Transformation of Financial Statements to IFRS 

Publication date/update: 14.08.2023

IFRS are international financial reporting standards. Today, transforming financial statements in accordance with these standards is a sought-after service for many companies. This is necessary to comply with the norms of Law 208-FZ of 27.07.2010 "On Consolidated Financial Statements." Additionally, many branches and subsidiaries of foreign firms must present statements that meet IFRS requirements.

In this article, we will elaborate on how to transform financial statements prepared under domestic standards (RSBU) to meet IFRS needs.

First and foremost, transforming RSBU into IFRS involves adjusting Russian financial statements to achieve IFRS compliance using a transformation table. The transformation table is a working document used by accountants to prepare financial statements by making adjustments to the original figures of domestic reporting.

About a decade ago, international standards firmly integrated into our accounting practices. The first to adopt these new guidelines were international corporations and the largest Russian companies engaged in global activities, such as active exportation of goods. Gradually, more enterprises, including small businesses, began transitioning to the new rules. How should one start preparing IFRS-compliant statements if not already initiated? Here are some options:

Generally, the most accurate IFRS reporting is characterized by:

Fundamentally, IFRS is based on the principle of accounting for the management of finances and cash flows from the perspective of an investor or creditor. Traditional Russian accounting, however, is conducted in the interest of the business owner. Thus, IFRS prioritizes balance, the abandonment of historical cost, the concept of control, and resource accounting.

The transformation of financial reporting to meet IFRS requirements has become increasingly pertinent due to the fact that IFRS-compliant financial reporting is a crucial step that enables Russian organizations to access international capital markets. Global investors insist on transparency in the financial information regarding company activities and managerial reporting to investors.

According to the Law of 27.07.2010 No. 208-FZ "On Consolidated Reporting," the transformation of reporting must be conducted for the group as a single entity. This means it consolidates the assets, liabilities, equity, income, expenses, and cash flows of the parent company and its subsidiaries.

This largely concerns:

The stages of transforming financial statements in accordance with IFRS for Russian companies are as follows:

It is best to use balance sheet items and income statements for this. The items occupy one column and are written one below the other. The more well-thought-out the table, the more data it will accommodate. For example, under IFRS, instead of simply writing "administrative expenses," it's better to detail salaries, office rent, and consulting services. This will save time on data deciphering.

It is important to know that IFRS does not prescribe a report format, so companies can develop their own. Additionally, lines such as "Total Assets," "Total Liabilities," "Total Equity and Liabilities," "Profit Before Tax," and "Profit After Tax" should be included.

To avoid errors with the double-entry method, all assets should be recorded with a "plus," liabilities with a "minus," expenses with a "plus," and income with a "minus."

To do this, you need a trial balance (TB) at hand. It will help transfer data from Russian reporting. The IFRS document should be prepared with sub-accounts and expanded balances for settlement accounts. The data from the TB should be entered into the first column.

Next, verify the correct operation of control ratios: the profit amount for the current year in the Equity section should equal the profit for the period in the income statement (in our example, it's -80,000) and in the balance sheet, Assets = Liabilities + Equity.

You can proceed to the next stage only if all control formulas match.

There are two types of adjustments:

Firstly, focus on the initial lines. These differ the most from RSBU. In the following year, data from them will need to be repeated but through retained earnings. This is known as reversing entries.

It is crucial to understand that there is no universal solution. Each company must calculate everything individually. It is essential to analyze each line during the transformation to compare differences and reflect all operations for the absence of errors.

If the RSBU data includes intangible assets (IA), it is important to understand their valuation under IFRS. It is crucial to know their composition. This often involves trademarks developed by the organization itself. According to IFRS paragraphs 63 and 64, a trademark created by the organization cannot be recognized as an IA, as the costs of its creation cannot be distinguished from business development costs. Such expenses are written off as costs, which will impact the financial result.

It is essential to consider the future perspective when preparing IFRS reports. All adjustments for future periods are reflected in IFRS and affect the result.
If the company did not engage in any activity during the year and did not even pay salaries, no operations need to be accounted for except those that were actually conducted, such as rent payments.

One of the crucial areas of transformation work is adjusting retained earnings. If there were operations in the past year that affected the financial result, they are reflected in retained earnings under IFRS. Introductory entries must be made for this. If the trademark is still in intangible assets under RSBU in the current year, it needs to be written off again. It is important to note that the write-off expenses were incurred last year, so they become retained earnings.

If last year an expense, such as a bonus, was reflected in IFRS, this year it will emerge from the TB as an expense. This means there was no double recognition of the same expense in different periods. The introductory entry should adjust the RSBU income statement against IFRS retained earnings. The financial result of the operation will be zero.

Achieving IFRS-compliant reporting can be done using one of the following models:

It is important to understand that transforming reports from RSBU to IFRS involves making a series of adjustments on the reporting date to convert national standards-based reports into the IFRS format.

Each model has its own advantages and disadvantages. They include:

Preparing for the transition to IFRS requires a company to undertake specific preparatory algorithms as outlined in IFRS 1 "First-time Adoption of International Financial Reporting Standards" (implemented by the order of the Russian Ministry of Finance No. 217n of 28.12.2015).

According to paragraph 6 of IFRS 1, a company must establish a starting point for IFRS application by preparing and presenting an opening Statement of Financial Position (SFP) according to international standards on the transition date.

The standard prescribes the following actions for reflecting information in the opening report:

Additionally, the company must adhere to certain requirements regarding its accounting policies (AP):

If the previous year had a positive financial result but accumulated retained earnings were negative, the retained earnings under IFRS should be shown as the difference between these figures.

If there was an adjustment for the reclassification of administrative and other expenses last year, but it did not affect the financial result, it does not need to be repeated this year. It remains in the past, and new adjustments should be made in the current year.

This is one of the stages of forming IFRS reports from RSBU. Nonetheless, the accounting department faces extensive work in filling out reporting forms and notes. It is crucial to describe significant provisions of the accounting policy and compile a complete package in accordance with IFRS. These actions require considerable time and specialized skills.

It is also important to note that if a company is preparing IFRS reports for the first time, it must initially refer to the provisions of IFRS 1 "First-time Adoption of International Financial Reporting Standards." Transformation must account for these standards' requirements.

Experts from DVP Audit are ready to assist the accounting and finance departments of any company in transforming their reports to comply with IFRS norms. We can perform the following tasks: