Accounting Innovations - 2018: What Business Should Expect

Recently, numerous amendments to the law on accounting were adopted. Their appearance, to a large extent, is conditioned by the need to implement the norms adopted in the European Union in Ukrainian legislation. However, there were numerous and not pleasant surprises due to other interests. What accountantsand other financial professionals should expect is discussed in the following.

European Trends

First, it should be find out why it was decided to make changes to the rather stable Law of Ukraine. The fact that the European Parliament and the EU Council adopted the Directive on annual financial statements, consolidated financial statements and related reporting of certain types of companies as of 26.06.2013, No. 2013/34/EU (hereinafter - EU Directive No. 2013/34/EU). This document contains new conditions for the compilation, presentation and disclosure of financial statements, as well as the recognition and measurement of certain types of assets and liabilities, income and expenses. Moreover, the innovations introduced in some places differ significantly from the rules of the International Financial Reporting Standards (hereinafter - IFRS). That is why lawmakers have made comments on the changes, and at the same time they have made a lot of their own ideas. It should also be noted that now the Law of Ukraine “On Accounting and Financial Reporting in Ukraine” (on improving some provisions)  of 05.10.2017, No. 2164-VIII (hereinafter - the Law on Accounting) extends also to transactions on the execution of state and local budgets and the preparation of financial statements of execution budgets taking into account budget legislation.

Changes in definitions

It is quite significantly updated Art.1, which contains the definition of a number of accounting terms. Some terms have been clarified. For example, national accounting norms (standards) are developed on the basis of international accounting standards and EU legislation in the field of accounting. In the past, they only had the opposite of international standards.

New terms also appeared in the Law on Accounting. This, in particular, relates to expenses and incomes, the definitions of which are similar to those contained in Accounting Standards 16 “Expenses” and 15 “Income”. The term “taxonomy of financial reporting” also appeared there, which refers to the composition of articles and indicators of financial reporting and its elements to be disclosed. Taxonomy will be developed by the Ministry of Finance. And the Law on Accounting is supplemented with definitions of concepts such as “Report on payments in favor of the state”, “management report”, “equity capital”, “national provisions (standard) of accounting in the public sector”, “companies of public interest”, “net income from the sale of products (goods, works, services)”, etc.

Small or large?

It should be noted that in order to compile, submit and publish financial and consolidated financial statements, the EU Directive No. 2013/34/EU established new criteria for the classification of companies by size. This classification is reflected in the updated law. It does not coincide with that contained in Art. 55 of the Commercial Code of Ukraine (hereinafter - CCU), which also has European roots. In the Regulation of the Commission (EU) of 12.01.2001, No.70/2001 on the application of Art.87 and 88 of the Agreement on EU establishing on State aid to small and medium-sized companies were defined categories of enterprises that are currently in the CCU. Although, the purpose of this classification is slightly different, it is designed to support and develop small and medium businesses. The Table shows the indicators that determine which category the company belongs to in accordance with the Law on Accounting and the CCU.

Table. Classification of the enterprise based on the indicators

When determining eligibility criteria at newly formed enterprises, it is used the indicators at the date of preparation of annual financial reporting.

If an enterprise of one of the listed categories does not meet the criteria stated in the annual financial statements for two consecutive years, it transfers to the corresponding category of enterprises (that is, it is recognized as larger or smaller).

Since the division of enterprises into large and small enterprises is often used in Ukrainian legislation, the simultaneous existence of several classifications can lead to conflict situations.

Principles of accounting

The principles of prudence, historical (actual) cost and periodicity disappeared from the list of principles contained in Art.4 of the Law on Accounting. Instead, there appeared the principle of the unified monetary measure, by which the measurement and generalization of all business transactions of the company in its financial statements is carried out in the single currency.

In addition, it is provided that other principles as defined by international standards or national accounting regulations (standards) or national public sector accounting standards (standards) may be applied, depending on which of the following standards is applied by the company.

Article 5 of the Accounting Act, according to which enterprises conduct accounting and financial statements in the monetary unit of Ukraine, has been supplemented by the norm at which, at the request of users, financial statements may be additionally converted into foreign currency.

Accounting documents

Several rules relate to the simplification of documentary accounting transactions.

1. A norm is introduced according to which insignificant shortcomings in documents containing information about a business transaction are not grounds for non-recognition of a business transaction. However, this is possible only on condition that these shortcomings do not prevent the identification of the person, who participated in the economic transaction, and contain information about the date of drawing up the document, the name of the enterprise on whose behalf the document is drawn up, the content and scope of the business transaction, etc.

2. There is a norm according to which the rights and obligations of the parties arising from the results of the economic transaction, executed by the primary document in accordance with the requirements of this law, do not depend on the fact that it is reflected in the registers and in the accounts of accounting.

There is public interest

Among the changes introduced into the Law on Accounting, it is necessary to mention the emergence of such a concept as “enterprises of public interest”. What kind of enterprise is this? This is considered to be an enterprise - an issuer of securities which securities are admitted to stock trading, banks, insurers, non-state pension funds, other financial institutions (except for other financial institutions and non-state pension funds belonging to micro enterprises and small enterprises), and enterprises which belong to large enterprises.

