RUSSIA BRIEFING Understanding Russian Accounting Principles

RUSSIA BRIEFING
The Practical Application of Russia Business
Volume I - Number II
Daily Business News Available at
www.russia-briefing.com/news
Understanding Russian
Accounting Principles
In This Issue:
Russian and U.S. Accounting Standards Compared
Industry Specific Differences between Russian and U.S. Accounting Standards
Russian Chart of Accounts (In Russian and English)
Structuring a Transformation from Russian Accounting to U.S. GAAP
Trade Opportunities in Central Asia: Kazakhstan and China
R
USSIA BRIEFING
Welcome
to the November issue of Russia Briefing
In this new issue of Russia Briefing, we compare Russian accounting standards with U.S. generally accepted accounting principles.
We first look at some of the main differences between Russian accounting and U.S. GAAP including the difference in documentation,
timing, the chart of accounts, division of cost types, provisions and accruals, expense and revenue recognition, and multiple element
sales. We also examine how revenue is handled, how to structure a transformation from Russian accounting principles to U.S. GAAP,
and the industry and business specific differences between Russian and U.S. accounting.
The final article in this issue reports on the growing trade opportunities that exist between China and Central Asia, focusing on the
newly formed special economic zone in the Xinjiang border town of Yili.
This publication is the result of a joint cooperation between Asia Briefing, Dezan Shira & Associates and Russia Consulting Ltd, our
partner firm in Moscow. The Russia Briefing web site features daily business news, legal, tax and operational updates and is available
at www.russia-briefing.com.
Best Regards,
Chris Devonshire-Ellis
Publisher, Asia Briefing Ltd
Principal, Dezan Shira & Associates
Ulf Schneider
Managing Director, Russia Consulting
RUSSIA BRIEFING
Russia Briefing Daily News
www.russia-briefing.com/news
Andy Scott
Managing Editor, Asia Briefing Ltd
in partnership with
RUSSIA CONSULTING LTD
Providing professional corporate establishment, due
diligence, legal, accounting, tax and audit services in
the following Russia and Eastern European cities:
Moscow ● St. Petersburg ● Kiev ● Minsk ● Almaty
Over 150 experienced English, German and Russian
speaking professionals in these locations.
[email protected]
www.russia-briefing.com
ADDITIONAL REGIONAL RESOURCES
EMERGING ASIA
www.china-briefing.com
www.2point6billion.com
INDIA BRIEFING
The best source of Russia business, legal,
tax, and policy intelligence on the web.
www.india-briefing.com
CENTRAL ASIA
VIETNAM BRIEFING
Produced in association with Dezan Shira & Associates.
www.vietnam-briefing.com
Comm
unist
Tax
Lawy
er
www.communisttaxlawyer.com
Cover Art
This issue’s cover photograph, by Brian Jeffery Beggerly, is of matryoshka dolls for sale at Izmaylovo Market in Moscow.
Mr. Beggerly’s Flickr page can be found at www.flickr.com/photos/beggs.
All materials and contents © 2010 Asia Briefing Ltd.
No reproduction, copying or translation of materials without prior permission of the publisher. Contact: [email protected]
Comparing Russian Accounting
Standards with U.S. GAAP
[ By Ulf Schneider, Managing Director, Russia Consulting and
Andreas Bitzi, General Director St. Petersburg, Russia Consulting ]
ssia
......
Ru
g
n
i
t
un ds
o
c
Ac ndar
Sta
U.S
.
............
GA
AP
........................
................................................
................................................................................................
R
ussian accounting is based
on a totally different concept
than U.S. GAAP, focusing
on taxation which makes
it very document driven.
Russian accounting standards (RAS) have
existed for more than 10 years. However,
when asking an accountant about the
relevant legislation, they usually refer
to taxation rules. Form over substance:
Whether goods were delivered and paid
does not matter. What is important is that
all documents are available, accomplished
with signatures and stamps. Only then a
purchase will be effective in the P&L.
This has historic reasons. Under Soviet
times, shareholders, financial lenders
and profit-oriented management were
absent and the state authorities were
the only institution to pass reports to.
Today, the balance sheet and profit & loss
statement are still primarily provided to
tax authorities.
For this reason, accountants are usually
interested in having statutory accounting
and all reports as close as possible to the
needs of tax authorities and avoid double
work.
In this issue of Russia Briefing, we not
only focus on RAS but also on regulations
in the Russian tax code and the respective
regulations on tax procedures.
Issue
RAS
U.S. GAAP
Shareholders,
Target
Government
management,
group
authorities
banks, etc
In theory:
substance
over form
Substance
Basic
principles
In practice: over form
form over
substance
Statements are
usually suitable
Statements
for balance
Informative
are hardly
sheet analysis,
value
suitable
comparability,
consistency
For a transaction to be considered
completed, it is important that all
necessary documents are available in the
accounting. In Western countries, this is
usually simply an invoice. In Russian
accounting, there are more documents:
Contract
Invoice
Handing-over protocols: they confirm
that the services have been rendered or
the goods have been delivered
VAT invoice: this document is
necessary for VAT accounting and VAT
returns; without the VAT invoices, it is
not possible to prove VAT payments or
reimburse input-VAT
In some cases, additional documents
are necessary
Most common
differences between
RAS and U.S. GAAP
Differences between Russian accounting
and U.S. GAAP can be categorized as
follows:
Missing documentation
In U.S. GAAP, bookings are made once
a transaction economically happens.
