In 1998, the Russian government adopted a program for accounting reform, which designated International Financial Reporting Standards (IFRSs) as the main instrument of the reform. In July 2004, the Ministry of Finance (MoF) developed and approved the Concept of Mid-Term Development of Accounting and Financial Reporting in the Russian Federation for the period 2004 - 2010. According to the Concept, requirement for IFRSs reporting will be gradually extended to different classes of companies in stages through 2010, though not to small companies. At the same time, the MoF will be working to bring Russian Accounting Standards (RASs), which significantly differ from IFRSs, more in line with IFRSs. However, according to the article "Russia's Road to IFRS", progress in accounting reform has been somewhat haphazard: as of 2006, there was no official translation of IFRSs into Russian, and several vital pieces of enabling legislation were held up in the Duma (Russian Parliament). Namely, the MoF prepared a draft of the law on preparation of consolidated financial statements in accordance with IFRS and a draft of a new federal law on accounting. It is anticipated that the law on consolidation will define the timing for the transition to IFRS for different types of companies in Russia. However, as of 2007, both laws are still under consideration in the Duma.

General Overview

In 1998, the Russian government adopted a program for accounting reform, which designated International Financial Reporting Standards (IFRSs) as the main instrument of the reform. On July 1, 2004 the Ministry of Finance published the "Concept of Mid-Term Development of Accounting and Financial Reporting in Russian Federation." The aim of the Concept is to increase the quality of the reporting information and secure its availability for the users. According to the concept, in the period between 2004-2007 all public interest enterprises, except those which are listed on foreign exchanges and prepare financial statements in accordance with other internationally accepted accounting principles, will be required to use IFRSs in their consolidated accounts. Russian Accounting Standards (RASs) based on the IFRSs and the relevant enforcement infrastructure should be developed during this period. From 2008 to 2010, all public interest enterprises will be required to use IFRSs in the consolidated statements. The possibility of allowing certain enterprises to prepare individual financial statements using IFRSs instead of RASs will be considered. (Concept of Development 2004; PWC 2006, p. 20)

According to a report by PricewaterhouseCoopers, RASs regulate major aspects of accounting, as well as the presentation and disclosure of information (such as accounting policies, fixed assets, intangible assets, inventories, income and expenses, related parties, segment information, government grants and others). The new RASs have introduced fundamental accounting assumptions and requirements, such as going concern, consistency of accounting policies, accrual basis, prudence, substance over form, cost-effectiveness and others, thus bringing Russian practice closer to international practice. Although accounting procedures are gradually becoming more harmonized with IFRSs, there is still a long way to go. Some significant differences continue to exist and in some cases there are no specific RASs that cover certain areas. For example, there are no rules for accounting for the impairment of some assets. Nor is there a specific rule for business combinations. Moreover, some of the adopted standards are based on older versions of the corresponding IFRSs. The Russian versions of the adopted standards are not mere translations of the English language originals but in many cases abbreviated, simplified versions of the original English language IFRSs. There is a timing lag between the time a new international standard is issued and the time that new standard is translated into Russian and adopted as part of the Russian accounting rules. (Gethin 2006, p. 26; McGee and Preobragenskaya 2004, p. 9; PWC 2006, p. 20)

In his article "Russia's Road to IFRS" prepared for the 2006 World Congress of Accountants, Howard Gethin notes that although the Government of Russia declared its route for the integration of IFRSs into RASs, progress in the accounting reform has been somewhat haphazard: as of 2006, there was no official translation of IFRSs into Russian, and several vital pieces of enabling legislation were held up in the Duma (Russian Parliament). As stated in the Concept, public companies are expected to present their consolidated accounts in accordance with IFRSs by the end of 2007. On October 29, 2004, the Duma gave preliminary approval to the Law on Consolidated accounts. However, as of January 2007, the law has not yet been passed. (Deloitte IAS Plus website; Gethin 2006, p. 26; Gregson 2007, pp. 38-39)

