Archive 2010

  • 05.04.2010

    Changing Ukraine's Accounting and Reporting System: Economic Necessity and Practical Reform Steps


    The cost of paying corporate taxes is a major determinant of the business climate in any country. In the case of Ukraine corporate tax rates are not excessive, but the administrative burden of paying taxes is extremely high, due to a very complicated and inefficient tax accounting and reporting system. As a result, Ukraine ranks 181 out of 183 countries in the sub-indicator "paying-taxes" of the publication "Doing Business" by the World Bank. Similar shortcomings concern the system of commercial accounting, which is still to some extent subordinated to tax accounting and thus very burdensome to apply by companies.

    This situation has wide-ranging economic implications. The current system of accounting and reporting provides a very weak basis for informing managers, creditors, potential investors and tax authorities. As a result, banks are often not ready to provide loans based on the analysis of financial reports, but prefer to stick to "collateral lending", thus restricting the access to finance by business. But also foreign investors find it difficult to deal with the existing system. Last, it is questionable whether the current system provides a good basis for stable and high public revenues. For all that reasons, it is of paramount importance to reform the accounting and reporting system. In particular, tax and commercial accounting should be re-aligned, in order to avoid the current practice of "double double-entry accounting", which increases the administrative burden for companies considerably. Furthermore, the current accounting and reporting system is based on the idea of "Form over Substance". This should be changed towards a principle that reflects the true underlying economic situation of the company. Besides, the frequency of tax and commercial reporting should be decreased from currently four to one time per year, as is the case in most developed countries. But also the auditing of companies should be tightened.

    In order to implement these reforms, we suggest raising the organisational status of the accounting methodology division in the Ministry of Finance. Furthermore, a working group should be created, with the aim of drafting a new system of accounting and reporting. Finally, a fixed timetable should be established. In our view, the adoption of the new system should be obligatory for joint stock companies already in 2011. Other companies should have an option to join the new system in 2011 and an obligation to do so in 2012.

    Reforming the system would create huge benefits at a very low cost. Besides, it would send very positive signals to foreign investors. Furthermore, the reforms would be highly popular with business and the population. Thus, the reform of the system of accounting and reporting would be an ideal first step in the reform agenda of the new government.

    Attached file  (119.8 kb)
    Authors:  Otten Thomas, ʳ , г
    Research spheres:  Infrastructure, Real sector
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