Ivanova Lyudmyla Borysivna,
Ph.D. in Economics, postdoctoral student, Kyiv National Economic University by Vadym Hetman
Иванова Людмила Борисовна,
к.э.н., докторант, Киевский национальный экономический университет имени Вадима Гетьмана
Funding sources for rehabilitation: an accounting aspect
Финансовые источники санации: учетный аспект
Актуальность данной проблемы обусловлена проведением реформы налогового
законодательства в реальном секторе экономики Украины, гармонизацией налогового
законодательства с методологией бухгалтерского учета, ее влиянием на формирование
экономической информации в антикризисном управлении субъекта-должника
In crisis management of an entity of a real sector of economy rehabilitation
is carried out to prevent a bankruptcy and liquidation. This procedure aims to
restore the solvency of a subject-debtor, satisfaction of creditors’ claims in full or
in part. In general scheme of bankruptcy procedure in Ukraine rehabilitation comes
after the initiation of the case and the stage of disposal of the property. Successful
rehabilitation procedures complete bankruptcy. Opposite – negative remedial
actions lead to the stage of bankruptcy recognition and liquidation of the debtor.
Part 1
Rehabilitation as a stage of bankruptcy proceedings is subject to its general
principles. Several authors, such as H. V. Fedorova, H. B. Yun, Yu. A. Voronova,
V. V. Hryhoriev, V. E. Kerimov (their point of view is shared by the author of this
article) consider bankruptcy as an integrated system of measures aimed at the
improvement of enterprises. In our view, this allows to prove the feasibility of
study of issues and investigation of accounting at each stage of legal bankruptcy
proceedings. Moreover, according to the norms of bankruptcy law in Ukraine the
regulation of legal relations between the parties regarding the debt repayment is
provided not only in the bankruptcy proceedings, but also in the pre-bankruptcy
period of an insolvent enterprise, that is during the pretrial rehabilitation. In this
regard, there is a reason to combine pretrial rehabilitation measures and a set of
measures in the conditions of procedure of bankruptcy in a single system of crisis
management of subjects in real economy, and to consider accounting data
processes from this point of view. A systematic approach to the study of the
features of accounting, in our opinion, is appropriate also because the legislation
regarding crisis management of enterprises in Ukraine is based on the concept of
conservation of debtor’s property.
This concept leads to the prevalence of rehabilitation measures compared to
liquidation procedures, during which even may the owner of the company change,
but the integrity of a business entity is maintained. The concept of conservation of
the property of the debtor brings certain peculiarities to the accounting system of
crisis management in real economy, in particular, it can be traced in relation to the
points of accounting of financial sources of rehabilitation.
Rehabilitation in conditions of continuous monitoring, financial control,
and if necessary, implementation of preventive anti-crisis measures, may be carried
out at the expense of own funds of the debtor. In the case of their lack
rehabilitation is carried out at the expense of other sources. In January 2011, the
President of Ukraine approved Amendments to the Act on Bankruptcy № 4212-VI
of 22.11.2011 which entered into force since 2013 (hereinafter – Act № 4212-VI).
The norms of this Act regulate measures to prevent the debtor’s bankruptcy and
out-of-court procedures aimed to prevent the bankruptcy of subjects of different
forms of ownership in real economy. Analysis of the norms of given legislation
Act shows that the procedures included in the rehabilitation plan, are virtually
independent on the form of ownership. But funding of pretrial rehabilitation of
business consists mainly of own sources and sources obtained from the creditors in
the form of repayable financial assistance, trade credit, loans of financial
institutions. Funding of enterprises with state ownership can be carried out both
from public funds and from other sources (Article 5 of Act № 4212-VI).
Providing a repayable financial aid is the most common measure in
rehabilitation of pretrial and trial procedures of the subject-debtor, the source of
rehabilitation and an integral part of the mechanism of restoration of the solvency
of the entity. According to Art. 3 Par. 3 of Law on Bankruptcy before 2013 and
Art. 5 Par. 4 of the amended law, that is in force since 2013, financial assistance
means that the subject-debtor must assume certain obligations before the
individuals who provided it. We are talking about the repayable financial
assistance, defined in the national regulatory framework only in the Tax Code of
Ukraine (hereinafter - TCU). According to Par. 14.1.257 of TCU “Repayable
financial aid – is the amount of funds received by the taxpayer for use under a
contract, which does not include interest or provision of other types of
compensation in the form of fees for the use of such means, and is required to
return”.
