What's new in Russian accounting standards

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​published on 18. February 2020 | reading time approx. 6 minutes

 

Major changes have been adopted in the procedure for handling financial accounting and preparing financial statements in the Russian Federation in relation to the disclosure of profit tax settlements and leases/rentals.

 

 

 


At the end of 2018, the Russian Ministry of Finance published two new pieces of legislation to regulate the procedure for handling financial accounting and preparing financial statements in the Russian Federation, namely Ordinance No. 236n of 20 November 2018, introducing changes to the Accounting Standard PBU 18/02 “Profit tax”, and Ordinance No. 208n of 16 October 2018 on the endorsement of the Federal Accounting Standard FSBU 25/2018 “Financial accounting for leases/rentals”. The latter has the status of a Federal Accounting Standard based on the Federal Act No. 402-FZ “On financial accounting” of 6 December 2011. It is the first federal standard adopted since the said Act came into force.


Profit tax settlement: Changes in the Accounting Standard PBU 18/02

For some time now, accountants have disputed whether the recognition of inventory write-downs in financial accounting handled according to the Russian accounting standards leads to permanent or temporary differences. Supporters of the conservative view believe that in this case a permanent difference arises and a permanent tax liability should be recognised in financial accounting in line with the Russian accounting standards, whereas supporters of the progressive approach believe that such a difference is temporary and deferred tax assets should be recognised.


The Russian Ministry of Finance has resolved this dispute by introducing amendments to the Accounting Standard PBU 18/02. The Accounting Standard PBU 18/02 now directly states that, for example, the disclosure of write-downs for inventories, financial assets or other assets in financial accounting and the disclosure of provisions (e.g. for unused holiday leave) in financial accounting leads to the creation of a temporary difference and, thus, usually to deferred tax assets.


Temporary differences are also considered to arise where assets are revalued at market value for the purpose of financial accounting, which is, for example, relevant for companies that recognise property, plant and equipment at revalued amounts in their financial accounting and in financial statements. These companies should take into account that now the profit tax related to transactions that are not included in the annual result in financial accounting should likewise be recognised outside profit or loss. For example, deferred tax liabilities arising when property, plant and equipment is revalued to an amount beyond the cost of the asset and as part of the related revaluation surplus do not affect the net profit or loss for the period but the total comprehensive income for the period in financial accounting, i.e. they are recognised directly in equity.


The application of the balance sheet method for the calculation of deferred taxes is another important change introduced to the Accounting Standard PBU 18/02. Now the temporary difference is determined as the difference between the carrying amount of the asset (liabilities) and its tax base (value for tax purposes).


Another change is the manner of presenting information on profit tax settlements in the income statement and the related definitions. Instead of the usual items of "current profit tax", "permanent tax receivables and liabilities" and "changes in deferred tax liabilities and assets", a new, combined value of profit tax expenses (income) will now be introduced into the income statement and will be divided into current profit tax (as shown in the profit tax return) and deferred profit tax. The latter represents the net change in deferred tax assets and liabilities for the period, with the exception of the results of transactions to be recorded in equity.


The Ministry of Finance of the Russian Federation has prepared the draft ordinance on introducing these (and some other) changes to templates of corporate financial statements. The ordinance is expected to come into force this year.


The new version of the Accounting Standard PBU 18/02 specifies special aspects of the application of the standard by members of a consolidated taxpayer group and changes the requirements regarding the disclosure of information about the company's profit tax settlements in the notes to financial statements.


The amended version of the Accounting Standard PBU 18/02 applies to reporting periods from 2020. However, companies may apply the Accounting Standard PBU 18/02 to earlier reporting periods. In any case, the effects of the introduced changes on the financial statements must be shown retroactively, i.e. as if the new version of the Accounting Standard PBU 18/02 had always been applied to the disclosure of the balance sheet profit (loss) taking into account the transferred retroactive adjustments.

 

In our opinion, the changes introduced to the Accounting Standard PBU 18/02 are mostly of technical nature (with the exception of profit tax expenses (income), which are allocated to the total comprehensive income) for companies that had previously adopted the progressive approach, and require the introduction of changes mainly in the procedure for the disclosure of information in the templates of financial statements and notes to financial statements. For companies that adopt a more conservative approach, more comprehensive changes may be required in the way they handle financial accounting and prepare financial statements.