Russia Briefing
3
Comparing Russian Accounting Standards with U.S. GAAP
Accruals are set up to show costs and
revenues in the period they actually
economically occur. In RAS, bookings
are made solely on the basis of available
documents proving the transaction. This is
a fundamentally different concept and can
potentially lead to big differences between
the two concepts.
Re-grouping in B/S or P&L
while in RAS it would be expensed
linearly during the following 12 months.
Chart of accounts
U.S. GAAP: Only a basic structure is
given. The details can be worked out
by each organization, according to the
principles of relevance, comparability,
understandability and true and fair view.
In U.S. GAAP, there are little restrictions
on how a balance sheet and P&L statement
have to look. The standards require
some basic elements. In RAS, there is a
compulsory form of balance sheet and
profit and loss statement which has to be
followed exactly.
RAS: There is one specific chart of
accounts delivered by the authorities that
has to be followed (see page 5).
Transactions not considered
in Russian accounting
RAS: Limited division of costs in the
P&L: costs of goods sold, administrative
expenses and other expenses. The definition
of cost types also differ from U.S. GAAP.
Future costs that are caused by activities
in the current period but have to be paid
for only in the future. According to U.S.
GAAP, under certain conditions, the costs
have to be shown immediately. Under RAS,
such provisions do not exist. Examples are
audit costs, bonus costs and warranties.
Typical timing differences
Sometimes, the time when certain costs
can be shown may differ between U.S.
GAAP and RAS. Most important timing
differences occur in depreciation periods.
Or, for instance, if an employee fills the
tank of his lorry with petrol, in U.S. GAAP
the costs for the petrol are immediately
expensed. In RAS, the costs can only
be shown by driven kilometers, that is,
when the fuel is actually used on the
road. If a monthly newspaper is ordered
for twelve months for US$20, the amount
is immediately expensed in U.S. GAAP,
Division of cost types
U.S. GAAP: Types of costs are subdivided in the P&L.
P&L Statement
Name
T RUR T RUR
2008
2009
10 284,692 261,451
20 -231,072 -206,216
Code
Operative result
Revenue
Cost of
goods sold
Gross profit
Sales and
distribution
Operative profit
Other result
Interest received
Interest paid
Other revenues
Other expenses
Profit before
taxes
Current profit tax
Additional tax
after inspection
Net profit
29
30
53,620
-32,687
55,235
-10,519
50
60
70
90
100
140
20,933
-5,993
989
-1,697
14,232
44,716
0
-5,647
580
-4,697
34,952
180
181
-3,605
0
-12,836
-553
190
10,627
21,563
Categories of differences between
RAS and U.S. GAAP
Differences due to discrepancies
with regard to contents
4
Re-grouping in
P&L or B/S
Differences due to missing
documents in RAS
e.g. Currency
Conversion
e.g. Expenditures for renovation,
in case the handover certificate
is not yet available
Transaction will
be considered
both in RAS and
U.S. GAAP, but
differently
Transaction will
be considered only
in U.S. GAAP
e.g. Amortisation Method
e.g. Provisions
Russia Briefing
The earlier the closing date for
U.S. GAAP, the more often
these differences occur.
Provisions and accruals
U.S. GAAP: Provisions and accruals have
to be made at year-end for both costs and,
given certain criteria, for earnings.
RAS: Accrual accounting principles are
applied only in few cases. Bookings
are made if an activity is completed and
documents handed over. Provisions are
acceptable only in specific cases.
This can lead to a mismatch of revenues and
costs, as revenues may occur in a different
period than the costs connected thereto.
The few accruals that might be booked in
RAS can usually not be booked in Russian
tax accounting. Furthermore, in practice
the few cases when accruals are possible,
it is usually not done because accountants
are not very familiar with the concept and
avoid them.
Another reason for avoiding accruals in
Russian statutory accounting is that, in
practice, accountants do not like to deviate
too much from tax accounting but rather
have statutory accounting in line with tax
accounting.
Example
It is January 2010, and the company DEF
is closing the financial year 2009. DEF’s
management gives an order to a big four
audit firm to conduct an audit for the
financial year 2009. The audit will take
place in April 2010. DEF’s management
can reasonably estimate the cost for the
audit to be around US$100,000, payable
in May 2010.
During December 2009, a production
facility in the DEF’s factory exploded and is
not yet repaired. It is estimated that the costs
for repairing will be around US$500,000;
the works will be conducted in 2010.
In U.S. GAAP, DEF would make accruals
for the costs of the year-end audit as well
the maintenance. The reason is that in both
cases, the costs are caused by economic
events in 2009, but the documents and
invoices will come only in 2010.
For the audit costs, an accrual of
US$100,000 has to be made for repairing of
the machine, and another accrual booking
of US$500,000 for the audit. This will lower
DEF’s profits in 2009 by US$600,000.
Comparing Russian Accounting Standards with U.S. GAAP
Russian Chart of Accounts
Acct.
Name in Russia
Name in English
01
02
03
04
05
07
08
09
10
11
14
Fixed assets
Amortization of fixed assets
Profitable investments into stocks of materials
Intangible assets
Amortization of intangible assets
Equipment to be installed
Investments into non-current assets
Deferred tax assets
Materials
Animals in farming and fattening
Reserves for decrease in value
of stocks of materials
Storing and acquisition of stocks of materials
Tangible assets cost deviation
86
90
91
94
Основные средства
Амортизация основных средств
Доходные вложения в материальные ценности
Нематериальные активы
Амортизация нематериальных активов
Оборудование к установке
Вложения во внеоборотные активы
Отложенные налоговые активы
Материалы
Животные на выращивании и откорме
Резервы под снижение
стоимости мат. ценностей
Заготовление и приобретение мат. ценностей
Отклонение в стоимости
материальных ценностей
НДС по приобретенным ценностям
Основное производство
Полуфабрикаты собственного производства
Вспомогательные производства
Общепроизводственные расходы
Общехозяйственные расходы
Брак в производстве
Обслуживающие производства и хозяйства
Выпуск продукции (работ, услуг)
Товары
Торговая наценка
Готовая продукция
Расходы на продажу
Товары отгруженные
Выполненные этапы по
незавершенным работам
Касса
Расчетные счета
Валютные счета
Специальные счета в банках
Переводы в пути
Финансовые вложения
Резервы под обесценение
финансовых вложений
Расчеты с поставщиками и подрядчиками
Расчеты с покупателями и заказчиками
Резервы по сомнительным долгам
Расчеты по краткосрочным кредитам и займам
Расчеты по долгосрочным кредитам и займам
Расчеты по налогам и сборам
Расчеты по социальному
страхованию и обеспечению
Расчеты с персоналом по оплате труда
Расчеты с подотчетными лицами
Расчеты с персоналом по прочим операциям
Расчеты с учредителями
Расчеты с разными дебиторами и кредиторами
Отложенные налоговые обязательства
Внутрихозяйственные расчеты
Уставный капитал
Собственные акции (доли)
Резервный капитал
Добавочный капитал
Нераспределенная прибыль
(непокрытый убыток)
Целевое финансирование
Продажи
Прочие доходы и расходы
Недостачи и потери от порчи ценностей
96
97
99
Резервы предстоящих расходов
Расходы будущих периодов
Прибыли и убытки
15
16
19
20
21
23
25
26
28
29
40
41
42
43
44
45
46
50
51
52
55
57
58
59
60
62
63
66
67
68
69
70
71
73
75
76
77
79
80
81
82
83
84
Input VAT
Costs of the main production
In-house half-finished products
Costs of the auxiliary production
General production expenses
General administrative expenses
Spoilage in production
Service plants and facilities
Production of goods (works, services)
Goods
Trade margin
Finished products
Sale expenses
Goods delivered
Completed stages of work-in-process
Cash
Settlement accounts
Currency account
Special bank accounts
Transfers on the way
Investments
Reserves against the devaluation
of financial investments
Settlements with suppliers and contractors
Settlements with buyers and customers
Doubtful debt reserves
Short-term credits and loans
Settlements on long-term credits ans loans
Tax and due payments
Social insurance and service payments
Staff salaries
Settlements with accountable persons
Other settlements with staff
Settlements with founders
Settlements with sundry debtors and creditors
Deferred tax liabilities
In-house settlements
Charter capital
Owned shares
Capital reserves
Add-on capital
Retained income (outstanding loss)
Special purpose funding
Sales
Other income and expenses
Shortages and losses due to
impairment of assets
Reserves for future expenses
Accruals
Profits and losses
In RAS, both the audit costs and the
maintenance costs would be shown in full
in 2010, not in 2009.
Bookings
P&L bookings
Audit costs U.S. GAAP
Audit costs RAS
Maintenance costs
U.S. GAAP
Maintenance costs RAS
2009
2010
100,000 0
0
100,000
500,000
0
500,000
No expenses recognition due to
missing documents from vendors
U.S. GAAP: Once expenses have
economically occurred, they can be
reflected in the P&L.
RAS: Expenses can only be shown if the
suppliers deliver all the official documents
and if these documents are correct.
Example
Supplier A sells services to Company B.
Company B partakes in the services sold,
but Company A does not deliver the
necessary legal documents.
In U.S. GAAP, the actual delivery of
the services and the payment made is a
reasonable basis for the booking of the
costs for the machine on the accounts
of Company B, even if there are no
documents like handing-over protocol or
VAT invoices.
In RAS, the costs for services cannot
be shown due to missing documents, no
matter whether the services have been
rendered and paid for.
Discount recognition
U.S. GAAP: Generally, gross display of
sales, following display of allowances as
expenses.
RAS: Direct netting of sales.
Revenue recognition
for goods sales
U.S. GAAP: Revenue is recognized when
a delivery has taken place and significant
risks, rewards and control have been
transferred to the buyer. At the same time,
the fee is determinable and collectability
is assured.
RAS: Revenue is recognized given certain
criteria are met (all at the same time):
Russia Briefing
5
Comparing Russian Accounting Standards with U.S. GAAP
The legal right of ownership of goods
or services has been transferred to the
buyer and accepted by the latter (i.e.
when documents are signed)
The purchase transaction of the product
or service shall lead to an economic
benefit to the purchaser
The seller of the goods or services has
a legal right to receive the revenue that
arises from the purchase/sale contract
Non-fulfillment of one of the above
criteria will lead to payments being shown
as accounts payable, not as revenue.