Moreover, in December 2005, the MoF posted on its website the Draft Law on Official Accounting which, according to the Ministry, is a step in the implementation of the "Concept of Mid-Term Development of Accounting and Financial Reporting in Russian Federation." In addition to the introduction of unified accounting requirements and principles of legal regulation, the Law made a distinction between the role of governmental and non-governmental bodies. According to the Draft Law, a number of self-regulatory bodies will be given responsibility to prepare accounting standards which will be approved for application by governmental bodies. In December 2005, opponents of the MoF's approach also submitted to Duma for consideration the Draft Law Concerning the Regulation of Accounting and Financial Reporting which advocates development of unified standards for financial reporting and the definition of the regulatory system for accounting at the legislative level. (Buza 2006, pp. 131-133)

Accounting in Russia is regulated by state authorities, rather than by independent professional organizations. The regulatory framework for Russian accounting has three levels. The first level includes the Federal Law on Accounting, the Civil Code, the Federal Law on Joint-Stock Companies, etc. The second level of the regulatory framework consists of Russian Accounting Standards (RASs), the Chart of Accounts and other accounting regulations. Regulatory bodies overseeing Russian accounting principles include the MoF, the Central Bank of Russian Federation (CB), the Federal Service on Financial Markets (FSFM), and the Federal Tax Service. The credit institutions regulated by the CB are required to prepare financial statements in accordance with IFRS (in addition to the financial statements prepared in accordance with Russian GAAP / Central Bank regulations). (IPAR 2006, p. 79; PWC 2006, p. 20; E&Y 2006, p. 35)

All companies listed on the Russian Stock Exchange should submit quarterly financial reports (balance sheet, profit and loss statement and required disclosures) and additional information to the FSFM within 30 days after the close of the quarter. As of 2006, such companies were permitted to file their IFRSs or US GAAP based financial statements in lieu of statutory accounts. In the future, however, they will need to make their existing IFRSs or US GAAP based financials available to the general public. (Ernst & Young 2006, p. 40)

Order No. 44-2534/04-01 of the Federal Service for Insurance Supervision (FSIS), dated April 4, 2005, "On Submission of Annual Financial Statements and Supervision Reports, Annual Statistical Reports for 2004 by Insurance Companies to the Federal Service for Insurance Supervision and Territorial Insurance Supervision Bodies," provides information on statutory documents that insurance companies should use as a guide when submitting reports. It is also specified that insurance companies located in the Central Federal Region should submit annual financial statements and the reports submitted over the course of supervision, in addition to the annual statistical reports for 2004, directly to the Federal Service for Insurance Supervision. (PWC 2006, p. 20; E&Y 2006, p. 35)

The accounting policies of a given company are developed on the basis of the legislation and regulations from the first two levels. Each company keeps its accounting books and prepares its financial statements in accordance with its approved accounting policies. One of the major differences between Russian accounting and international practice lies in the understanding of the term "accounting" itself. In Russia, the term has a primary meaning of bookkeeping and a secondary connotation of financial reporting. Therefore, Russian accounting rules give extensive coverage to bookkeeping procedures, rather than financial reporting rules. (PWC 2006, p. 20; E&Y 2006, p. 35)

In order to disseminate IFRSs more widely in Russia, a project has been launched by the European Union, in conjunction with the Association of Chartered Certified Accountants (ACCA) and PricewaterhouseCoopers, FBK (a Russian accountancy firm), and Agriconsulting (a Russian consulting business). Started in December 2005, "Implementation of Accounting Reform in Russian Federation," is a two-year project, which involves accounting firms and professionals in Russian business, as well as the Ministry of Finance and the Ministry of Agriculture. The IFRS implementation program has four main branches, The first component is Policy and Legal Advice, and closely involves the MoF and the ACCA. The Training and Development will propose recommendations for improvements to national studies and training in order to make them more suitable for international business practices. ACCA is closed involved in this component. Information and International Cooperation component is intended to spread the message about the reform initiatives to Russian Firms. The final component is Accounting Reform in Agricultural Sector, which is being undertaken by Agriculture Ministry of Russia. (Gethin 2006, p. 26)

The Institute of Professional Accountants of Russia (IPAR) is a member of the International Federation of Accountants (IFAC). Russian Collegium of Auditors (RCA) is an associate member of IFAC. (IFAC website)

The Principles

IFRS 1: First-time Adoption of International Financial Reporting Standards (effective 2006)

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There is no publicly available information as to Russia's compliance with this principle.

