Principles of Russian accounting: what affects localized versions of Microsoft Dynamics?
You can face lot of unusual and strange requirements while trying to implement Microsoft Dynamics system in Russia. Many of them will arrive from accounting department. How to deal with them and what is the difference between European standards and Russian standards of accounting and taxation that would affect implementation?
Nature of legislation
Russian legislation undergone considerable changes within last years. It still does. Lot of changes happen every year, and it keeps localization team busy :-). However in general it looks similar to IFRS principles in many aspects, and there is a tendency to comply with IFRS standards more and more in the future.
The major difference in accounting principles between IFRS or common European standards and Russian accounting standards is that in Russia the accounting is pretty formal (form prevails nature of transaction). This means that all transactions that are made in accounting should be correctly supported by corresponding proper documents. Unless paper document is present, no transaction can be booked. In order to be cost deductible in tax accounting, the transaction should satisfy two principles: it should be economically justifiable and it should be correctly documented. E.g., there should be a document from supplier, properly filled, in order to book a cost and VAT transaction, otherwise it cannot be deductible (or has a certain risk of being non-deductible if tax inspection will make verification). Here I should mention that there appeared electronic signatures and electronic documents in Russia few years ago, but due to many reasons it is yet in very rare use.
Most differences with European legislation comes in VAT settlements, currency control and currency exchange rates, advance payments, banking transactions, print forms.
Thus, Microsoft localizations of Dynamics products in Russia are one of the most complex in the world, similar difficulty with Brazil, India and China. It has lots of changes and additions to the objects, and all because of specific local accounting and tax processes.
Basically, there are two types of accounting: bookkeeping accounting and tax accounting. Whereas bookkeeping produces Profit and Loss Statement and Balance Sheet, aiming to satisfy the reporting needs of relevant users (owners, creditors, investors, etc.), the tax accounting results in certain amount of taxes to be calculated and paid.
The situation is that Russian governmental authorities are not very much interested in results of bookkeeping, rather paying most of the attention to how much taxes does company pay. In this relation, there traditionally has been a tendency to match as much as possible those two accountings: in order to avoid handling of differences between tax accounting and bookkeeping. For the purpose of satisfying management reporting needs, in many cases a third accounting was carried - management accounting. However bookkeeping should in principle act exactly as management accounting, and can play this role, the historical tradition of matching bookkeeping with tax accounting is still very strong in Russia and should be considered when performing implementation of ERP system.
Both bookkeeping and tax accounting are rigidly limited by legislation. Bookkeeping allows more flexibility to the users, whereas tax accounting has quite imperative limitations. But, both accountings anyway allow certain flexibility and choice options, which company makes when creates its accounting policy. Accounting policy is a special document, created by company, that describes the principles of accounting and taxation, selected by the company. E.g., what method of calculation of Cost of goods sold (COGS) will company use: weighted average or FIFO, how it will treat additional expenses - include in the cost of the items or write-off to the costs immediately, etc. When doing implementation that covers accounting and taxation functionality, always start with asking the copy of valid accounting policy - it will save lot of efforts in the future if you read it beforehand.
Local mentality and traditions
Generally, accounting in Russia should be carried out according to the legislation (Tax Code, accounting principles, various orders, explanation letters and recommendations of authorized bodies).
However tax offices have tendency to interpret legislation in a certain manner, profitable for the government. In some cases such interpretations are not even legitimate. You can encounter issues with that: even if you prove your approach in a court case, you might be non-operational for some time as your accounts might be blocked, and this would not do good for continuity of your business. Thus, the approach of tax office should be considered and respected.
On a third level, there exist opinions of accountants themselves. Historically accountants were materially liable, and that lead to developing a very conservative approach towards accounting. Regular accountant is trying to avoid risks and will most likely try to form such principles, that would be perhaps less efficient tax-wise, but also less risky in all matters. So it usually leads to the situation when accountant describes a huge amount of different requirements, that are MUST for implementation. In many cases it is not so.
Efficiency principle should be considered here. Some of the work can be done manually and does not need to be made in the system. E.g., if there is a need to submit to authorities one annual report for which accountant would spend 6 hours to prepare manually, it is useless to implement automation of this report in the system if such automation will cost 300 hours of consultancy and programming work.
Another issue is that for many requirements there are no penalties, or the penalties are insignificant. Let’s be honest: if there is a requirement that is very difficult to automate in the system, but there is no penalty for that, and there is no much risk that anybody would ever find it – is it worth to be automated? All in all, your company comes to Russia not to do accounting – it comes to do business and earn profits.
So, when accountant tells you about a certain requirement, the first thing you should do is to ask him: where is that stated in the law, what would happen if it will not be satisfied, and what would be the penalty for non-following that requirement.
Summary
Russian accounting and taxation standards are complicated, and Russian localization of Microsoft Dynamics products is one of the most complex in the world. A variety of legal requirements should be followed, but even more requirements can be ignored or postponed, regardless that every normal accountant would insist on fulfilling all the available requirements in the system. You should carefully select a trusted and reliable Partner in Russia who can assist and advice (filter :-) ) on a variety of legal requirements you can face during implementation of your Microsoft Dynamics ERP system.
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