Example
We assume a sale of a machine for
US$100,000 from a Company A to a
Company B. The sales contract is signed
on December 20, 2010. The delivery of
the goods is made on December 21, 2010
and the purchaser immediately starts
using the goods. The delivery is made
with a simple delivery note, which simply
shows that a delivery takes place and is
countersigned by company B. The legally
necessary accompanying documents
(handing-over protocol, VAT invoice) are
dated and handed over to the purchaser on
January 15, 2010. It is further assumed
that Company B is able to pay for the
delivered goods.
In U.S. GAAP, the revenue is booked in
2010, since the delivery has taken place
and all criteria for revenue recognition
are fulfilled.
In RAS, the revenue is booked in 2011, as
this is the time when the official handingover protocol and the corresponding VAT
invoice are dated and handed over.
Multiple element sale
In U.S. GAAP, special attention has to be
paid to multiple element sales. This is less
of an issue in RAS.
U.S. GAAP: In a multiple-element sale,
the sale of the different elements will be
regarded as one deal and revenues can only
be shown if the sale as a whole fulfills all
revenue recognition principles. Revenue
of single elements of the sale can be shown
if the delivered element has a standalone
value and the undelivered elements can
be objectively valued (fair value). If
these criteria are fulfilled, each delivered
element’s revenue can be recognized.
6
Russia Briefing
RAS: There is no specific rule.
For every element of a multiple-element
sale, revenue is recognized according to
the price that is fixed in the underlying
contract.
Example
We assume signing of a sales contract
between Company A and Company B on
December 20, 2010. The contract consists
of two machines to be delivered and
services to be rendered from Company A
to Company B. The total contract value is
US$300,000 (US$100,000 for Machine 1,
US$100,000 for Machine 2 and
US$100,000 for services). Both Machine 1
and Machine 2 cannot function without
the services element of the contract.
Machine 1 is delivered, including all official
documents (handing-over protocol, VAT
invoice) on December 21, 2010. Machine 2
is delivered, including all official
documents, on January 31, 2011. The
services rendered start on December 21,
2010 and end on February 28, 2011. On
February 28, 2011, the official documents
for the rendered services are handed
over.
Revenues
U.S. GAAP
All revenue
2010
2011
300,000
RAS
Machine 1
Machine 2
Services
100,000
100,000
100,000
Inventory
U.S. GAAP: Apart from the method
of specific identification of each
object in inventory, the last-in-first-out
(LIFO) method is a permitted costing
method.
In case the LIFO method is applied,
the entity is obliged to calculate the
corresponding LIFO reserve (the
difference between what the value
would be in case of FIFO (first-in-firstout) accounting and the applied LIFO
method, in the footnotes to the financial
statements).
For different items of inventory,
different valuation methods may
be used, as long as they are used
consistently over time.
The principle of lower of cost or market
is applied
Write-downs to the lower level of cost
or market cannot be reversed; they lead
to a constantly new cost basis
RAS: LIFO method is not permitted.
Permitted methods to value inventories
are specific identification method, FIFO
or average cost method.
The same method of inventory valuation
has to be applied to all goods in inventory.
Different methods for different items are
not permitted.
In RAS, just as in IFRS, the value of
the inventory is the lower of cost or net
realizable value. In case the reason for
a write-off no longer exists, they can
be reversed up to the original carrying
amount.
Pension accounting
U.S. GAAP: There is a differentiation
between defined benefit and defined
contribution plan accounting. Pension
assets and liabilities under a defined
benefit plan are looked at as part of the
company.
Furthermore, a disclosure must be made
about the various basics for calculation,
contribution, assets, liabilities, actuarial
assumptions, etc.
RAS: No difference between defined
benefit and defined contribution plans.
All is treated as defined contribution
plan.
No disclosures have to be made about
basics and assumptions of the pension
plan, its assets and obligations.
Comparing Russian Accounting Standards with U.S. GAAP
Example
Assuming Company ABC has a defined
benefit pension plan for its employees. The
contribution the company makes to the
pension accounts of its employees in the
year 2010 is US$100,000. The company
has a future pension obligation, discounted
to today’s value, of US$2,000,000. At the
same time, the pension assets of ABC have
a market-related value of US$10,000,000.
In U.S. GAAP, Company ABC will have to
show a pension liability of US$10 million
on the balance sheet. The contributions of
US$100,000 of the current year are only
one of several factors that influence the
profit & loss statement.
In RAS, only the contribution of the
current year in the amount of US$100,000
have to be shown as pension costs. No
pension obligation or asset is shown on
the balance sheet.
Example
Russian Company XYZ has 1 million
euros on its bank account. The booking
is made at today’s exchange rate of 39.00
rubles per euro.
The company decides to exchange euros
for rubles. The bank buys the euro at
the current bid rate of 38.75 rubles per
euro. Therefore Company XYZ receives
38.75 million rubles.
In U.S. GAAP, this transaction would
lead to an entry in foreign currency loss
of 250,000 rubles.
In RAS, the booking is made as follows:
Other expenses of 39 million rubles
(1 million euros at today’s book value)
Other income of 38.75 million rubles
(1 million euros at the bank’s bid rate)
Financial instruments
U.S. GAAP: Terms, conditions, accounting
policy and fair values (and calculation
thereof) have to be disclosed.
Exchange rate differences
Assumption:
Invoice issued in euros
Booking in Russian accounting in
RUR, with current date
Time of payment: exchange rate of the
RUR has changed and resulted in an
exchange rate difference
U.S. GAAP: Booking as foreign currency
gain or loss in the P&L.
