Dmitriy Belianskiy, Head of Outsourcing at Mazars Ukraine
KyivPost, issue 38, September 19, 2014
The number of companies in Ukraine owned by foreigners or non-resident companies grows every year. Foreign owners require their local teams to prepare financial statements under International Financial Reporting Standards (hereinafter IFRS).
At the same time accounting and financial reporting in Ukraine is regulated by Ukrainian Accounting Standards (hereinafter UAS). Initially UAS were developed on the basis of IFRS in order to bring them in line with international practice, to make them available for the stakeholders from different countries, to encourage foreign investment and to foster integration of Ukrainian business into the global economy. However, the problem of discrepancies between IFRS and UAS still exists.
The key factor that drives this discrepancy is the fact that tax accounting consumes most of time in Ukrainian companies. Ukrainian authorities often amend the Tax Code, adjusting the norms of the national standards to the provisions of the Tax Code of Ukraine. That is why most accountants try to pay close attention to the tax accounting in particular. Thus, tax accounting takes the priority, while the correct accounting and financial reporting are set aside. Besides, in contrary to the most countries, there are no penalties for failure to comply with the basic principles of UAS. That’s why accountants do not always perform the routine operations set in the Ukrainian standards. For instance, accrual of provision for unused vacations or bad debts allowance is considered to be one of such operations. Company will not be fined if the provision is not accrued and isn’t shown in the financial statements.
Another factor is that it is rather difficult to explain to the financial representative of a company with foreign investments why costs are incurred, but are not shown in the reports. Usual response of a Ukrainian accountant to such question “We did not obtain the primary document” shocks foreigners.
Thus, while ignoring the basic principles of financial reporting (accrual concept, matching principle, prevailing of substance over form, etc.) we get a distorted picture of the business activity and, as the result, the users of financial information make wrong business decisions on the basis of incorrect data.
On the other hand, the majority of specialists in foreign companies maintains accounting records and prepares financial statements following the concept worked out by the parent company (which usually complies with IFRS standards). This additional accounting is usually kept simultaneously with accounting under the national standards and requires additional labour input and involvement of experienced specialists.
In our opinion, here are some of the potential solutions to the issues mentioned above:
- As part of reforms in the financial sector the Ukrainian government should consider an option of introducing penalties for non-correct disclosure of financial statements according to UAS in order to comply with the common international practices.
- The companies could invest into professional development and training of local specialists in order to switch their vision of accounting from tax communication to financial one.
- Involvement of experienced professionals from outsourcing companies could be also considered as an immediate solution. Such companies, while preparing reports and keeping accounting records, consider all the above-mentioned points and provide the owners with an opportunity to get accurate information to make managerial decisions and, at the same time, facilitate the work of Ukrainian management. Moreover, very often, outsourced services cost less than a full-time reporting specialist.