IFRS 2: Share-based Payment (effective 2005)

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There is no publicly available information as to Russia's compliance with this principle.

IFRS 3: Business Combinations (effective 2004)

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According to a 2006 report by PricewaterhouseCoopers, Russian accounting may differ from that required by International Financial Reporting Standards (IFRSs) because of the absence of specific Russian rules on the classification of business combinations between acquisitions and uniting of interest; and consolidation of special purpose entities. There are no rules on provisions in the context of business combinations accounted for as acquisitions. (PWC 2006, p. 25)

There are inconsistencies between Russian rules and IFRS that could lead to differences for many enterprises in certain areas. Under Russian rules, goodwill is calculated by reference to the book value of acquired net assets. (PWC 2006, p. 26)

IFRS 4: Insurance Contracts (effective 2006)

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There is no publicly available information as to Russia's compliance with this principle.

IFRS 5: Non-current Assets Held for Sale and Discontinued Operations (effective 2005)

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There is no publicly available information as to Russia's compliance with this principle.

IFRS 6: Exploration for and Evaluation of Mineral Resources (effective 2006)

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There is no publicly available information as to Russia's compliance with this principle.

IFRS 7: Financial Instruments: Disclosures (effective 2007)

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There is no publicly available information as to Russia's compliance with this principle.

IAS 1: Presentation of Financial Statements (effective 2007)

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There is no publicly available information as to Russia's compliance with this principle.

IAS 2: Inventories (effective 2005)

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According to a 2006 report by PricewaterhouseCoopers, under Russian accounting requirements, inventories are initially recognized at cost. The cost of inventories (by types) can be assigned by using different cost formulas in the event they are transferred for production or otherwise are disposed of. The following cost formulas are allowed: specific identification; average cost; first-in, first-out (FIFO); or last-in, first-out (LIFO). Finished goods are valued at actual cost, standard cost or direct costs. Work in progress can be valued at standard cost, direct costs, cost of raw materials and semi-finished goods, or actual cost (for unique production only). (PWC 2006, p. 21)

For reporting purposes, inventories should be measured at the lower of cost and net realizable value if (1) the price of inventory decreased during the reporting year, or (2) if inventory became obsolete or partially damaged. Provisions for impairment of inventories are created at the reporting year-end. In the balance sheet, inventories are shown net of the provision. (PWC 2006, p. 21)

IAS 7: Cash Flow Statements (effective 1994)

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According to a 2006 report by PricewaterhouseCoopers, Russian rules do not define the term "cash equivalents" and, therefore, cash balances per cash flow statement are reconciled to cash, rather than to cash and cash equivalents. (PWC 2006, p. 22)

IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors (effective 2005)

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According to a 2006 report by PricewaterhouseCoopers, there are inconsistencies between Russian rules and International Financial Reporting Standards (IFRSs) that could lead to differences for many enterprises in certain areas. Under Russian rules, the correction of errors is included in the determination of the net profit or loss for the reporting period, but separate disclosure and pro-forma restated comparative information are not required. Extraordinary items must be disclosed separately (PWC 2006, p. 26)

IAS 10: Events after the Reporting Period (effective 2005)

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There is no publicly available information as to Russia's compliance with this principle.

IAS 11: Construction Contracts (effective 1995)

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According to a 2006 report by PricewaterhouseCoopers, there are inconsistencies between Russian rules and International Financial Reporting Standards (IFRSs) that could lead to differences for many enterprises in certain areas. Under Russian rules the completed contract method can be used for the recognition of revenues under construction contracts when the outcome of a construction contract can be estimated reliably. (PWC 2006, p. 26)

IAS 12: Income Taxes (effective 2001)

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As stated in the paper by McGee and Preobragenskaya, the Russian standard on income taxes is based on the older version of International Accounting Standard (IAS) 12: Income Taxes. (McGee and Preobragenskaya 2004, p. 10)

IAS 14: Segment Reporting (effective 1998)