RAS: Exchange rate differences are shown
in “other expenses” or “other income.”
Earlier recognition of parts of costs is
possible for tax accounting if the contract
is set up specifically to be able to do so.
In services business, this is even more
the case. Generally, a lot depends on
how contracts are set up, and special
care should be taken for the creation of
contracts in order to optimize taxation
and accounting.
Example
Related party disclosure
RAS: Only joint stock companies
are required to disclose related party
information.
Therefore, for these practical reasons,
most of the accountants of the ordering
company follow the old approach, which
is: revenues and costs are shown once
the production/assembly of the object is
finished. Accountants on the supplier’s
side have to follow the new approach.
The timing of costs can potentially
have a very high impact not only on the
accounting itself, but also on profit tax
payments.
RAS: No disclosures of terms, conditions
and accounting policy of financial
instruments, only limited information
about fair value.
U.S. GAAP: Disclosure of material related
party transactions is necessary, for all
legal forms, in the notes to the financial
statements.
standard module in the Russian accounting
system “1C” which incorporates the new
rule. Manual bookings may cause errors
and incorrect data. Additionally, many
accountants fear to get too far from
Russian tax accounting. In tax accounting,
the percentage of completion method does
not exist.
Industry and business
specific differences
between RAS and
U.S. GAAP
Long term agreements and
recognition of revenue and cost
U.S. GAAP: Revenue and cost recognition
is possible based on the method of
percentage of completion, given certain
criteria are met.
RAS: Not long ago, the accounting rules
for long-term projects changed in order
to converge to international accounting
standards. Consequently, by now it is
possible in Russian accounting to use the
percentage of completion method, just
as it is used in U.S. GAAP. However,
this is hardly ever done in practice. The
reason for that is that the there is not yet a
We assume a machinery manufacturing
project which starts in year one and ends
in the middle of year three. The total sales
price is 5 million euros, and the estimated
connected costs are 4 million euros,
which means an estimated gross profit of
1 million euros (20 percent). For simplicity,
it is assumed that the planned costs equal
the actual costs.
By the end of year one, 25 percent of
the total costs are incurred; by end of
year two, 73 percent of the total costs
are incurred, and within year three the
remaining 27 percent.
Invoices are issued for 900,000 euros in
year one, 2.9 million euros in year two
and 1.2 million euros in year three. The
client pays 750,000 euros in year one, 1.75
million euros in year two and 2.5 million
euros in year three.
For the bookings in Russian accounting,
the old standard (which is used in practice,
as described above) is applied.
Russia Briefing
7
Comparing Russian Accounting Standards with U.S. GAAP
Year one
Year two
Year three
Contract price
5,000,000
5,000,000
5,000,000
Estimated total costs
4,000,000
4,000,000
4,000,000
Estimated total gross profit
1,000,000
1,000,000
1,000,000
Estimated gross profit margin
20%
20%
20%
Costs to date
1,000,000
2,916,000
4,000,000
Estimated cost to complete
3,000,000
1,084,000
Progress billings during the year
900,000
2,900,000
1,200,000
Cash collection
750,000
1,750,000
2,500,000
Percent complete (accum. Costs / total costs)
25%
73%
100%
Revenues
1,250,000
2,395,000
1,355,000
Costs
1,000,000
1,916,000
1,084,000
Gross profit per year U.S. GAAP
250,000
479,000
271,000
Accounts receivable
150,000
1,300,000
0
Prepayments by clients
0
0
0
Revenues
0
0
5,000,000
Costs
0
0
4,000,000
Gross profit per year U.S. GAAP
0
0
1,000,000
Accounts receivable
0
0
0
Prepayments by clients
750,000
2,500,000
0
Example
If, for instance, by the end of 2010, a
handing-over protocol is signed for costs
of US$250,000, this amount is shown
as costs in 2010. US$250,000 remains
booked as prepayments.
Bookings by year-end in U.S. GAAP
P&L entries
Balance sheet entries
Bookings by year-end in RAS (old approach)
P&L entries
Balance sheet entries
Company A signs a services contract
with Company B. The services costs
US$500,000 are rendered by Company B
to Company A from September 2010 until
June 2011. On the contract signature date,
Company A pays to Company B the full
amount of US$500,000 as a prepayment.
In U.S. GAAP, the important issue to
look at is: what part of the services are
rendered in 2009 and what part in 2010.
The bookings are made accordingly.
In RAS, it depends on how the contracts are
set up. If it is defined such that several steps
are made rendering the services, and after
each step a handing-over protocol is signed.
In case the whole services are defined as
one, and only one handing-over protocol
for the rendered services is made and
signed in 2011, the full costs can only
be shown in 2011. If there are handingover documents for, let us assume, all
the works until December 31, 2010, a
part of the costs can be shown in 2010.
8
Russia Briefing
How to structure a
transformation from
RAS to U.S. GAAP
A transformation from Russian accounting
to U.S. GAAP might not be easy, depending
on the size and type of business. Generally
two methods of transformation are typical,
a manual one in Excel or an automated one
in the accounting system.
Excel transformation from
RAS to U.S. GAAP
A manual transformation from RAS
to U.S. GAAP can be done in a simple
Excel sheet. Columns are used for
transformation bookings and the lines
are used for the single accounts. At the
end of the transformation a re-statement
might take place from Russian rubles to
U.S. dollars.
