Raising capital. European values

By Natalia Shevchenko, Partner at Otten Consulting

Do Europeans impose too many requirements for accounting?

Why are potential investors in no hurry to invest in a promising industry? What is the priority in making funding decisions? Apparently, these and many other questions arise from every owner or manager of an agricultural enterprise, especially when referring to raising capital, including foreign one.

The requirements of potential investors and creditors are quite clear and logical:

  • guaranteeing the rights of investors and owners;
  • clear and transparent business rules;
  • efficiency of production processes organization;
  • transparency of resource use.

Such requirements are not a whim of specific investors or financial institutions, it is their guarantee that the invested funds will be returned, and the appropriate percentage of profit will be distributed. Any investor in any country wants such guarantees.

Accounting as a reflection of the real status

We know from experience that many agricultural enterprises can change the rules in the process of activity, rewrite accounting data of previous years, change information or present it in a more attractive form than it actually is. Accounting management accounting often contain errors and untimeliness of processes representation and assets movement, and the form of the operation reflection (piece of paper) has advantages over the actual situation (essence and real facts).

All this harms the truthfulness and transparency of data representation, and, therefore, these factors can not only cause a lack of funding, financial problems of the company or incorrect management decisions, but also cause a discrepancy with the requirements of potential investors. How to trust Ukrainian business, understanding that it is often impossible to control a business through numbers (accounting and financial indicators)?

The requirements of foreign investors for the actual reflection of the financial picture are quite simple and understandable. For them, financial accounting is a picture of the enterprise status in numbers. Accounting does not exist by itself; it should reflect any changes in the enterprise that can be calculated and evaluated in monetary terms. If finished products was shipped from the warehouse — this is a cause to reflect this event in the account, and not wait for the receipt of the expenditure invoice with the signature of the recipient.

If the shares are paid in grain, then there is no arrears in them already, and the grain in the warehouse has become less, and this should be reflected in the account when delivering grain, and not when there is money to pay taxes. If there is a risk of no returning the debt by the buyer according to information about his liquidation or bankruptcy, then this is the basis to recognize possible losses from write-offs and form a reserve for doubtful debts, etc.

Real reflection and the following effective analysis of the enterprise financial result and activities is the key to making the right strategic, tactical and operational decisions by the management of the enterprise, it helps to provide all the reliable information about the enterprise, without distortion, in order to obtain credit and investment capital. Transparency and accuracy provide guarantees of the similar approach in all business processes and add confidence in decency, high level of organization and openness in doing business in general.

The key to the real status reflection

The operational process requires a rapid response to daily changes and appropriate decision-making by the management to ensure full-fledged functioning and achieving certain goals by the company.

Precisely in order to meet the needs for up-to-date information that there is an operational accounting that informs about what happened today and how it will affect the functioning tomorrow. Based on the fact that operational information is primarily necessary for managers of various links, and moreover, is the result of their activity or the work of their departments, it is optimal to conduct operational accounting by persons directly responsible for certain processes.The storekeeper enters data on the movement in the warehouse, the head of the production department — data on the manufactured products, etc.

The accounting database at the enterprise is the main (as well as the most accessible) source of any information about economic activity of the enterprise. And although in most cases such a database is used only for accounting and tax accounting, standard automated accounting systems (for example, 1C) provide the possibility of simultaneously maintaining several types of accounting: accounting, management (operational), and, if desired, accounting according to international financial reporting standards (IFRS).

This practice leads to a more efficient exchange of information between various departments of the enterprise (production, accounting, management, etc.) and allows to receive flexible reports customized for the specific user needs.

A customized system provides real-time information and, in addition to operational accounting issues, solves the problems of material assets movement controlling, efficient use of material and human resources, effective planning, and the like.

A detailed plan of the operational accounting system implementation is quite individual and should be developed only after analyzing the policy and context in which the enterprise operates.

The implementation of operational accounting does not entail the implementation of additional documents or reports, does not have an additional burden on personnel. On the contrary, due to the automation of information and the avoidance of duplicated processes (one wrote by hand, the second entered data into the system, etc.), the use of human resource is more efficient.

Clarity of reporting and its compliance with the rules

A very common is the approach to accounting as a tool for providing information to regulatory authorities. Accountants are even ready to present false data in reports, that is, what is requested by statistics or in tax service. This approach is very harmful to both the enterprise and the country statistics, since it does not reflect the real status of the economy.

As a result, real users — management, creditors and investors — receive information that very often is not correct or does not correspond to reality.

The financial reporting is intended to provide information to external and internal users, which are investors, management, creditors. Financial reporting is not the results of the enterprise functioning. This is a fixation of the enterprise status and an analytical document that makes it possible to:

  • understand the main successes, achievements and problems in the enterprise functioning and analyze their causes;
  • predict future, plan development, anticipate risks and avoid them;
  • provide information to the investor and creditor about the financial stability of the enterprise;
  • evaluate the work of management personnel.

What is the difference between financial reporting requirements in accordance with international standards? Systemically — more freedom of choice, the lack of clear scheme of accounts, a large degree of professional judgment and the prevalence of the essence of the operation over its documentary design. In detail — by certain rules and differences in the reflection of individual transactions, because of which transformations and adjustments are carried out if it is necessary to transfer reports from Ukrainian standards to IFRS.

Why international standards?

Because this is the language of accounting that is spoken by most countries of the world, and, given globalization and the era of international business, we want to have fewer differences and:

  • apply unified approaches and accounting policies;
  • be understandable to users from different countries;
  • obtain guarantees of compliance with certain standards;
  • follow generally accepted caution in evaluations;
  • know about the compliance of income with expenses;
  • be able to study the notes to the financial statements in accordance with international standards and accounting policies.

Every year, adaptation to IFRS is becoming an increasing necessity. Foreign investors want to compare the performance of the company with its competitors and the industry as a whole, to be confident in the transparency, correctness and control of the information reflected in the financial reports. An investor evaluates how successfully management is able to manage his funds.

So what is the key for the investor?

European values are the values of a civilized style of doing business. Its basic principles are honesty, transparency and efficiency. So, investors or creditors who are willing to take risks and invest in agribusiness want to evaluate:

  • the dynamics of the enterprise development (most often in the last three years);
  • financial stability and solvency of the enterprise;
  • availability of assets, assessment of their market value and potential risks (for example, the duration of land lease agreements);
  • hidden risks and the likelihood of their occurrence.

An investor or a creditor needs to give a significant amount of confidence to answer the only question: “Can the enterprise provide the planned level of profitability?”

If we are talking about a loan, the question is: “Can the debtor in time and in full pay the principal amount of the debt and interest on the loan?”

In the process of finding the answer, the investor and the lender study the necessary information and decide how much they are willing to take risks, and what percentage of the income they want to receive at a given level of risk.

Such decisions are closely related to the transparency and accuracy of accounting, and therefore, a very important mission is laid on accounting and reporting. And the way document management, reflection of operations and reporting are organized, very clearly shows how high are the chances of a particular company to receive foreign investment.