Foreign Currency Accounting in Russia: Assets & Liabilities

January 31, 2023

BRACE Law Firm ©

The integration of Russian business into the global entrepreneurial community has allowed companies to involve assets and liabilities denominated not only in Russian rubles but also in foreign currencies. Any entrepreneurial activity is inextricably linked to the requirement to maintain financial documentation for tax payments and reporting to the relevant regulatory authorities.

Accounting documentation and reporting must comply with Federal Law No. 402-FZ dated December 6, 2011, On Accounting (the "Law No. 402-FZ"). Under this law, the accounting objects of an economic entity include:

• facts of economic life;
• assets;
• liabilities;
• funding sources for its activities;
• income;
• expenses;
• other objects established by federal standards.

Accounting objects are subject to monetary measurement. [1] Such measurement must be performed in the currency of the Russian Federation. [2] As a general rule, the value of accounting objects denominated in foreign currency must be converted into the currency of the Russian Federation. [3]

Pursuant to Article 307 of the Civil Code of the Russian Federation (the "Civil Code"), an obligation requires one party (the debtor) to perform a specific action for the benefit of another party (the creditor). Such actions may include transferring property, performing work, providing a service, contributing to a joint activity, or paying money. Alternatively, a debtor may be required to refrain from a specific action, while the creditor has the right to demand performance. Obligations arise from contracts and other transactions, resulting from harm, unjust enrichment, or other grounds specified in the Civil Code.

For accounting and financial reporting purposes, an asset is defined as property (including cash and bank deposits) that the accounting entity owns or uses and controls as a result of past economic facts, from which it expects future economic benefits or potential.[4] Company assets may be expressed in both rubles and foreign currency. The inclusion of foreign currency assets has necessitated adjustments to relevant accounting legislation.

Accounting is regulated by:

• Federal Accounting Standards;
• Industry Accounting Standards;
• Regulations of the Central Bank of the Russian Federation (the "CBR");
• Accounting recommendations;
• Standards of the economic entity.

Federal standards establish the procedure for converting foreign currency-denominated objects into rubles. Accounting entries for an organization's foreign currency accounts and operations must be recorded in rubles. These amounts are determined by converting the foreign currency at the CBR exchange rate effective on the date of the transaction. Simultaneously, these entries are recorded in the currency of the settlements and payments. [5]

The primary document governing the accounting of foreign currency assets is the Order of the Ministry of Finance of Russia No. 154n dated November 27, 2006, On Approval of the Accounting Regulation "Accounting for Assets and Liabilities Denominated in Foreign Currency" (the "Order No. 154n" or "PBU 3/2006"). PBU 3/2006 sets forth the specifics for generating accounting information and reporting on foreign currency assets and liabilities, including those payable in rubles, for organizations that are legal entities under Russian law. Credit institutions and state (municipal) institutions are excluded from this regulation. Furthermore, this regulation does not apply when converting ruble-based reporting into foreign currencies for requirements set by constitutive documents or credit agreements with foreign entities.

The value of foreign currency assets and liabilities must be converted into rubles for accounting and reporting purposes. Such conversion is performed at the official CBR exchange rate for the respective foreign currency. If no official rate is available, the conversion uses a cross-rate calculated based on CBR-established rates. A cross-rate is the ratio between two currencies determined by their rates relative to a third currency.[6] These conversion grounds were introduced into Order No. 154n by Ministry of Finance Order No. 180n dated November 9, 2017. However, if a different rate is established by law or agreement, the conversion follows that specific rate.

Because exchange rates fluctuate, it is crucial to account for the foreign currency exchange difference. This represents the difference between the ruble valuation of an asset or liability on the date of payment or the reporting date of the current period, and its ruble valuation on the date it was initially recorded in the current period or the reporting date of the previous period.[7] The Ministry of Finance of Russia expressed this same position in Letter No. 07-02-06/303 dated December 19, 2012. Exchange differences are recorded in the accounting period corresponding to the payment date or the period for which the financial statements are prepared.

In practice, accounting records must reflect exchange differences arising from the following operations:

1. Full or partial settlement of accounts receivable or accounts payable denominated in foreign currency, provided the rate on the payment date differed from the rate on the date the debt was initially recorded or the date of its last remeasurement.
2. Remeasurement of the following assets and liabilities:

• Cash on hand;
• Funds in bank accounts (bank deposits);
• Monetary and payment documents;
• Securities (excluding shares);
• Settlement balances, including loan obligations with legal entities and individuals (excluding advances, prepayments, and security deposits);
• Unbilled accrued revenue denominated in foreign currency that exceeds the amount of any advance received.