An enterprise of public interest is required to create an accounting service headed by a chief accountant, which will consist of at least two persons. This provision does not apply to non-state pension funds and joint investment institutions.

A chief accountant of an enterprise of public interest may be appointed a person who has a full higher economic education, experience in finance, accounting and taxation of at least 3 years, has no unpaid or unclaimed conviction for committing a crime against property and in the sphere business activity. Other laws may specify other requirements for the chief accountant of such enterprise.

Application of IFRS

In accordance with the changes, according to international standards, the following enterprises should make financial reporting and consolidated financial statements:

• enterprises of public interest;
• public joint stock companies;
• enterprises engaged in mining activities of national importance;
• enterprises conducting economic activity by types, the list of which is determined by the Cabinet of Ministers of Ukraine (hereinafter - CMU).

Financial and consolidated reporting

In accordance with the Law on Accounting, the procedure and deadlines submission of financial reporting, consolidated financial statements, management reports and a statement of payments in favor of the state to state bodies are determined by the CMU, and for banks - by the NBU.

According to the made amendments, financial and consolidated financial reporting should be prepared on the basis of international taxonomy of financial statements according to international standards.

The financial reporting reduced in terms in the composition of the balance sheet and the statement of financial results is to be determined for microenterprises, small enterprises, non-profit associations and representations of foreign business entities, except for those obliged to prepare financial statements in accordance with international standards.

There is such kind of reporting in the accounting law as a management report. The said report should be submitted together with the financial reporting and consolidated financial statements in accordance with the procedure and terms established by law. If consolidated financial statements are presented by the company, a consolidated management report is to be submitted. At the same time microenterprises and small enterprises are exempted from submitting a management report. Medium Enterprises have the right not to reflect non-financial information in such a report.

It should be noted that according to the updated Art.13, reporting period for the financial reporting is a calendar year, and the interim financial reporting is based on the results of the first quarter, the first half, nine months. In addition, in accordance with the accounting policies of the company, reporting could be prepared for other periods.

A few words should be said about consolidated reporting, under which the financial reporting is understood now, which controls, and enterprises, which are controlled by it, as a single economic entity.

Companies that control other companies (except companies of public interest) may not submit consolidated financial statements if, together with the controlled enterprises, their performance at the date of the annual financial statements does not exceed two of the following criteria:

• book value of assets - 4 million euros;
• net income from the sale of products (goods, works, services) - 8 million euros;
• average number of employees is 50 people.

There were also changes regarding the list of persons who signed the report. It was clarified that in the case when the accounting is conducted by an enterprise that carries out activities in the field of accounting or auditing activities, the financial reporting should be signed by the head of the company or an authorized person, as well as the head of the enterprise that carries out activities in the field of accounting or auditing activities. At the same time, the responsibility of the accounting company is determined by law and by the contract on the provision of accounting services.

According to the Law on Accounting, financial reporting of enterprises are not the commercial secrets, are not confidential information and do not belong to restricted information, except in cases stipulated by law. Financial reporting is not subject to a ban on the dissemination of statistical information.

Enterprises may submit clarified financial reporting and consolidated financial statements for the replacement of previously submitted financial reporting and consolidated financial statements based on the results of an audit to correct errors discovered by themselves or for other reasons.

Audit, disclosure, etc.

Among the most prominent amendments are the changes related to the disclosure of the report and the need to obtain an audit opinion (and, consequently, to undergo an audit). According to the law, not later than 30 April of the year following the reporting period, enterprises that meet the following categories are required to publish annual financial reporting and annual consolidated financial statements together with an auditors' report on their own website (in full volume) and other ways in cases specified by the legislation. They are:

• enterprises of public interest (except for large enterprises that are not issuers of securities);
• public joint stock companies;
• subjects of natural monopolies in the national market;
• enterprises engaged in mining activities of national importance.

Large enterprises that are not securities issuers and medium-sized enterprises are obliged, not later than by 1 June of the year following the reporting period, to publish the annual financial reporting together with the audit report on their own website (in full).

Other financial institutions belonging to microenterprises and small enterprises are obliged, not later than by June 1 of the year following the reporting period, to publish the annual financial reporting together with the audit report on their own website (in full).

In addition, companies are required to ensure the availability of financial reporting and consolidated financial statements for the purpose of familiarizing legal entities and individuals at the location of these enterprises.

In conclusion, it should be noted that the law will enter into force on January 1, 2018, except for its provisions concerning the disclosure of reporting and audit findings by microenterprises and small enterprises. This rule will come into force on January 1, 2019. The first reporting period, for which enterprises that are required to apply international standards file financial reporting based on taxonomy according to international standards in electronic form, is 2019. At the same time, enterprises have the right to submit financial reporting, compiled according to the taxonomy of financial reporting, starting from the reporting period in which this law enters into force.