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William Thomas Stevens on: Doing business in the Eastern Bloc: conceptual differences in accounting principles - the language of business.

WILLIAM THOMAS STEVENS ON: Doing Business in the Eastern Bloc: Conceptual Differences in Accounting Principles - The Language of Business

Each nation tends to have its own approach to economic operations and to the accounting language used to describe them and investors need to be aware of the nuances of differences. But there are some general accounting principles, more or less applicable to centrally-planned economies, and others broadly used in market-based economies. Any multinational or joint venture operating or seeking to operate in Eastern Europe cannot expect to make a unilateral transfer of U.S. accounting concepts to Eastern Europe. There are significant differences, and an immediate mutual understanding of each other's accounting concepts cannot be expected. An awareness of these differences is important to achieving an eventual understanding.

Decentralization in the Soviet Union

Originally Russian economic operations were highly centralized in accordance with the requirements of central planning. Accordingly, the Russian accounting system was rigid, tightly specified. To stimulate improvements in economic results, a movement which began in the 1950s and was formalized by the Soviet Economic Reforms of 1966, gave greater authority and latitude to managers of various enterprises for planning and operations. The authority was accompanied by increased responsibility for performance and, as a stimulus, bonus schemes were instituted to reward superior performance. While operational decentralization narrowed the differences in Russian and American views of operations, economic planning and accounting remained highly centralized in the Russian system. The accounting system lagged behind operational changes. Accounting continued to focus on producing reports directed to users who were concerned with centralized economic planning and control rather than on producing reports useful for day-to-day operations.

Measurement Objectives

The focus of American enterprise and its accounting tends to be short-term. Externally reported accounting measurements of Operating Income, Extraordinary Items, Net Income, and Earnings per Share as well as the internal measurement of Return on Investment, and other performance measures are all oriented to the short-term. Moreover, the American short-term, previously represented by the annual report, is becoming increasingly shorter as more and more stress is put on interim reports, usually issued quarterly on a formal basis to the public and even more frequently for internal operational use, sometimes on a daily basis.

Confusion exists between evaluations of managerial performance (Return on Investment) and measurements of enterprise performance (Residual Income). While there are variants of the use of these measures in both the United States and the USSR, Americans generally emphasize managerial performance through short-term evaluations while Russians focus on enterprise performance and lay greater stress on the long-term.

More important, the asset base upon which either measure depends differs significantly. Russia does not book intangible assets, although copyrights and patents exist. Land is viewed as a gift of nature, vested in the state and is not included as an enterprise asset. Other tangible asset values are essentially assigned to the enterprise's balance sheet leading to what may be either hopeful expressions of value or an overly conservative but basically subjective view. This is in direct opposition to the American historical cost concept, accounting for transactions at the market prices at which they occurred. Russian and American books values may be far removed from economic reality and must be viewed with caution.

Contrasts In Concepts of Profit

The most significant difference between American and Russian and accounting principles lies in their concepts of profit. In the United States, the cost allocation accounting model focuses on short-term results and has led to complex accounting rules for determining periodic profit. These rules are directed to an accounting matching of revenues and expenses, and presumes that if the matching is done consistently in accordance with the rules, a simple subtraction of expenses from revenues for a specified period yields profit.

So dominant is the American concentration on profit that most current accounting principle promulgations are concerned with fine-tuning revenue recognition rules on the one hand and expense recognition rules on the other. The concept of profit itself is rarely addressed; consistent application of the rules is the issue, not economic reality.

The Soviet profit concept rests more on economic considerations than on accounting rules. The principal difference is that the USSR includes an expense for the use of capital in measuring profit while Americans do not. The Soviet capital charge is not just a book figure but is a money amount remanded to the state bank.

Another significant difference in profit concepts lies in the concept of price. In centrally-planned economies in general, output prices (roughly equivalent to American selling price or revenue), as well as input prices (roughly equivalent to expenses for labor, materials, and so on) are assigned by the government, ostensibly as economic normatives. In America, prices are market-based, representing bargains struck between buyers and sellers.

Both countries attach considerable importance to inventories. As a consequence of administered prices, Soviet production becomes an end in itself and stated profits may be unrealized by sales or transfers and lie in inventories. In the United States, unsold inventories remain assets but sometimes are used to control short-term profit through managerial control of inventory unit costs (in long-term focused countries, such as Japan, inventories are regarded almost as an evil).

Accounting Education

The broad difference in accounting concepts may be seen in how accountants are educated. In the past, the USSR placed relatively little importance on educating accountants, preferring to direct the thrust of its education to engineering, science, and production. In a centrally-planned economy with uniform accounting rules there is little need for an accounting profession. The U.S., on the other hand, places considerable emphasis on educating accountants as professionals, a natural consequence of an increasingly complex economic operating environment, ever more complex and formal accounting measurement rules, and the need for an accounting interpretation of economic events in terms of the American emphasis on matching revenues and expenses.


There are significant differences in American accounting concepts and those of Eastern Europe and Russia. Some of the differences are rooted in culture; some in the economic systems in use; and some in politics.

Changes in accounting principles rarely precede changes in economic or political views and frequently lag far behind operational changes. Accordingly, nations which were once centrally-planned economies and followed the Soviet accounting model to some degree are likely to continue the old rules and concepts for some time after their mode of operations changes. There may be considerable opportunities for business in these environments but the investor needs to, to proceed with great caution and gain assurance that the investor and the host environment are on the same wave length in their discussions of potential business activities.

William Thomas Stevens is a Professor in the Department of Accounting and Taxation at St. John's University

EDITORS NOTE: The Spring 1992 of the Review of Business will include a special Symposium section on Business Education in Eastern Europe.
COPYRIGHT 1991 St. John's University, College of Business Administration
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Stevens, William Thomas
Publication:Review of Business
Date:Jun 22, 1991
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