7.1 Background

Russian accounting is regulated by a system of legal acts which consists of four different levels of documents.

The first level of documents compiles the laws and other legislative acts (Presidential Decrees, Government Regulations) regulating the way accounting is set up and maintained in enterprises.

The following are also part of the first group of documents:

• Federal Law «On Accounting»;
• Civil Code of the Russian Federation;
• Federal Law «On Governmental Support of Small Business in the Russian Federation»;
• Federal Law «On Joint-Stock Companies»;
• Federal Law «On Limited Liability Companies»;
• Regulation on accounting and reporting in the Russian Federation;
• Resolution of the Government of the Russian Federation ¹ 1355 of 7 December 1994; and
• Other documents.

The Federal Law «On Accounting» occupies a major place among those of the first level and contains the major accounting requirements.

The regulation on accounting and reporting in the Russian Federation was developed on the basis of the Federal Law «On Accounting» and determines the procedures for set-ting up and maintaining the accounts and compiling and submitting the financial statements of entities, regardless of their legal form (with the exception of credit institutions).

The Civil Code of the Russian Federation is a significant part of the system of legal acts on accounting, as it consolidates many issues regarding accounting. The Civil Code of the Russian Federation defines the exis-tence of an independent balance sheet as one of the indications of a legal entity, establishes the necessity of approving the annual financial state-ments and instances where an audit opinion is required. It provides defini-tions of subsidiaries and associated companies and determines proce-dures for reorganization and liquida-tion of legal entities of different forms.

The Federal Law «On Governmental Support of Small Business in the Russian Federation» determines the procedure by which small businesses should submit financial statements and also provides for accounting and reporting compilation according to a simplified procedure.

The Federal Laws «On joint-Stock Companies» and «On limited liability Companies» establish accounting and financial statements compilation requirements, confirmation of the reliability of the data contained in the internal auditor's annual report of a company determine the procedure by which the annual financial statements are approved, as well as instances in which an audit opinion is required.

Resolution of the Government of the Russian Federation ¹ 1355 of 7 December 1994 establishes a list of criteria for entities' economic activities, on the basis of which entities' financial statements should be audited on an annual basis (see also section 7.4).

The second level of the system of legal acts consists of accounting regulations. At present, there are 12 Regulations (standards) on accouning which establish principles and general accounting rules. These documents also provide main concepts related to distinct areas of accounting and possible methods for accounting for business operations. In content, these regulations are similar to International Accounting Standards.

The third level of documents include methodical instructions on accounting, including recommendations in which specific procedures for applying principles and regulations of accounting are set forth for particular types of activities.

This group of documents includes methodical recommendations for planning, accounting and calculating the cost of goods (work, services) in construction, farming, science and research and development, methodical recommendations on taking inventory of property and financial obligations. One of the most important documents at this level is the Chart of Accounts and instructions for its use.

The fourth level of documents in terms of the accounting regulation system includes documents belonging to the company itself, which determine its accounting policy in all systematic, technical and organizational aspects.

The existing system of regulation provides companies with the opportunity to select a method by which to account for assets. Accounting regu-lations and methods are established by the company in an Order on accounting policy If there are some specific accounting methods that are not developed in a uniform manner, companies have the right to develop them independently and approve them with such an Order.

Branches and representative offices of foreign companies located in the Russian Federation are allowed to maintain their accounting on the basis of regulations established in the country in which the foreign company resides, unless these regulations contradict International Accounting Standards developed by the IAS Committee.

7.2 General Accounting Principles

Russian accounting is based on the double-entry method. Companies should use a working chart of accounts developed on the basis of the centrally-established Chart of Accounts.

Economic operations should be accounted for in the currency of the Russian Federation (roubles).

Transactions in foreign currency are accounted for in roubles in amounts converted from currency amounts according to the exchange rate of the Central Bank of the Russian Federation effective as at the transaction date. Once it has been recorded in the accounts, the cost of property acquired for foreign currency is not recalculated, regardless of changes in the foreign currency and rouble exchange rates.

Facts regarding economic activities should be documented in Russian. Source documents prepared in other languages should be translated into Russian line-by-line.

Supporting documents must be available for all economic transactions performed by the company These documents serve as source-accounting documentation on which the accounting should be based.

The historical cost of property acquired by the company may not be changed, except in the following cases:

• fixed assets are revalued at the beginning of a financial year following a decision taken by the company In this case, the cost of fixed assets after the revaluation must comply with market prices as they existed at that time;
• the original cost of fixed assets increases by the amount of costs incurred from completing construction work, equipment or reconstruction; and
• fixed assets arc partially liquidated, resulting in a reduction in the cost of fixed assets.

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7.3 General Regulations for Compiling and Submitting Financial Statements

According to Russian legislation, companies prepare financial statements monthly, quarterly and annually on an accrual basis.

Annual financial statements include:

• balance sheet;
• profit and loss account;
• appendices to the above two items containing additional information on capital movement, cash flow, movement of borrowed funds, accounts receivable and payable;
• notes; and
• audit opinion.

Calculations regarding taxes and contributions to non-budgetary funds are not included in the financial statements.

A company's financial statements must present fully and reliably the company's economic and financial position, any change in this position as well as the financial results of the company's activities.

The information in the financial statements for the reporting year and the year previous must be presented in comparable formats.

A company's financial statements must include the results of the activities of the company's branches, representative offices and other structural subdivisions.

If the company has subsidiaries or associated companies, consolidated financial statements must be prepared in addition to the company's own financial statements. The consolidated financial statements must include figures from the reports of both companies located in the Russian Federation and abroad.

A financial year of a Russian enterprise is a calendar year.

Companies submit quarterly and annual financial statements to:

• shareholders;
• statistics authorities;
• tax authorities; and
• other interested users (upon the decision of the shareholders).

Considering the fact that financial statements in Russia are prepared in accordance with statutory legislation which differs from international regulations, in order to present the financial statements to Western founders or investors, the statutory financial statements are normally brought into compliance with international standards.

This enables company shareholders to make more efficient management decisions.

7.4 Audit Requirements

According to current Russian statutory legislation, annual audits are compulsory for the following entities:

• open joint-stock companies, regardless of the number of shareholders and the size of charter capital;
• companies with foreign investments in their charter capital;
• banks and other banking institutions;
• insurance companies;
• commodity and stock exchanges;
• investment institutions;
• non-budgetary funds financed by obligatory contributions stipulated by statutory legislation from legal entities and individuals;
• charities and other (non-investment) funds financed by voluntary contributions from legal entities and individuals;
• companies whose annual earnings exceed 500,000 minimum monthly wages (i.e. 41,745,000 roubles as at 1 July 2000); and
• companies whose balance sheet assets exceed 200,000 minimum monthly wages as at the end of the reporting period (i.e. 16,698,000 roubles as at 1 July 2000).

Normally, a company in the Russian Federation is entitled to select its own auditor. An auditor may be a legal entity or a registered entrepre-neur who possesses an appropriate license.

In addition to a compulsory annual audit, companies may on their own initiative, engage an auditor to ensure that the financial statements are sufficiently reliable to attract additional investments, etc.

Expenses resulting from a compulsory audit are included in production costs, whereas expenses resulting from a voluntary audit conducted for taxation purposes are not included therein.