While for B/S conversion to dollars the
period-end exchange rate has to be used as
the accurate method, for P&L conversion
an accurate method is rather difficult
with this manual method and usually one
uses the average exchange rate over the
period.
However, if inflation versus exchange rate
development tends to hyper-development,
this method might not be allowed
according to U.S. GAAP.
The transformation can come in five
different forms:
Additional entries due to missing
documents: This is often the case, as
in RAS bookings are only made based
on present documents
Reclassifications: In U.S. GAAP, some
items may have to be reclassified in
comparison with RAS
Additional bookings that are necessary
according to U.S. GAAP, but not
according to RAS; U.S. GAAP may
require bookings that are not required
in RAS (one example is pension
accounting, as mentioned above, U.S.
GAAP requires showing net pension
liabilities or net pension assets on the
balance sheet)
Revaluations: This is, for instance,
necessary in case of impairments of
assets or if fair value has to be applied
according to U.S. GAAP
Others
On the following page, there is a sample of
a manual RAS to U.S. GAAP conversion
sheet.
Automated transformation
from RAS to U.S. GAAP
Most of all legal entities in Russia use
the standard accounting program 1S for
accounting purposes. This program is very
good for local purposes, in particular for
requirements of the tax authorities and all
special documents required for Russian
accounting and tax purposes.
About 95 percent of all enterprises in
Russia and the other CIS countries use
this program. In its standard configuration
the program cannot not used for
transformation to U.S. GAAP. However,
with some IT-assistance and programming
one can upgrade the program.
Comparing Russian Accounting Standards with U.S. GAAP
Russian
Closing
account plan balance
in RAS
in RUR
(0)
Balance sheet accounts
01 Assets
02 ......
03 ......
04 ......
Corrections
for missing
documents
(1)
(2)
Reclassifications
...... (11)
(12)
......
Additional
U.S. GAAP
bookings
Revaluations
according to
U.S. GAAP
Ending
balance
U.S.
GAAP
in USD
(21) (22) ...... (31) (32) ...... (41) (42) ......
(99)
(100)
Balance sheet accounts
2010 BGA
2011
2050
3011
3012
P&L Accounts
26
Administrative
expenses
27 ......
28 ......
... ......
... ......
... ......
... ......
... ......
Parallel account plans
In the Russian standard ERP system,
“1C,” it is possible to implement a parallel
account plan according to U.S. GAAP, just
as it is possible in any internationally used
ERP system. The parallel account plan is
matched to the Russian account plan, so
that costs and revenues are automatically
transferred. At the period-end, further
manual adjustments may be made, such
as provisions and accruals. This is shown
at right.
For more information or advice on
Russian accounting principals and other
matter related to bookkeeping in Russia,
please contact Dezan Shira & Associates
at [email protected] or visit
www.dezshira.com.
Other
Corporate Ending
account balance
plan
in RUR
P&L Account
4110
Salaries
RAS
Acct. Cod
1
10
11
12
12.1
12.2
12.2.1
12.2.2
19
21
24
26
26.1
26.2
26.3
26.4
28
Acct. Name
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
U.S. GAAP
Acct. Code
1111
1112
1120
1121
1122
1123
1200
1201
1202
1203
1204
1205
1300
1400
1410
1440
1500
Acct. Name
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
…………..
Ulf Schneider is the managing director of Russia Consulting. With offices in Moscow, St. Petersburg, Minsk, Kiev, Almaty and Hamburg,
Russia Consulting provides multinational investors with consulting services with a major focus on practical support in such areas as business
set-up in Russia, Belarus, Ukraine and Kazakhstan. These include corporate establishment, accounting outsourcing, taxation and management
reporting. Before starting his own business, Ulf worked as CFO in the Moscow office of Allianz Insurance. During that time he led many
projects in financial management, life and pension insurance. After studying economics in Kiel and at the University of Illinois, Ulf worked
for five years with Procter & Gamble in financial management, corporate taxation and planning. Ulf and Russia Consulting are a partner
firm for Dezan Shira & Associates in Russia and Eastern Europe.
Ульф Шнайдер является генеральным директором группы компаний Russia Consulting, офисы которой находятся в Москве, СанктПетербурге, Минске, Киеве, Алматы и Гамбурге. Russia Consulting оказывает западным компаниям профессиональную поддержку
в области создания и развития бизнеса в России, Беларуси, Украине и Казахстане, в области подбора персонала и ИТ-услуг, ведения
бухгалтерского учета, налогообложения и подготовки отчетности, а также управления компанией.
До этого Ульф Шнайдер занимал должность финансового директора в Московском офисе страховой группы «Альянс». В это время
он занимался проектами в области финансового менеджмента, страхования жизни и здоровья, а также пенсионного страхования.
После получения экономического образования в Киле и в Университете штата Иллинойс Ульф Шнайдер проработал пять лет в
компании «Проктер энд Гэмбл» в области финансового менеджмента, корпоративного налогообложения и планирования. В это
время он работал в офисах в Германии, а также в Брюсселе.
Trade Opportunities along
Kazakhstan’s Border with China
[ By Chris Devonshire-Ellis, Principal, Dezan Shira & Associates ]
C
hina has ratified a new
special economic zone
in Yili, in northwestern
Xinjiang near the border
with Kazakhstan. The
area is already China’s only Kazakh
autonomous prefecture, populated mainly
by ethnic Kazakhs.
