Corporate and annual financial statements by foreign companies operating in Russia
Author: Ekaterina Grebneva, Chief Accountant at Accountor Russia
When foreign companies operating in Russia prepare their annual financial statements, they often have a tough time ensuring that internal corporate reports prepared according to International Financial Reporting Standards (IFRS) match those prepared according to Russian Accounting Standards (RAS). Depending on business operations, this problem may be resolved by either applying the accruals method or using BRIDGE Report.
Why IFRS and RAS do not match?
International Financial Reporting Standards (IFRS) and Russian Accounting Standards (RAS) have historically served different purposes. For example, the purpose of financial statements prepared according to IFRS is to analyze the economic indicators of a particular company. Such statements are intended for company owners, investors and other market players. Whereas RAS reporting is first and foremost prepared for state authorities (tax office, statistics authorities, etc.)
Main differences: submission deadlines and cost recording
The abovementioned purpose differences determine the main differences in preparing annual reports under IFRS and RAS, i.e. document submission deadlines and cost recording principles.
The deadline for preparation of annual financial statements (IFRS) in foreign companies is within 5-10 days of the beginning of the New Year, while in Russia a company’s financial statements are prepared within the first 3 months of the beginning of a new reporting period.
The timing difference is due to the particularities of cost recording. The matching principle applies under international standards: expenses are to be recorded in the period during which income is received. And when recording the expenses incurred in the reporting year, accountants are entitled to determine themselves their amount based on their personal experience and statistics.
Under Russian standards, costs and revenues are recorded only if they are confirmed, i.e. when related primary documentation is available. This requirement does not allow quick recording of all operations performed in a certain period hence the 3 months allocated for preparation of annual financial statements.
These differences in reporting principles can result in inconsistencies between key indicators in reports, and this problem is especially relevant to foreign companies operating in Russia.
How to establish a correspondence between corporate and accounting reporting?
Each company has its own characteristics and way of doing business as well as its own procedure for keeping records of its business and financial activities. Individual decisions on the principles for correspondence between IFRS and RAS reports are therefore made for each specific situation. The following 2 methods are predominantly used:
- Accruals method;
- Preparation of two types of report based on BRIDGE Report.
This method consists in the accounting of assumed accruals. When accountants prepare reports using this method, they provisionally take into account certain expenses affecting the financial result despite having no primary documentation for these expenses. This method allows quick recording of the operations affecting the financial result exactly in the period during which these operations are performed.
The accruals method may be used only upon observance of the following conditions:
All documents or their draft with precisely set basic financial parameters are available to accountants;
Accountants have enough information about business operations and may obtain data from projected or planned expense or revenue amounts.
BRIDGE Report allows analyzing the discrepancies between the data in corporate report (IFRS) and statutory (accounting) report for comparable pairs in P&L (profit & loss) and BS (balance sheet) accounts from corporate and Russian chart of accounts. This document provides a list of reasons for discrepancies with a detailed breakdown of the discrepancies as well as detailed explanations.
We use this method in similar cases as it allows automating report preparation and analysis. Our IT specialists have developed a special 1 C add-on for this purpose.
What in the end?
Discrepancies between IFRS and RAS reports may arise, but they may be minimized or eliminated provided accountants are informed in a timely manner about planned or completed business operations. Otherwise, all inconsistencies between documents will be taken into account and analyzed through a special software and the help of a professional accountant. The methods considered in this article allow resolving the problem of mismatch between IFRS and RAS annual reports taking into account the particularities of each individual company’s activities.