Exchange differences are generally credited to the organization's financial results as other income or other expenses. However, exchange differences related to founder contributions to the organization's authorized (share) capital are credited to additional paid-in capital.

If an organization operates outside the Russian Federation, the value of assets and liabilities used for such activities must also be converted into rubles for reporting purposes. This conversion uses the official CBR exchange rate, unless an average rate is used (calculated as the sum of the products of official rates and their duration in days, divided by the total days in the period).

Differences resulting from converting the value of foreign operations into rubles are reflected in the accounting for that period and credited to additional paid-in capital. If foreign operations cease (completely or partially), the portion of additional paid-in capital corresponding to those exchange differences is reclassified to the financial result as other income or expenses. Exchange differences must be recorded separately from other types of income, expenses, and results of foreign currency operations.

Maintaining financial reporting is mandatory for business activities both in Russia and abroad, providing a basis for regulatory oversight. Organizations operating domestically or internationally must record entries in accounting registers for foreign currency assets and liabilities in rubles. While reporting is primarily in rubles, it must also be prepared in another currency if the laws of the foreign jurisdiction where the activity occurs require it.

The transaction date is a critical factor. It is the day the organization acquires the right, under Russian law or contract, to record the assets and liabilities resulting from the operation. The Ministry of Finance has clarified that organizations should use the foreign currency transaction date to determine when to reflect the acquisition of goods.[8] Specifically, for imports, the transaction date is the date the acquisition expenses are recognized.

Regarding foreign currency assets and liabilities, financial statements must disclose:

• The magnitude of exchange differences from converting assets and liabilities payable in foreign currency;
• The magnitude of exchange differences from converting assets and liabilities payable in rubles;
• The magnitude of exchange differences credited to accounts other than the financial results account;
• The official CBR exchange rate on the reporting date. If an alternative rate is established by law or agreement for ruble-payable items, that rate must be disclosed.

Recent regulations also address accounting in the new constituent entities of the Russian Federation. The Ministry of Finance detailed its position in Letter No. PZ-15/2022. While the Law No. 402-FZ requires ruble-based measurement, specific rules apply to these regions.

The value of objects expressed in Ukrainian hryvnia in the final 2022 financial statements must be converted at the CBR rate effective December 31, 2022. Subsequently, the value of investments in non-current assets (fixed assets, intangible assets, etc.), inventories, advances, and security deposits is not remeasured due to rate changes. However, cash, bank deposits, securities (except shares), and settlement balances (except advances) must be remeasured on each reporting date following the rules of PBU 3/2006.

If an economic entity registered in a new constituent entity operated elsewhere in Russia during 2022, any accumulated exchange difference from that activity must be added to retained earnings as of December 31, 2022. Conversely, if such an entity operated in Ukraine in 2022, the conversion of those assets and liabilities into rubles must be performed as of December 31, 2022, with subsequent accounting following Section IV of PBU 3/2006.

Staying current with regulations is vital given the political and economic instability. Proper application of these rules minimizes risks and helps avoid penalties for non-compliance. Informational letters from the Ministry of Finance provide significant assistance in navigating the complexities of foreign currency accounting.

Despite international restrictions and sanctions, many businesses remain focused on international cooperation and cross-border operations. Consequently, the accounting of foreign currency-denominated assets and liabilities remains a relevant and critical field of accounting, independent of external circumstances.

____________________________

References

[1] Point 1 of Article 12 of the Law No. 402-FZ.

[2] Point 2 of Article 12 of the Law No. 402-FZ.

[3] Point 3 of Article 12 of the Law No. 402-FZ.

[4] Order of the Ministry of Finance of Russia No. 256n dated December 31, 2016, On Approval of the Federal Accounting Standard for Public Sector Organizations "Conceptual Framework for Accounting and Reporting of Public Sector Organizations".

[5] Point 24 of the Regulations approved by Order of the Ministry of Finance of Russia No. 34n dated July 29, 1998, On Approval of the Regulations on Accounting and Financial Reporting in the Russian Federation.

[6] Basic Standard for Operations on the Financial Market when Carrying Out Forex Dealer Activities (approved by the Bank of Russia on September 23, 2021, and agreed by the Standards Committee on September 6, 2021).

[7] Point 3 of the Regulations approved by Order No. 154n.

[8] Letter of the Ministry of Finance of Russia No. 07-05-10/50 dated July 23, 2008.