The prefecture has a total population
of four million with about 500,000
living in the city of Yining, also known
as Ghulja. The 200-square-kilometer
zone will transform the nearby border
port at Khorgas into a center for trade
with Kazakhstan, including container
transportation, processing facilities
and the promotion of tourism in both
Kazakhstan and Xinjiang. The US$1
million China-Kazakhstan Khorgas
International Border Cooperation Center
is expected to be operational by 2014.
China is looking to spend US$294
million in a span of five years to revamp
the highways at the border trading areas
of the Xinjiang Uygur Autonomous
Region. The construction will boost trade
with Kazakhstan, Russia, Mongolia,
and Kyrgyzstan. The Xinjiang border
will cover 5,600 kilometers including
15 custom posts and 101 highways
for passenger and cargo transportation
activity in the region.
Yining is the principal city, agricultural
market, and commercial center of the
Ili River Valley. It is an old commercial
trading center for products such as tea and
cattle, and it is still an agricultural area
with extensive animal husbandry. It has
extensive fruit orchards, while iron, coal
and uranium are mined nearby.
The city’s roots run deep and its
predecessor, the now ruined city of
Almaliq, was an important trading city in
the times of Chinggis Khan and was a major
trading city during the Silk Road days.
10
Russia Briefing
|Yining Airport is located just north of
the city, and has commercial services to
Urumqi, while a new electric railway line
from Urumqi to Ghulja to Khorgos was
completed in late 2009. A daily passenger
service – an overnight Urumqi-Ghulja
train – began on July 1 this year.
Khorgas is linked to the Kazakhstani
city of the same name just across the
border, which is linked with rail and road
networks to Almaty and other destinations
in Kazakhstan. The Khorgas Port is open
year-round, making it attractive. It has
well developed inspection facilities,
banking, post and telecommunications
infrastructure. Khorgas has over 2,500
branch offices and enterprises operating
mainly in Sino-Kazakhstani trade and can
accommodate three million passengers
and 2 million tons of cargo each year.
China-Kazakhstan bilateral trade is worth
about US$10 billion each year, and this
figure has been growing significantly.
China is now Kazakhstan’s second
largest trading partner. The Yili SEZ will
provide benefits in tax incentives and
greater financial freedoms for businesses
investing in the area, with the main focus
being on trade with Kazakhstan and the
rest of Central Asia.
China and Kazakhstan signed a joint
communiqué in 2007 cementing relations
between the two countries and increasing
trade to US$15 billion by 2015. The
agreement also highlights Chinese and
Kazakhstani interest in cooperating
on a natural gas pipeline project, a
petrochemical project and a partnership
on deep processing of gas and oil.
Given the right export routes, Kazakhstan’s
production potential could propel it
to become a major player in the oil
industry. Proof of its growing clout is
its chairmanship of the Organization
for Security and Cooperation in Europe
in 2010. The country is the first former
Soviet state to assume the position and
head the 56 country organization.
In 2005, the China National Petroleum
Company spent US$700 million to have
the 962.2 kilometer Atasu to Alashankou
pipeline reach the Chinese border. The
Atasu-Alashankou pipeline is China’s
first pipeline that allows oil to be imported
from Central Asia. Completed in 2009, the
pipeline runs for 2,228 kilometers from
Atyrau in Kaszakhstan to Alashankou
in Xinjiang and has a capacity of 120
thousand barrel per day.
Khorgas Port is 380 kilometers from
Almaty, Kazakhstan’s main economic
center and a developing regional hub for
Central Asia, with extensive air and rail
connections to most major Central Asian
cities. The Regional Financial Center
of Almaty (RFCA) is a specific area
developed to handle the development of
Almaty in this manner, which also includes
a stock exchange. James Wolfensohn,
former president of the World Bank chairs
the International Advisory Board of the
RFCA.
Great opportunities lie in Western China
as China’s border areas open up to
international and bilateral trade. The
development of a new SEZ in Yili
confirms our opinion that the new markets
to look at in China for growth are in the
west, and in the case of Yili, businesses
interested in developing trade links with
the huge markets in Central Asia will do
well here.
For more information on Yili and crossborder business between Kazakhstan
and China, please contact Dezan Shira
& Associates at [email protected] or
visit www.dezshira.com.
Trade Opportunities along Kazakhstan’s Border with China
Kazakhstan’s Border Crossings with China
a
ol
Samara
Saratov
Magnitogorsk
Volga
Orenburg
Volgograd
Qostanay
Orsk
Atyrau
(Gur'yev)
Caspian
Sea
Dashhowuz
Baku
Krasnowodsk
Charjew
Mary
Tehran
Mashhad
Gushgy
(Kushka)
uD
'
Naryn
ya
Mazar-e
Sharif
Kuqa
im
Tar
Wushi
Korla
He
40
Osh
Kazakhstan
Dushanbe
Tajikistan
Qurghonteppa
(Kurgan-Tyube)
ar
China
Almaty
Bishkek
Kyrgyzstan
Khujand
Qarshi
Am
Yining
International Boundary
Knorugh
National Capital
Oblystar Capital
Termiz
Railroad
Ind
Qom
Shu
Zhangatas
Zhambyl
Shymkent
Nawoiy
Bukhoro
Samarqand
Urumqi
Panfilov
us
Ashgabat
Ile
Qapshaghay
Turkistan
Tashkent
Uzbekistan
50
I r a n
Herat
Yazd
Zaisan (Kazakhstan) /
Jimnay (China)
Kabul
Afghanistan
Islamabad
Pakistan
30
Jimnay is a historically important way
station for trades traveling between
Xinjiang and Central Asia. Its opposite
port is Kazakhstan’s Maykapchagay
Port in Shyghys Qazaqstan Oblast,
just 500 meters from the Chinese
port and 60 kilometers from Zaisan
City in Kazakhstan. It is a year round
highway crossing and the crossing is
650 kilometers from Urumqi. The port
is currently fully operational and can
accommodate traffic of 50,000 people
and 100,000 tons of goods.
