Adoption of International Financial Reporting Standards (IFRS) in the Russian banking system: where we stand now.

• Author: Korovyakovskaya, Inessa Yu.

1. INTRODUCTION

   The adherence to the international accounting standards is considered to be a passport to the integration into the world financial markets. One of the most significant problems of the business environment in Russia today is that the country's financial reporting standards are still designed to meet the needs of the tax authorities (Bagaeva, 2008). International Financial Reporting Standards (IFRS) differ in that they first and foremost protect the interests of the shareholder who evaluates his investment decisions and compares whether it is better to invest or to keep his money in a bank (Khazimuratova, 2006). The demand for accounting information comes from various sources including managers, investors, lenders, employees, suppliers, customers, governments and the public (Alexander & Nobes, 2004, ). Further, the availability and quality of accounting information depends on legal traditions and capital markets structure of a country (Ball, Robin & Wu, 2003; La Porta, Lopez-de-Silanes, Shleifer & Vishny, 2000).

   This study reviews the adoption of International Financial Reporting Standards (IFRS) in Russia in general, and in the banking sector, in particular. Russia is one of the most influential Eastern European countries with a growing market that has a significant impact on the world economy. The country is rich in natural resources and foreign capital is of great importance for the firms that have been developing these resources. As a very large emerging market, Russia offers significant opportunities for foreign investors (Preobragenskaya & McGee, 2003).

   The main contribution of this paper is in providing an overview of the adoption of the IFRS that includes preparations for the implementation of IFRS in Russia, the major stages of this process, major problems related to the implementation, the situation with IFRS's adoption by Russian banks, and propositions. This study contributes to the literature on the adoption of IFRS in Eastern Europe and in the international markets.

2. LITERATURE REVIEW

   2.1 IFRS adoption in Russia

   Extant literature on IFRS convergence is focused almost exclusively on factors influencing corporate compliance with IFRS in European countries (e.g. Dumontier & Raffournier, 1998; Street & Larson, 2004), while the literature on IFRS adoption in emerging countries is scarce (Abd-Elsalam & Weetman, 2003). It is widely believed that the use of IFRS in Russia will propel enhanced international investment in Russia (Bagaeva, 2009).

   In 2004, the Russian Ministry of Finance approved Russia's transition to IFRS over the period 20042010. The three main goals of IFRS implementation were: First, IFRS were proposed for the consolidated reporting, which not exist under Russian accounting standards. Second, new Russian accounting standards were to be developed in line with IFRS principles. Third, an infrastructure for IFRS use and implementation was to be developed due to the current lack of developed valuation markets in Russia (Bagaeva, 2008). Accounting in Russia suffered from conflicts in tax, accounting and corporate laws. Adoption of IFRS in Russia had been slowed down by a number of factors, such as lack of availability of comprehensive education on IFRS, inadequate translations of standards from English into Russian, and lack of professionals with IFRS knowledge who could oversee the implementation and adherence to IFRS standards (Preobragenskaya & McGee, 2003).

   International investors favor firms that prepare their financial statements in accordance with IFRS or US GAAP (McGee & Preobragenskaya, 2004). From 2005 onward, banks and listed firms have had statuary requirements to prepare reports in accordance with IFRS. However, Russian companies that do not have international investors as stockholders have been reluctant to prepare their financial statements in accordance with IFRS due to the additional costs associated with implementation of IFRS. Another reason is their unfamiliarity with and lack of expertise in IFRS.

   2.2 Differences between Russian Accounting Standards and IFRSs

   Russian legislation and regulations are very specific regarding the documentation required to support a transaction. In practice, unlike IFRS, transactions are accounted for in accordance with their legal form, rather than their substance. The practical application of RAS results in significant differences compared to IFRS as stated in Doing Business in Russia 2009 Report by Deloitte & Touche Regional Consulting Services Limited (Russia):

   Financial statements are generally prepared on a historical cost basis with only limited use of revaluations; The fair value concept is not widely applied, except for investments in market traded securities; Finance leases may be capitalized, but usually are not; Assets are not normally tested for impairment (except for intangible assets); The useful lives of fixed assets tend to be in line with the useful lives specified for tax purposes; The assets and liabilities of an entity which has been acquired are measured and maintained at book value at the...