International Financial Reporting Standards in Ukraine: obligatory or voluntary implementation?

Rapid expansion of information technologies, globalization, international cooperation, multinational corporations – all these factors have been accompanying our lives for almost a century.

Different countries and different laws, but what about financial reporting? To be able to read financial statements, the approaches to compilation must be identical, and financial statements must be clear to all users without exception.

The only way out of this situation was implementation of a common reporting standard, which would implement a unified approach to the preparation of financial statements. Such a unified approach is implemented with the International Financial Reporting Standards (IFRS).
In Ukraine, the implementation of IFRS began with the reform of accounting, and the adoption of the Law of Ukraine dated 16.07.1999 № 996-XIV “On accounting and financial reporting in Ukraine” both with the implementation of Local Accounting Principles (UA GAAP) which in almost all aspects meets provisions of IFRS.

Clear accounting and financial reporting prepared in accordance with the requirements of IFRS is a kind of a “quality mark” and confirmation that information provided in the reporting is reliable. For those companies planning to enter international markets, with shares listed on stock markets, attracting investments from international donors (both private companies and financial institutions such as EBRD or IMF) IFRS standards for the financial statements are mandatory.

Most of the accountants in Ukraine are focused primarily on tax accounting and tax consequences. However, the Tax Code of Ukraine foresees maintaining the accounting practices whether according to Local Accounting Principles or IFRS, which are also a basis for taxation. So importance of accounting cannot be ignored. Is there a choice? Who should decide how to maintain the accounts: according to local accounting principles or IFRS?

Part 2 of Article 12 of the Law № 996-XIV provides a list of enterprises for which the application of IFRS is mandatory:

  • enterprises of public interest
  • large enterprises
  • public joint-stock companies
  • enterprises engaged in the extraction of minerals of national importance
  • enterprises engaged in economic activity by types, the list of which is determined by the Cabinet of Ministers of Ukraine

The rest of the companies can choose IFRS as a conceptual basis for accounting at their own discretion.

So, IFRS or UA GAAP? What is the best choice for the company if your activity is not found in the list above? However, if you are focused on long-term development, attracting investments, entering international markets – the earliest application of IFRS will clearly simplify and facilitate the life of the company.

The transition to accounting in accordance with the IFRS system requires a change in accounting policy and certain actions aimed at harmonizing (transforming) accounting between UA GAAP and IFRS. Transformation means to identify and implement discrepancies in accounting between UA GAAP and IFRS. Transformation should be completed in accordance with IFRS 1 “First-time Adoption of International Financial Reporting Standards”.
The indicative algorithm for the transition to IFRS is as follows:

Step 1. Determine the date of transition. This is usually January 1st, but the period would be different if reporting users set a different reporting period for the fiscal year.

Step 2. Develop an accounting policy in accordance with the requirements of IFRS. The provisions of this accounting policy to previous periods are applied retrospectively, which will be reflected in the transformation adjustments.

Step 3. Prepare a trial balance on the accounts in accordance with UA GAAP.

Step 4. Analyze the remnants of each of the accounts for their compliance with IFRS and accounting policy.

Step 5. Make transformational (corrective) records to reconcile with the identified differences. These can be, for example, differences in the amount of depreciation, disposal or recognition of certain items, reclassification of assets/liabilities and so on.
Important! Transformation records should not affect the financial result of the year, so they should be made through the account of retained earnings (loss).
An example of such a transformation table is given below.

Step 6. Make a transformed trial balance.

Step 7. Based on the transformed trial balance, prepare financial statements.

In addition to the usual practice for every accountant report to consist of a balance sheet (statement of financial position) and statement of financial performance (statement of profit and loss), the IFRS reporting package includes a statement of equity, a statement of cash flows and a notes part.

Perhaps the most important component of financial statements is the notes section.

The notes reveal:

  • general information about the company;
  • basics of preparation, approval and submission of financial statements;
  • significant provisions of the accounting policy;
  • significant judgments and assumptions;
  • disclosure of information regarding fair value use;
  • reclassifications in the financial statements for the reporting year compared to the financial statements of the previous year and correction of errors;
  • disclosure of information, which confirms the articles submitted in the report.

It is also necessary to take into account the transition (comparative period). In accordance with the requirements of clause 30 of IFRS 1 “First-time adoption of International Financial Reporting Standards”, there should be two comparative periods for each type of reporting and three for the income statement.
Thus, implementation of IFRS as a conceptual basis for accounting and reporting is evidence of the reliability of information, its complete coverage and, accordingly, such reporting fosters more confidence among its users. The need to use unified accounting approaches is caused by market conditions, so IFRS is being implemented by more and more companies in Ukraine.

Wishing you good luck on the way of transformations!

Maria Vasilenko

Junior accountant
IFRS consultant
Laudis Legal & Accountanc