The NOFA Foundation has organized the Round table “Place of the Accounting Legislation in the Legal System of the Russian Federation”

20 April 2007
The NOFA Foundation has organized the Round table “Place of the Accounting Legislation in the Legal System of the Russian Federation” On the 18th of April, 2007, the NOFA Foundation has organized the Round table “Place of the Accounting Legislation in the Legal System of the Russian Federation”. The following issues were brought forward Round table participants: - Functions of accounting and relations regulated by accounting legislation - Accounting law’s subject and method - Necessity of separating accounting law from other legislation - Private nature of accounting law - Misuse of accounting data in civil law - Significance of separation of the accounting legislation for IFRS adoption - Problems of using accounting data for regulation of related fields (tax, civil law and others) The NOFA Foundation Working Group representatives, which developed Draft Law “On regulation of accounting and financial reporting”, representatives of Ministry of Finance, Central bank of Russian Federation, the heads of accounting and financial departments of the largest companies, representatives of the Institute of Professional Accountants of Russia, representatives of legal scientists, and also auditors, and analysts have participated in the Round Table. The NOFA Foundation’s Draft of the Paper entitled ‘Changes in civil and other legislation, proposed in connection with accounting reform’ was submitted for the discussion. Opening the Round table Mikhail Kiselev, the Chairman of the National Accounting Standards Board of the NOFA Foundation, noted the actuality of the discussing issue. Today Russia and other countries using National Accounting Standards are faced with a number of legal problems in adoption of national equivalents of the International Financial Accounting and Reporting Standards (IFRS). This problem displayed right away after the beginning of realization the Program of Reform of Accounting in accordance with IFRS which was adopted in 1998. The existing Law “On Accounting” uses civil law terminology and in consequence of that the difficulties with using of international conceptual terminology in Russian Statements on Accounting in their approaching to IFRS are arisen. Distinguishing of accounting legislation might promote to solve problems and to accelerate of IFRS principles adoption in Russian accounting practice. Today, Draft law “On official Accounting” and draft law “On regulation of accounting and financial reporting” are two widespread discussed alternative drafts one of which should substitute existing law “On accounting”. According Mikhail Kiselev’s opinion, these laws contain similar norms allowing presence in legislation concerning their own conceptual terminology and opportunity for definition of institutes, conceptions and terms that differs from their definitions in the civil law. According to the opinion of the developers of draft law “On regulation of accounting and financial reporting”, the definition of basic terms which are used in accounting sphere, in text of the law itself is inappropriate for a number of reasons. Firstly, internationally recognized definitions of these notions can be changed in the near future in the framework of the draft concerning the revision of IFRS Conceptual fundamentals. Secondly, definitions can be misrepresented during numerous draft law legal consultations. That is unacceptable from the point of view of approaching to international practice. The Round table participants were asked to present their views concerning with the problems of the independency of accounting legislation as separate law field, and to concern possible ways to solve problems of misusing civil legislation in accounting standards interpretation. Elena Avakyan, the Head of Administration Department at the Supreme Arbitration Court of the Russian federation, observed the need for framework law regulating the Russian financial reporting standards and establishing the system of self-regulation. All other rules and regulations of the financial statements should be imposed solely by standards developed and adopted by a single non-government entity. The status of the legal act to the standards should be given by the authorized government agency. The standards will provide a conceptual framework and will be the basis for the resolution of all disputes in the area of financial accounting and reporting. However the barrier for establishment of such a system may be found in the Russian legal rule: if the law does not define the term, but it definition is contained in legislation from other areas of regulation, the term applied by analogy. In this situation, the adoption of a framework law, referring to the terminology of the standards (legal acts at the lower level) makes terminology in the field of financial accounting and reporting vulnerable from the legal point of view. There are two ways to solve this tight situation. The first is do not to create intersectional terminology but this is unlikely because it was impossible to avoid the notions of "possession", "property", and etc. contained in the civil law. Another option is to change “the views” of the judicial system, to form the willingness to accept the rules of the standards as a rules of the specific law that is not intersect with other legislation. According to Elena Avakyan, such a requirement could be set directly in the framework law: all the terms and concepts used in the field of accounting and financial reporting are only in the sense in which they are used in the standards. Of particular interest was the report of Oksana Suhareva, deputy director of the united methodological center of FBK Company, in which she has formulated the essential characteristics of accounting law as a part of the legislation. Oksana Suhareva has noted that