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According to a 2006 report by PricewaterhouseCoopers, there are no specific rules requiring disclosures of certain segment information (e.g. reconciliation between the information by reportable segment and the aggregated information in financial statements, significant non-cash expenses, other than depreciation and amortization, which were included in segment expense and, therefore, deducted in measuring the segment result for each reportable segment). (PWC 2006, p. 25)

IAS 16: Property, Plant and Equipment (effective 2005)

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According to a 2003 report by Deloitte & Touche CIS, although, since 1998, Russian Accounting Standards (RASs) allow the companies to determine depreciation standards and the method of assessment on their own, the companies keep using the standards set by the government in 1990 requiring only straight-line depreciation. According to International Accounting Standards (IAS), the ruling factor for determining the useful life of fixed assets and which method should be applied is that the expected pattern of economic benefits is mirrored by the depreciation method and the method is applied consistently between accounting periods. Moreover, RAS distinguishes, within fixed assets, objects of low value the amount of which is determined by the Ministry of Finance (MoF). These objects are included in inventory and are subject to accelerated depreciation, usually occurring immediately after they start being used. (Deloitte & Touche 2003, p. 20)

As stated in a 2006 report by PricewaterhouseCoopers, property, plant and equipment shall be recognized at historical cost. To offset to a certain extent the effect of inflation on the fixed-asset base, a company has the right to perform the revaluation of the historical value of fixed assets and accumulated depreciation once per year (at the beginning of the year) or less often, but still on a regular basis. The depreciation of fixed-asset items may be carried out by one of the following methods: the straight-line; diminishing balance; sum-of-the-years-digit; or sum-of-the-units. The useful life is determined by a company according to its accounting policy. (PWC 2006, p. 21)

There are inconsistencies between Russian rules and International Financial Reporting Standards (IFRSs) that could lead to differences for many enterprises in certain areas. Under Russian rules, the useful life of property, plant and equipment is usually determined using periods prescribed by the government for tax purposes. (PWC 2006, p. 26)

IAS 17: Leases (effective 2005)

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According to a 2006 report by PricewaterhouseCoopers, Russian accounting may differ from that required by International Financial Reporting Standards (IFRSs) because of the absence of specific Russian rules on the recognition of operating lease incentives. Further, there are inconsistencies between Russian rules and IFRSs that could lead to differences for many enterprises in certain areas. Under Russian rules finance leases are generally defined in legal terms and the right of capitalization is given to a lessor or a lessee by a contract. (PWC 2006, p. 26)

IAS 18: Revenue (effective 1995)

NC

According to a 2006 report by PricewaterhouseCoopers, there are inconsistencies between Russian rules and International Financial Reporting Standards (IFRSs) that could lead to differences for many enterprises in certain areas. Under Russian rules, revenue recognition rules do not differentiate between exchanges of goods of a similar nature and value and exchanges of dissimilar goods, and do not discuss adjustment for the amount of cash or cash equivalents transferred in exchanges for dissimilar goods. (PWC 2006, p. 26)

IAS 19: Employee Benefits (effective 2006)

NC

According to a 2006 report by PricewaterhouseCoopers, Russian accounting may differ from that required by International Financial Reporting Standards (IFRSs) because of the absence of specific Russian rules on the accounting for defined benefit pension plans and some other types of employee benefits. (PWC 2006, p. 25)

IAS 20: Accounting for Government Grants and Disclosure of Government Assistance (effective 1984)

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There is no publicly available information as to Russia's compliance with this principle.

IAS 21: The Effects of Changes in Foreign Exchange Rates (effective 2005)

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According to a 2006 report by PricewaterhouseCoopers, Russian accounting may differ from that required by International Financial Reporting Standards (IFRSs) because of the absence of specific Russian rules on the translation of the financial statements of hyperinflationary subsidiaries and the treatment of accumulated deferred exchange differences on disposal of a foreign entity. (PWC 2006, p. 25)

IAS 23: Borrowing Costs (effective 1995)

NC

According to a 2006 report by PricewaterhouseCoopers, interest on loans is generally either recognized as an expense and taken in full to the profit and loss account or capitalized. Russian accounting requires the capitalization of borrowing costs during the construction of a non-current asset. Interest costs relating to intangibles and securities can also be capitalized up to the moment an asset is recognized in the books. (PWC 2006, p. 22)

IAS 24: Related Party Disclosures (effective 2005)

NC

According to a 2006 report by PricewaterhouseCoopers, the weakest disclosure issues in Russian Accounting Standards are related-party transactions (indication of whether they are conducted on an arm's-length basis and the disclosure of exact terms). (PWC 2006, p. 41)

IAS 26: Accounting and Reporting by Retirement Benefit Plans (effective 1998)

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There is no publicly available information as to Russia's compliance with this princple.

