Comparative analysis of Russian accounting principles and US GAAP

Today numerous large Russian companies publish corporate results in both Russian Accounting Standards and either IFRS (International Financial Reporting Standards), or US GAAP (generally agreed accounting principles):

• -    Generally Accepted Accounting Principles (GAAP or US GAAP) are the principles adopted by the U.S. Securities and Exchange Commission (SEC) [1].

• -    Russian GAAP (RAP) or Russian Accounting Standards (RAS), refer to the body of regulatory documents concerning financial accounting and reporting standards in the Russian Federation.

The main differences between RAS and international standards

Russian accounting is based on a different concept than US GAAP, focusing on taxation which makes it very document driven. We can see some major differences at a glance:

• -    IFRS / US GAAP focus on substance over form.

• -    IFRS and US GAAP show most assets at fair or present value.

• -    Under RAS, only those transactions that actually took place and confirmed by relevant documents, can be recorded in the accounting system.

• -    RAS has significantly different rules for accruals and depreciation than IFRS.

• -    Russian tax accounting allows changes to prior periods which create reconciliation issues in IFRS.

• -    IFRS and US GAAP provide more opportunities to capture revenue and expense.

We also have a few problems related to the conversion from RAS to IFRS. For example in many cases it is necessary to revaluate fixed assets of an entity.

US GAAP and IFRS guidance on financial statement have many similarities. Both sets of standards include components: a statement of financial position, a statement of profit and loss and a statement of comprehensive income, a statement of cash flows and accompanying notes to the financial statements.

RAS requires the components be included in the set of annual financial statements: balance sheet, statement of financial results (i.e., income statement) and explanatory appendices to the balance sheet and statement of financial results. Similar to IFRS and US GAAP, RAS requires that the financial statements be prepared on the accrual basis of accounting (with the exception of the cash flow statement).

Table 1 – Comparison of US GAAP and RAS [2]

Inventory

• -     US GAAP : Apart from the method of specific identification of each

object in inventory, the last-in-first-out (LIFO) method is permitted costing method.

• -     RAS : Specific identification method, FIFO or average cost method are

permitted.

Pension accounting

• -     US GAAP : There is a differentiation between defined benefit and

defined contribution plan accounting. Pension assets and liabilities under a defined benefit plan are looked as a part of an entity. Moreover, a disclosure must be made about the various basics for calculation, contribution, assets, liabilities, etc.

• -     RAS : No difference between defined benefit and defined contribution

plans. All is treated as and defined contribution plan. No disclosures are not required about basics and assumptions of the pension plan.

Is it difficult to translate RAS results into IFRS or GAAP?

The process of conversion depends on the set of differences, structure of a group and quality of Russian accounting and financial information system. For example if there are pensions in a company than it is necessary to involve an actuary, when an entity has a lot of acquired companies we need to apply purchase accounting based on independent valuation and for an oil company we have to estimate asset retirement obligation.

Usually it takes few months and an entity need professionals (the team of 23 qualified persons). Now it is a usual practice to create the IFRS department within the company in order to compile financials and involve a consulting company only at the first stage of a conversion project to discuss accounting policy choices, provide pro-forma of reports and trainings.