Foreign companies face unique accounting and management challenges.
PhotoXPressRussian branches of foreign companies can be successful in today’s difficult economic circumstances only if they demonstrate good business performance against a background of high risk. To do this, they need to both attract customers and report full compliance with their parent company’s global KPIs.
While opening a branch office in a foreign country, a parent company often allows a great deal of flexibility in adhering to established rules, business processes and information systems, logically assuming that this is the best way to ensure continuity, preserve the overall development strategy and save resources. But in some cases – particularly accounting, control and reporting functions – such a practice does not work. The difference in the legislation and the requirements of market regulators is simply too great.
When opening a representative office within the European Union, where there is a unified system of accounting and finance, there are usually fewer problems in setting up financial protocols. But working in the Russian market requires considerable adaptation. It is necessary to understand the characteristics and legal requirements of the local market and to build management and reporting systems that meet the interests of both the foreign headquarters and the local unit.
In the Russian context of rapidly changing legislation, the main problem for companies is parallel maintenance of accounting, management and tax accounting. Even Russian resident companies must cope with the complexities of parallel accounting and tax accounting, and a foreign company’s representative office faces additional challenges because it must also perform accounting according to the local standards of the parent — either European IFRS or U.S. GAAP. Russian accounting standards have been developed with an eye towards monitoring, in particular, by tax bodies, while GAAP and IFRS standards have been designed for investors.
A foreign company setting up a Russian regional branch or representative office has two options to cover all the specific accounting and reporting procedures.
The first is to pass on the accounting functions to a local outsourcing company. At the end of 2015, the Russian Central Bank removed a number of barriers to the transfer of accompanying business operations, including accounting, financial reporting and disclosure, to companies specializing in these functions. That decision spurred development of the Russian market of services in the field of consulting and accounting outsourcing.
The second way is to adjust the parent’s company’s accounting information system to the requirements of Russian legislation and normative legal regulations. To do this, the Russian office organizes a functional IT solution that maintains the concept established by the global office, but modifies it to conform to the local legal requirements. This system allows the company to consolidate reporting both for Russian regulators and for the parent headquarters at the same time, monitor and check reports according to Russian and international accounting standards and make quick adjustments.
Each approach has advantages and disadvantages. Outsourcing these functions can lead to reliance on external contractors, a high risk of leaks of important corporate information and a general opacity of how operations are carried out. On the other, adjusting global standards to local realities is often a bigger project than originally thought, and frequently results in uncontrolled costs and use of time resources.
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