IAS 27: Consolidated and Separate Financial Statements (effective 2005)

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According to a 2006 report by PricewaterhouseCoopers, there is a requirement in Russian accounting to prepare consolidated financial statements, but they are still treated as secondary to the stand-alone statutory financial statements and are often not prepared. Consolidated accounts can be prepared under International Financial Reporting Standards (IFRSs) or Russian Accounting Rules. A decision to prepare consolidated financial statements under IFRS instead of RAR is made by the management of the parent company or its owners/shareholders. IFRS consolidated financial statements that are prepared instead of consolidated statutory financial statements must be provided to the owners/shareholders of the parent company. The report further notes that although the Russian consolidation rules introduce a procedural framework similar to IFRS, specific rules may differ (for example, in exceptional cases investments in subsidiaries and associates can be carried at cost) or may not address a number of practical issues. (PWC 2006, p. 22)

Further, there are inconsistencies between Russian rules and IFRS that could lead to differences for many enterprises in certain areas. Under Russian rules, proportionate consolidation may be used for subsidiaries in which the parent holds 50 percent or less of the voting shares. In the definition of control, it is not required that the ability to govern decision-making be accompanied by the objective of obtaining benefits from the entity's activities. Certain subsidiaries may be excluded from consolidation beyond those referred to in IFRS. A subsidiary that is a bank may be excluded from consolidation if it is dissimilar from the rest of the group. (PWC 2006, p. 26)

IAS 28: Investments in Associates (effective 2005)

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There is no publicly available information as to Russia's compliance with this princple.

IAS 29: Financial Reporting in Hyperinflationary Economies (effective 1990)

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According to McGee and Preobragenskaya, as of 2004, Russia has not adopted IAS 29: Financial Reporting in Hyperinflationary Economies. The authors note that the perception of many accountants is that the standard on hyperinflation is not needed because Russia's inflation rate has fallen below the threshold needed to trigger the hyperinflation standard. Russia's cumulative inflation over the most recent three years has been about 90 percent, and the threshold for using the hyperinflation standard is 100 percent. But the 100 percent test is only one of five items on the IAS list of possibilities. To be more compliant with IAS it is necessary to look not only at quantitative factors but also qualitative factors. For example, Russian companies do their planning in dollars, not rubles. If the ruble is not being used to make management decisions, a strong argument can be made that the hyperinflation accounting rules should be used even if the inflation rate does not hit the 100 percent minimum threshold. (McGee and Preobragenskaya 2004, p. 10)

IAS 31: Interests in Joint Ventures (effective 2005)

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There is no publicly available information as to Russia's compliance with this principle.

IAS 32: Financial Instruments: Disclosure and Presentation (effective 2005)

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According to a 2003 report by Deloitte & Touche CIS, investments can be classified as either current or long term. Current investments are by their nature readily realizable and are not intended to be held for more than one year after the balance sheet date. Long-term investments are investments held for more than one year. As Russian tax legislation does not allow to decrease the income tax base by the accrued provision for decline of long-term investments it is almost never created in practice. (Deloitte & Touche 2003, pp. 20, 21)

According to a 2006 report by PricewaterhouseCoopers, Russian accounting may differ from that required by IFRS because of the absence of specific Russian rules on the accounting for an issuer's financial instruments. There are no specific rules requiring disclosures of the fair values of financial assets and liabilities. (PWC 2006, p. 25)

IAS 33: Earnings per Share (effective 2005)

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There is no publicly available information as to Russia's compliance with this princple.

IAS 34: Interim Financial Reporting (effective 1999)

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There is no publicly available information as to Russia's compliance with this princple.