the main cause of inefficiency of the reform of the Russian system of accounting and reporting is the uncertainty of the regulatory accounting regulations and functions of accounting and financial reporting. According to Oksana Suhareva, the accounting law is public relations in connection with the formation and transfer of formal information on organization that is adapted for the economic decision-making. The main function of accounting is information and accounting legal relations is in their nature the information relationships. Ignoring of the accounting legislation as an independent legal field leads to the risk of permanent legal controversy when accounting for transactions. In the accounting law as opposed to the tax legislation, the discretionary method of regulation that allowing the entity to choose the variant of behavior should prevail. Boris Kolmakov, adviser to the President of the Association of regional Banks of Russia, member of Accounting Standards Board of the NOFA Foundation, has presented to the Roundtable participants analysis of the accounting and reporting regulation in the banking sector. According to Boris Kolmakov in order to improve implementation of IFRS in the bank accounting, it is necessary to reduce significantly the contradictions between aims of the various types of financial reporting that banks are required to present and to avoid the considering of the accounting terminology as equal to the civil and tax law terminology of the Russian Federation when regulating of the accounting. A situation where the IFRS terminology is considered by the regulator in the context of the terminology of the existing legislation of the Russian Federation and its own regulations, which based on the current legislation of the Russian Federation, led to a high risk of errors, the risk of arbitrary treatment and disputes with regulators, to the intricacies of accounting and reporting, and ultimately, the reporting process being more expensive. This increase in expensiveness of the reporting process negatively affected the ability of lending institutions to lower lending rates and fees for services, for both legal entities and individuals. According to the Association of Regional Banks, today in average there are 2-2.5 financial reports compiling employees per employee from income generating departments. The best way from the situation in place are the avoidance of regulation of accounting, the setting of understandable and uniform reporting rules, the exclusion of the situation where the quantity of reporting information creates a competitive advantage for variety of players in one market, the separation of public and private control under the financial position of a credit institution. During the discussions, the participants agreed that, despite the lack of recognition of this fact, accounting legislation actually formed as a separate branch of law. To date, the regulation of this area of law is mandatory, i.e. implemented solely by the State, using administrative methods. The Round table participants noted that the function of regulation of accounting and financial reporting is not a function intrinsic to the State and as a result, is excessive for it, because the state only to the little extent is a user of financial reporting and can not adequately monitor the interests of a wide range of its users. From this it has been concluded that the transfer of regulation of that field of law to the non-government level and the transition to a system of regulation based on the international principles are necessary. At the same time, a special role in the building of the system will play the early adoption of the NOFA Foundation’s draft law “On the regulation of accounting and financial reporting", which must to establish the hierarchy of the normative and other acts to be adopted in the sphere of financial reporting regulation and to determine the order of terms and concepts implementation in the area of financial reporting. The problem of the hierarchy of acts and the need for formulation of the separate conceptual framework for the regulation of financial reporting has given rise to particularly heated discussion of the Round table participants. Most of the participants were inclined to believe that in existing conditions of the legal regulation in the Russian Federation, the introduction into the Law of the provision that states the primacy of the subordinate act (which in essence will be the National Financial Reporting Standards) norms over the norms of laws, even laws governing the related areas of law, it would be very revolutionary, cause severe resistance of the system, and could only be done through a change in mentality of legislators law-users and especially the judicial system representatives. Resulting provisions of the Round table are the following: 1. The accounting law, as an independent branch of law, takes its shape and isolated place in the Law System of the Russian Federation. 2. Accounting law in their nature is the public relations, and should be the subject of prima facie method of regulation; the use of peremptory methods of regulation of this area leads to the loss of attractiveness of this kind of information to the users and consequently eliminates its demand. 3. The objective of financial statements is to provide interested parties with information about the financial position, financial performance, and changes in financial position and cash flows of the organization that is useful to economic decision-making. 4. The regulation of the accounting legal relations should be implemented on the basis of self-regulation principles by the institutions of civil society, uniting together representatives of the preparers, auditors and users of financial information. The NOFA Foundation plans the further development of the issues raised at the round table, and invites all interested persons to participate in the discussion.