 

Disclosure of leases New Federal Accounting Standard FSBU 25/2018

The Federal Accounting Standard 25/2018 "Financial accounting for leases/rentals" introduced significant changes in the procedure for handling financial accounting and preparing financial statements according to the Russian standards in relation to the disclosure of lease and rental transactions.


The Federal Accounting Standard FSBU 25/2018 is based on the principles of IFRS 16 "Leases", which came into force on 1 January 2019. IFRS 16 "Leases" was introduced in the Russian Federation by virtue of Ordinance No. 111n of the Ministry of Finance of the Russian Federation dated 11 July 2016.


According to the new Federal Accounting Standard FSBU 25/2018, if a company rents, for example, a warehouse or an office, or leases cars or trucks, etc., each such rental/lease should be reviewed for compliance with the provisions of FSBU 25/2018, as these items are most likely to be classified as rental/lease property and, accordingly, they should be recognised as a right-of-use asset and the rental/lease payment obligation should be simultaneously recognised in financial accounting.


Here, it is no longer relevant in whose balance sheet the parties contractually agree to recognise the rented/leased asset (as specified in a lease). Irrespective of who (lessee or lessor) is specified in the lease as the beneficial owner of the asset, the asset should be recognised as a right-of-use asset by the lessee if the lease meets the recognition criteria specified in FSBU 25/2018.


If no sub-lease is planned or if the lease does not provide for the transfer of ownership of the leased asset to the lessee and there is no possibility for the lessee to acquire the leased asset at a price significantly below its market value, it is possible not to recognise the leased asset as a right-of-use asset. This exception applies in two cases:

  • the term of the rental/lease is maximally one year; or
  • the market value of the leased property does not exceed 300,000 rubles and the lessee may derive economic benefits alone from this property (independently of other assets).


In this case, lease payments are recognised as an expense over the lease term on a straight-line basis or using another approach that reflects the lessee's pattern of consumption of the economic benefits embodied in the leased asset (which need not be consistent with the lease payment schedule).

If the leased asset is disclosed as a right-of-use asset, an asset and at the same time the related lease payment obligation should be recognised in the lessee's accounts. The lease payment obligation should be measured initially at the discounted nominal value of the future lease payments. The right-of-use asset is recognised at its present value, which includes in particular the value of the original estimate of the lease payment obligation, the lessee's expenses incurred in bringing the leased asset to a working condition and some other elements.


After initial capitalisation, the value of the right-of-use asset is reduced due to depreciation and the amount of the lease/rental payment obligation is increased by the amount of calculated interest and reduced by the amount of the lease/rental payments actually made.


It should be noted that the right-of-use asset should be recognised in the balance sheet under fixed assets, the lease/rental payment obligation should be divided in the balance sheet into the non-current and the current portion and recorded accordingly under non-current and current liabilities.


FSBU 25/2018 also provides for adjustments and defines the corresponding procedure for adjusting the value of the right-of-use asset and the amount of the lease/rental payment obligation after its initial recognition.


Lessors should recognise the rental/lease payment depending on whether the item in question is classified as an operating lease or a non-operating lease (finance lease). The measurement principles and the method of recognition in the financial statements are very similar to the corresponding IFRS rules.


The Federal Accounting Standard FSBU 25/2018 specifies requirements regarding the presentation of information in financial statements.


It should be noted that due to possible differences in the rules of reporting rentals/leases between financial and tax accounting, the application of the Federal Accounting Standard FSBU 25/2018 may lead to the necessity of disclosing deferred taxes in financial accounting and in the financial statements.


The amended version of the Federal Accounting Standard FSBU 25/2018 applies to reporting periods from 2022. Earlier application is permitted. The effect of applying this standard on results presented in the financial statements should be disclosed retroactively, but the standard allows some flexibility when it comes to the retroactive application.


In our opinion, companies that prepare financial statements according to IFRS (Reporting Packages for consolidation purposes) in addition to the Russian accounting standards should consider the possibility of an earlier application of the Federal Accounting Standard 25/2018. This is due to the fact that IFRS (IAS) 16 "Leases", on the basis of which the Federal Accounting Standard 25/2018 has been drawn up, has been applicable since 1 January 2019, so an earlier application of the Federal Accounting Standard 25/2018 may help avoid unnecessary adjustments and the workload related to preparing the financial statements.

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