Uchqudug
Urganch
Turkmenistan
Basht
Taldygorghan
Qyzylorda
a
Tachengi
Lepsi
Leke
Balkhash
riy
90
Zaysan
Balqash
Saryshaghan
rd
a
50
Oaraghandy
Zhezqazghan
Sy
ya
Oskemen
(Ust' - Kamenogorsk)
Ayagoz
Leninsk
(Tyuratam)
Nukus
40
Bi
Ekibastuz
Astana
Temirtau
Aral
Aral
Sea
Aqtau
(Shevchenko)
Biysk
tis
Kazakhstan
Beyneu
Makhachkala
Atbasar
Arqalyq
Shalqar
Novokuznetsk
Pavlodar
Esil
Aqtobe
(Aktyubinsk)
Barnaul
Er
Koksnetau
Rudnyy
Embi
Astrakhan
Omsk
'
Aqsay
Petropavl
tun
Oral
Kemerovo
Novosibirsk
To
b
Kurgan
Chelyabinsk
Ufa
Penza
50
Tyumen'
Kam
Krasnoyarsk
Tomsk
Irtysh
Yekaterinburg
ra
ga
An
ise
y
'
Ob
Kazan'
60
Ye
n
Ob
Nizhniy Tagil
Izhevsk
Ul'yanovsk
90
Nizhnevartovsk
Ch
Perm'
Nizhniy Novgorod
40
80
Surgut
R u s s i a
Kirov
Volg
a
70
il
Yaroslavl'
60
ym
50
ul
60
40
Rybinsk
Zhayyq
Baktu is open year round and connects
the Kazakhstan city of Maganshy (60
kilometers) with the Chinese city of
Tacheng. (17 kilometers). It is 700
kilometers from the former Kazakhstan
capital city of Semey Oblast and 621
kilometers from Urumqi. Baktu is
capable of handling 200,000 tons of
cargo and 100,000 passengers. A 3,040
square meter multifunctional inspection
hall has been set up, together with four
goods yards, each with a storage capacity
of more than one million tons. The port
is a major driver for the production
and export of agricultural goods in
the region. An international passenger
bus from Tacheng to Ayaguz and
Ust-Kamenogorsk of Kazakhstan runs
on a regular basis.
This crossing, also known as the Alataw
Pass, is the main rail crossing between
the two countries. It also has significant
highway routes, all mainly serving traffic
between Almaty and Urumqi. Located
at the eastern end of the Dzungarian
Gate, a pass connecting China to
Kazakhstan through the Dzungarian
Ka
Maganshy (Kazakhstan) /
Baktu (China)
Alatau mountains, Alashankou is
China’s second largest land port of
entry and accommodates more than 90
percent of all imports and exports into
the Xinjiang Autonomous Region. It
is also the western-most point of the
north Xinjiang branch of the LanzhouXinjiang railway. From Alashankou/
Dostyk, it is 460 kilometers to Urumqi
and 880 kilometers to Almaty.
Es
Khorgas is the largest highway border
crossing in China’s western regions, and
is sited on the Chinese side 90 kilometers
from Yining and 670 kilometers from
Urumqi, while on the Kazakhstan side it
is 35 kilometers from Panfilov and 378
kilometers from Almaty. The connecting
highway between these locations is good
quality. Khorgas sees a flow through of
3 million people and 2 million tons of
goods each year and is a major artery
between China and Central Asia. Bus
services also operate along this vital
trade route to Central Asia and Europe.
Dostyk (Kazakhstan) /
Alashankou (China)
Ur
al
Panfilov (Kazakhstan) /
Khorgas (China)
30
Kerman
Qandahar
60
0
400 Kilometers
200
0
200
70
400 Miles
30
30
80
Kazakhstan Fast Facts (2009)
Formal name
Republic of Kazakhstan
Capital
Astana
Land area
2,717,300 square kilometers
Population
15.6 million
Nominal GDP
US$107.9 billion
Nominal GDP per capita
US$6,930
Total value of imports
US$28.77 billion
Total value of exports
US$43.96 billion
Total value of trade with China
US$17.55 billion
Total value of imports from China
US$7.83 billion
Total value of exports to China
US$6.29 billion
Russia Briefing
11
INVESTMENT INTELLIGENCE FOR ASIA
Asia Briefing’s Online Resources
Russia
China
www.russia-briefing.com
www.china-briefing.com
2point6billion
www.2point6billion.com
Vietnam
India
www.vietnam-briefing.com
www.india-briefing.com
Please contact one of the firm’s offices for advice on incorporation, business management, tax, accounting,
due diligence, audit and other matters related to foreign investment in Asia, or e-mail [email protected].
www.dezshira.com