Eldar Maksymov and Dr. Earl K Stice, School of Accounting and Information Systems
Ukraine is an Eastern European country with a history of volatile economic climate. The future success and stability of the Ukrainian economy will largely depend on the government’s actions to make the economic climate more attractive to foreign investors through reforms. One area where change is needed the most is the area of financial reporting. The current accounting standards do not ensure that investors receive adequate financial information about the reporting company.
Since 1991, the year Ukraine gained independence from USSR, the accounting standards of the planned Soviet economy haven’t been changed to reflect the demands of the market economy. The fundamental function of accounting during the Soviet era was bookkeeping. The role of financial reporting was mostly statistical – to inform the government of the volume of goods and services produced and expenses incurred during the year. There was no emphasis on profitability or efficiency of an industry. Instead, the goal of the planned economy was to produce the planned amount of goods and services needed by the country. If the planned amount of goods and services was produced, but the expenses went over the budgeted amount, the government would normally make up the difference by increasing the budget of the producer of the goods or services. Accordingly, accounting principles used in reporting were substantially different from those needed in the more information-sensitive market economy. Consequently, current Ukrainian accounting principles need to be considerably updated to respond to the needs of the sought-after foreign investors.
In addition, the European Union, into which Ukraine is seeking to enter, is requiring from its member countries to implement International Financial Reporting Standards by 20051. Currently, the lack of adequate corporate reporting in Ukraine makes stagnating Ukrainian economy very unattractive to the members of the European Union and to potential foreign investors.
The following incompatibilities of Ukrainian in generally accepted (Ukrainian GAAP) accounting principles with the International Financial Reporting Standards (IFRS)2 require the most urgent attention:
- Ukrainian GAAP has no explicit requirement that parent companies must present consolidated financial statements (compared to IFRS 27). The absence of an explicit requirement to consolidate financial statements allows companies to hide their debts from potential investors.
- Ukrainian GAAP contains no specific regulation on whether part of the cost of an acquisition may be attributed to acquired research and development (compared to IFRS 22.27). The absence of requirement makes the financial statements of Ukrainian companies incompatible even with the statements of other companies in the country.
- Ukrainian GAAP has inadequate standards regarding the translation of the financial statements of subsidiaries in hyperinflationary economies (compared to IFRS 21.36). Inadequacy of the standards on this matter leads to incompatibility of the financial statements with those of foreign companies and, more importantly, to inaccurate or misleading financial reporting.
- Ukrainian GAAP imprecise requirements for impairment reviews (compared to IFRS 36.6-14). Absence of precision in these requirements allows companies to reflect outdated assets at higher values.
- Ukrainian GAAP includes no rules for the fair values of financial assets and liabilities (compared to IFRS 32.77). Absence of such reporting rules allows companies to report their assets at higher values and their liabilities at lower amounts.
- Under Ukrainian GAAP, trading, available-for-sale, and derivative financial assets and liabilities are not recognized at fair value (compared to IFRS 39.69, 39.93). Under these conditions, if the values of such assets change during the year the financial statements of the company will be misleading to the financial statement users.
The standards’ incompatibility issue has been widely covered in Ukrainian press. Kyiv Post stated that because the Ukrainian GAAP are incompatible with the international standards the companies seeking investments from Western banks are compelled to use Ukrainian GAAP for tax authorities and IFRS for banks and investors. One such example is Western NIS Enterprise Fund. Andrew Petriwsky, an investment officer for the company affirmed that the fund requires all the firms in its portfolio to use international standards for financial reporting.
In addition, big accounting firms with strong presence in Ukraine like Ernst & Young and KPMG repeatedly expressed hope that Ukrainian government would adopt IFRS in the country. Andrew Taylor, the managing partner with Ernst & Young in Kyiv reinforced the need for change by saying that none of his clients made a substantial investment in a Ukrainian company based solely on financial statements. According to Taylor, “It is foolish to think that a sophisticated Western investor would accept [Ukrainian GAAP].”3
From the information presented above one can see that the current accounting standards in Ukraine do not reflect the country’s political and economical ambitions. Potential investors avoid investing in Ukrainian businesses due to the incompatibility of the Ukrainian accounting standards with the international standards. In addition, the country’s ambition to join the European Union can’t be fulfilled until Ukraine at the least switches to the International Financial Reporting Standards. The time has come for the country’s parliament to implement the International Financial Reporting Standards in Ukraine.
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1 GAAP 2001 – A Survey of National Accounting Rules, 6
2 GAAP 2001 – A Survey of National Accounting Rules, 140
3 Accountants spurn national accounting standard, Kyiv Post