IAS 36: Impairment of Assets (effective 2004)

NC

According to a 2006 report by Ernst & Young, the impairment concept is not applied in Russian accounting regulations. McGee and Preobragenskaya note that the main reason for not adopting the standards on impairment of assets is that many companies have assets that are overvalued. Applying the impairment standard would cause the asset side of the balance sheet to shrink, considerably in many cases. In extreme cases, a company that appears healthy could appear to be insolvent if the impairment rules were applied. (E&Y 2006, p. 41; McGee and Preobragenskaya 2004, p. 9)

IAS 37: Provisions, Contingent Liabilities and Contingent Assets (effective 1999)

NC

According to a 2006 report by PricewaterhouseCoopers, there are inconsistencies between Russian rules and IFRS that could lead to differences for many enterprises in certain areas. Under Russian rules, provisions can be established more widely or less widely than under IFRS, and there is no requirement for discounting. (PWC 2006, p. 26)

IAS 38: Intangible Assets (effective 2004)

NC

According to a 2006 report by PricewaterhouseCoopers, the categories of intangible assets are defined by the relevant accounting standard. Amortization of an intangible asset shall be charged over its useful life by one of the following methods: straight-line method; sum-of-the-units method; or diminishing balance. An asset without a specified useful life may be amortized over 20 years, but not longer than the life of a company. Start-up expenses (if treated as a contribution of a company to the charter capital) and positive goodwill are included in the intangible assets and amortized on a straight-line basis over 20 years. Amortization of negative goodwill is accounted for as operational income and is written down to the financial results of a company evenly over 20 years. (PWC 2006, p. 21)

Further, certain set-up costs that have been paid by a company's founder can be capitalized. Internally generated brands and similar items can be capitalized if the enterprise has an exclusive legal right. (PWC 2006, p. 26)

IAS 39: Financial Instruments: Recognition and Measurement (effective 2006)

NC

According to McGee and Preobragenskaya, as of 2004, Russia has not adopted IAS 39: Financial Instruments: Recognition and Measurement. The authors note that the main reason why the standard on financial instruments has not been adopted is lack of demand. Very few Russian enterprises use complex financial instruments, and the ones that do are already applying the IAS or U.S. GAAP on this topic. (McGee and Preobragenskaya 2004, pp. 9, 12)

According to a 2003 report by Deloitte & Touche CIS, investments can be classified as either current or long term. Current investments are by their nature readily realizable and are not intended to be held for more than one year after the balance sheet date. Long-term investments are investments held for more than one year. As Russian tax legislation does not allow to decrease the income tax base by the accrued provision for decline of long-term investments it is almost never created in practice. (Deloitte & Touche 2003, pp. 20, 21)

According to a 2006 report by PricewaterhouseCoopers, investments should be initially recorded at the cost incurred by the investor, including amounts paid to a seller under a contract, fees paid to intermediaries in relation to an acquisition and other similar items. Short-term foreign currency securities are shown at the exchange rate of the given foreign currency in terms of RR established by the Central Bank of Russia as of the balance sheet date. Long-term foreign currency securities are not revalued. For reporting purposes, investments in publicly listed stocks should be revalued on a regular basis. A provision is created at the reporting year-end for financial investments in non-listed stocks if they are steadily decreasing. (PWC 2006, p. 21)

Russian accounting may differ from that required by IFRS because of the absence of specific Russian rules on the de-recognition of financial assets and on the hedge accounting for derivatives. Furthermore, there are inconsistencies between Russian rules and IFRS that could lead to differences for many enterprises in certain areas. Under Russian rules, trading, available-for-sale and derivative financial assets are not recognized at fair value. (PWC 2006, p. 26)

IAS 40: Investment Property (effective 2005)

NC

According to a 2006 report by PricewaterhouseCoopers, there are no specific rules requiring disclosures of the fair values of investment properties. Moreover, there are inconsistencies between Russian rules and International Financial Reporting Standards (IFRSs) that could lead to differences for many enterprises in certain areas. Under Russian rules, if investment properties are revalued, they are still depreciated and the gains and losses are not required to be taken to the income statement. (PWC 2006, pp. 25, 26)

IAS 41: Agriculture (effective 2003)

II

There is no publicly available information as to Russia's compliance with this princple.