In Civil and Economic Codes (hereinafter referred to as correspondently
CCU and ECU) the term “financial assistance” corresponds to the term “loan”. The
concept of the loan and the loan agreement in terms of civil and economic legal
issues is reflected in Articles 1046-1053 of Chapter 71 of CCU and ECU, the
content of which note the following. According to the loan agreement the lender
transfers money or other things, with certain generic characteristics, to the property
of the borrower, and the borrower agrees to return to the lender the same amount of
money (the loan) or the same number of things of the same kind and of the same
quality.
Attention should be drawn to the fact that in the process of rehabilitation
money form of an interest-free loan, that is, financial assistance, is more urgent. In
addition, for the case in Economic Court of great importance is a written form of
the loan. According to the norms of Civil and Ecomnomic Codes loan agreement is
concluded in writing in cases when the creditor is a legal entity, regardless of the
amount of contract. However, in the bankruptcy proceedings a written contract is a
necessity for the formation of evidence, to which the oral agreement does not
apply, since, according to Par. 1, Art. 218 of ECU “in the event of a dispute, a
court may not use the testimony of witnesses of oral contract”.
Another important issue of financial assistance, as a kind of loan is that
financial aid is available for free, and the loan has a price, which is determined
according to Article 1048 of CCU in the form of a percentage of the total. Interestfree loan character matches only contracts between individuals in the amount of –
“fifty-time size of personal exemption of citizens, and is not related to business
activities of at least one of the parties”. Such a contradiction follows the essence of
the definition of loans and financial assistance and concerns: first, the problem of
correspondence of concept “financial aid” to the criteria of financial services, and
second, the problem of limiting the number of individuals who can enter into a
loan agreement (in monetary terms).
Loan is a financial service under the Law of Ukraine “On Financial
Services and State Regulation of Financial Markets» № 2664-III of 12 July 2001
(as amended) and, along with other forms of borrowing, is the pooling of financial
assets with an obligation to return them in the following (Par. 4 Art. 4 of the Law
on Financial Services). Sign of financial services is chargeability – they are carried
out in the interest of third parties in order to gain profit or keep a real value of
financial assets (Par. 5, Art. 1). According to Par. 4 Art. 5 of this Act, such services
can be provided only by financial institutions. The provision of certain financial
services by entities, which are non-financial institutions, is determined by
regulations that regulate the activities of financial institutions and financial
services markets. It follows that financial aid does not meet the criteria of payment,
defined in Par. 5 Art. 1 of the Law on Financial Services and, therefore, has no
restrictions in terms of the provision of it by non-financial institutions, in particular
the subjects of real economy. According to the National Accounting Regulation 13
“Financial Instruments” (hereinafter – NAR 13) financial assistance corresponds to
a category of financial instrument as a contract that is manifested at one entity as
financial asset, and at the other – as financial commitments that are reflected in the
balance sheet after the right to receive the asset or liability to its transfer appears
(Par. 12 NAR 13). In general situations, and in a pre-trial or judicial rehabilitation
(including free, and targeted assistance), it is such a financial instrument that is
valued at cost of provision and is not meant for resale.
Part 2
The construction of accounting displaying of such operations in Ukraine,
including crisis management of enterprises is influenced by two factors. Firstly, the
accounting of the lender differs from the one of the borrower depending on the
terms of repayable financial assistance that is partly stipulated by the nuances of
tax registration in Ukraine. Secondly, under the conditions of rehabilitation it must
be considered that repayable financial assistance is provided by persons who are
interested in restoring the debtor's solvency: the founders (partners, shareholders),
the owner of the debtor’s property, his lenders (Article 5 Par. 3 of the revised Law
on Bankruptcy), which causes some enhancement of the control function regarding
the use of such non-refundable loan. Otherwise, regardless of the borrower
ownership (whether the company has a share of state property or it is commercial)
for the person providing the loan, it is important its effective use for a particular
purpose.
In cases of crisis management, particularly those related to bankruptcy, in
order to strengthen the control it is reasonable to display information in an
analytical context to synthetic account which corresponds to the use of provided
financial assistance in accounting of a debtor who received a target loan that is
financial assistance or financial credit from a financial institution.
According to the National plan of accounts and instruction on its use in
Ukraine № 291 of 30.11.99 the assistance recipient may use “Other long-term
liabilities” account to generalize information on liabilities which are not current,
including deferred income tax liability and imposts (mandatory payments) and
repayable financial assistance. So, in case of making a contract about providing
repayable financial assistance for more than one year, the borrower may
correspond to the obligation of the account credit. Besides, such a synthetic
account (account 55 in Ukraine) is useful in several specific cases concerning
antirecession measures of real economy entity. For example, for accounting
debtor’s delays, including taxes and imposts (mandatory payments), carried out
both within rehabilitation and in the other procedure of crisis management such as
settlement agreement between the debtor and lenders. Up to one year term it is also
useful for the assistant recipient to draw up a contractual document, taking into
consideration tax consequences (which will be discussed below) and display
current liability of assistance in current liabilities class according to loan
subaccount “Repayable interest-free financial assistance” to the corresponding
synthetic accounts (national accounts63 and 68). Such analytical section will allow
interested person to get detailed information about the composition of measures for
financial restructuring of debtor’s debt.
The displaying of the repayable financial assistance in accounting, simple at
first sight, has some difficulties due to different points of view on the
approximation and harmonization of tax accounting to financial accounting. Thus,
in the economic literature there is the idea of irrational displaying income changes
under the payment terms concerning repayable assistance available above the year
in tax accounting. According to another point of view the changes that happen as
results of loaning and non-refundable repayment operations in the debtor’s tax
account may also cause some changes in its accounting.1
Let’s briefly discuss the issues of the repayable financial assistance
displaying in accounting for persons who are applied measures of pretrial and
bankruptcy proceeding rehabilitation. In tax accounting the assignment
consequences of the repayable financial assistance are regulated by Art. 135.5 of
TCU “Other income” and depend on the following factors: refund term and the
categories of taxes paid by those who are involved in such transaction. So, if the
lender and the borrower pay the income tax under general conditions (pay income
tax at the legal rate of interest (Par. 151.1 Art. 151 TCU) and financial assistance
was returned within one fiscal period, there are no changes in tax accounting of
these persons. If an interest-free loan is returned late, in the next tax period(s), the
borrower gets incomes amounting to conditionally included interest, defined in
accordance with Art. 135 of TCU as the following: “the amount of defaulted
repayable financial assistance at the end of the accounting period must be
multiplied by the number of days of use and the discount rate of the National Bank
of Ukraine and divided by 365 days”.
The financial assistance that was given to the income taxpayer from persons
who are not subjects to this tax (including non-residents), or persons who have
benefits from this tax, including the right to apply a lower tax rate than base is
displayed in accounting is displayed the other way. According to the latest
regulations of TCU the income of the taxpayer (the borrower) increases only if
such assistance is non-refund in the same accounting tax period in which it was
extended. The payment of debts by the borrower in future fiscal periods causes the
increase of expenditures in the period when there was a return in taxpayer’s
taxation.
1
Research and practice statement to the Tax Code of Ukraine: in 3 chapters. Corporate author [general
editorship by M.Y. Azarov]. - 2nd ed., augmented edition. B. 2. - K.: Ministry of Finance of Ukraine, DNNU "Academy
of Financial Management", National University of STS of Ukraine. 2011. - 942 p. [Electronic resource]: - Mode of
access: http://www.profiwins.com.ua/uk/comentsnk.html
Summarized information of tax accounting of repayable financial assistance
is displayed in Figure 1.
Repayable financial assistance
To a taxpayer from an
income taxpayer
To a taxpayer from income
tax avoider
To a taxpayer
from a founder
(case 1)
or persons who have tax
privileges (case 2)
(case 3)
Assistance
receipt and
debt refunding
in one tax
period
There are no
changes in
tax
accounting
Debt
refunding in
other tax
period
Borrower gets
incomes
amounting to
conditionally
included
interest
Assistance
receipt and
debt
refunding in
one tax
period
There are no
changes in
tax
accounting
Debt
refunding in
other tax
period
Borrower gets incomes
amounting to nonrefund loan,
expenditures when
refunding
The debts
payment is during
365 days
according to the
agreement
Income occurs
after 365-day
term; the
expenditures are
displayed during
the loan refund
period
Fig.1 Changes in tax accounting of the borrower in consequences of financial
assistance.
Source: Arranged by the author * Figure 1 displays as an example the occurrence of changes
in tax accounting of only those types of financial assistance borrowers which may be contributors of rehabilitation
measures, including bankruptcy proceeding.
For payable financial assistance extended to the income taxpayer by his
founder (including non-resident) the following must be emphasized. The
consequences in the borrower’s (income taxpayer) tax accounting do not appear
when financial assistance was refunded within 365 calendar days of its receipt. In
this case, Par. 135.5.5 of TCU says that there is also no income amounting to
conventional income. In this condition, it is obligatory to draw up a loan agreement
specifying maturities. According to TCU regulation “if the agreement provides that
the loan will be refunded after the expiry of 365 days from the date of funds
receipt, in the period of their receipt the taxpayer increases the income by the loan
amount. Then according to the consequences of the current tax period in which the
loan is refunded, the taxpayer will increase the amount of expenditures on the
amount of repayable financial assistance”. Thus, at present, according to TCU
regulations holders are able to finance enterprises within one year period without
tax consequences.
Repayable financial assistance to the borrower – single tax payer (legal or
natural person) is not included in the income tax accounting if it is refunded within
12 months from the date of receipt (Par. 3 Par. 292.11 Art. 292 of TCU). A person
who provides financial assistance does not have any tax accounting changes.
Part 3
The above scheme of changes in borrower tax accounting by the financial
assistance consequences (Fig. 1) shows that the repayable assistance has effects in
tax accounting only in the case of late repayment. According to the debating point
(question of issue) of reflected changes in accounting the following can be said.
The fact is that in real economy “the accounting is the only database of information
on compiling both tax and financial reporting2”. The methodical principle of
harmonization of tax legislation and accounting methodology is a new method of
income tax object determining, which purpose is to reveal the relation between
accounting and taxable income, the adjustment of accounting income to the
amount of differences in taxes of the reporting period.3
For displaying the repayable assistance in accounting there are various
techniques in economic literature. Thus, to bring the taxation and accounting
together, the authors of the article dealing with the difference in taxes accounts
offer not to display the income changes arising under certain terms of payment
with financial assistance refund4 in tax accounting. As the argument there is the
fact that such changes will be canceled in the future. To that effect, there is a
reduction of temporary differences, but on other hand, one of the authors in the
research and practice statement to the Tax Code of Ukraine (Par. 135.5.5 Art. 135)
offers to display non-refunded by the due date financial assistance in the
accounting by the credit of the account “Other income from operating activities”
and in case of return, this account must be debited. No doubt, that such offer
emphasizes the priority importance of accounting on the basis of which tax
reporting must be compiled. However, national accounting regulations, especially
NAR 15 – “Income” contain no reliable reasons for the admission of such income,
and therefore, it can be displayed in reporting only by the efficient professional
judgment of an accountant. In addition, the use of this procedure in crisis
2
L.G. Lovinska Improving the regulatory support of accounting in the context of the
implementation of the Tax Code of Ukraine / DNNU "Academy of Financial Management", according to the
general editorship by F.O. Yaroshenko. - K., 2011. – B.2: Budget Strategy and State Budget 2012:
balance, transparency and realism. - 2011. - P. 488.
3
The same. P. 489.
M.I.Bondar Tax differences accounts under the Tax Code of Ukraine / M.I. Bondar, V.V. Babich / / Finance of
Ukraine. - 2011. - № 3. - P.72-80.
4
management on the background of persistent nonpayment creates an additional tax
on the debtor, which is inconsistent with the theory of property preservation.
The analysis of the regulatory and legal framework procedure for
rehabilitation and accounting of its activities in the system of crisis management of
real economy entity leads to such conclusions: organizational and financial
measures of rehabilitation can be carried out by its own sources, in the case of
financial difficulties mainly due to sources: for state-owned enterprises – state
budget in the form of non-repayable target assistance and repayable financial
assistance from lenders; for private ownership – through repayable financial
assistance received from the founders, owners, lenders, which contributes to the
realization of the debtor’s property preserving conception.
Repayable financial assistance is a type of financial service that is provided
on the basis of repayment, but at no cost by nonfinancial institutions and
enterprises; recognized in the debtor’s accounting after the right to receive the
asset; measured by the primary value of lodgment and is not appointed for resale,
has a target nature of the lodgment.
In order to strengthen the control in accounting with regard to the intended
use of repayable financial assistance it is offered to display activities in analytic
section, allowing the rehabilitation participants to get information and make a
decision on the financial restructuring of the debtor’s debt.
In tax accounting the repayable financial assistance must be displayed to the
debtor who receives it, depending on the organizational form and taxation type of
the lender (the income taxpayer or not taxpayer), and the date of repayment.
Incomes arising in the debtor’s taxation due to the receipt and repayment
obligations in various tax periods can not have consequences in the accounting
because of the absence of an appropriate regulatory framework.
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