February 1999

by Philip H. de Leon

For U.S. companies looking to invest in Russian companies, assessing their financial performance remains a challenge due to Russian accounting regulations (RARs). RARs were drafted and used for tax calculation and bookkeeping purposes and not designed for use by potential investors as a measurement of a company's financial performance. As the need has increased for understandable, comparable, transparent, detailed, and reliable financial statements to attract foreign investment, the Government of the Russian Federation (GOR) has taken steps to promote accounting reforms.

Significant international involvement in the reform process has included technical and/or financial assistance from the U.S. Agency for International Development (USAID), the American Chamber of Commerce in Russia, the European Bank for Reconstruction and Development (EBRD), the British Know How Fund, and the European Commission's Technical Assistance for the Commonwealth of Independent States (TACIS) program.

Steps in the Right Direction
The main goal of Russia's accounting reform program is to bring Russian accounting and auditing regulations into conformity with international accounting standards (IAS). The GOR has established an interagency government committee for accounting reform to aid this transition, as well as recognized the independent International Center for Accounting Reform (ICAR) in its official plan. In addition, the GOR has adopted a resolution requiring audits on major Russian enterprises, according to both RAR and IAS.

Note: IAS, established by the International Accounting Standards Committee, should not be confused with U.S. Generally Accepted Accounting Standards (US GAAP), which are issued by the Financial Accounting Standards Board (FASB), even though the two systems are similar.

ICAR
The International Center for Accounting Reform is a nonprofit, nongovernment Russian legal entity with a limited life span. It was created to develop a series of Russian national accounting standards that take account of the Russian situation during the period of introduction of IAS and to help Russian enterprises embark on the transition to IAS.

ICAR's role is also to prepare practical instructions for the application of the reform program and to develop training materials and retraining courses for practicing accountants. Donald Beskine, CEO of ICAR, says "Russian and international professional accountants are working together closely to devise an effective way for Russian enterprises to start applying an IAS system."

This past November, ICAR organized the first Russian conference on IAS, which drew over 500 participants and during which the official translation of IAS was presented. (See selection of translated terms on page 1.) Most importantly, there is now a norm for the translation of IAS terms into Russian, which will ease the transition to IAS for Russian and foreign firms. "One of the major constituents of the Accounting Reform Program is drafting and approving 22 national accounting standards [regulations] in compliance with IAS," said A.S. Bakaev from the Ministry of Finance at the ICAR conference.

Existing Discrepancies
U.S. companies need to be aware that, until all Russian companies make the transition to IAS, interpretation of financial statements prepared according to RAR can be misleading:

• The value of assets is based on their historical cost, not on their economic value (fair value);
  
• Revenues can be presented on a cash basis as well as on an accrual basis; and
  
• Loan loss reserves are more lenient under RAR.

• broad acceptance by key decision-makers
  
• changes in civil and tax legislation
  
• retraining Russian professional accountants under the IAS system.

In addition, assessing fair market value will continue to be a problem while a barter economy of some sort exists in Russia. According to Larissa Gorbatova of the Federal Commission on the Securities Market of the Russian Federation, "In some Russian enterprises, over 80 percent of all transactions are settled in nonmonetary forms, including barter and set-offs; assigning a fair value in these cases is not possible. We need to recognize that since we do not have reliable market prices for most financial assets, fair value accounting is still a big question mark."

Several Russian companies such as Gazprom and Rostelecom are already using IAS in their consolidated financial reports. Russia's need to attract foreign investors and enter the international markets as exporters and investors will continue to be a major incentive in this direction.

For further information on ICAR's activities, contact ICAR at icar@deol.ru and check the IASC web site at: www.iasc.org.uk.

ICAR is located at 4/17 Pokrovsky Blvd., Building 1, office 19, Moscow, 101000; tel.: +7 (502) or (095) 937-7046, fax: +7 (502) or (095) 937-7040.

Philip H. de Leon is the BISNIS Banking/Finance Specialist in Washington, D.C.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)