2001 Flat Tax Reform”. Voxeu.org. 19 Feb 2008. 16 Feb 2009. http://www.voxeu.org/index.php?q=node/941 “Russia’s Accounting Moves West”. All Business.com. 01 Jul 1999. 16 Feb 2009. http://www.allbusiness.com/accounting/291270-1.html “Russian Accounting and Taxation Systems”. UWASA.fi. 01 Sep 2002. 16 Feb 2009. www.uwasa.fi/midcom-admin/ais/midcom-serveattachment-4415/Lection2(Accounting_and_taxation)08.ppt Read More