The law “On Accounting” (“Accounting Law 2004”) stipulates a gradual transition to new accounting standards by the year 2008. Thus the Soviet-era accounting principles have gradually ceased to regulate financial reporting in Azerbaijan. It should be noted however that Azerbaijan has already made substantial advancement towards the new financial reporting philosophy.
The Accounting Law 2004charges the Ministry of Finance of the Republic of Azerbaijan with the task of arranging procedures in connection with the publication of initial National Accounting Standards (“NAS”). The Law stipulates that all significant entities including credit institutions, insurance companies, investment funds and commercial organizations which meet certain criteria are be subject to International Financial Reporting Standards (IFRS). Others (except for small private businesses) have the choice of using either IFRS or NAS. Small private businesses also have the right to choose between NAS or the simplified method of accounting.
All entities registered in Azerbaijan, which includes Azerbaijani legal entities, representative offices and any branches of companies within the territory of Azerbaijan are required to keep their accounts and records in local currency, and in accordance with the Azerbaijani accounting legislation (“AAL”). This includes the use of a mandatory and quite rigid chart of accounts which, in most cases, will also necessitate the employment of a full-time, experienced Azerbaijani chief accountant.
The Civil Code (2000) contains general provisions regarding financial reporting and audit requirements for legal entities. Joint-stock companies and limited-liability companies are required to use an independent auditor to audit their annual financials. Similarly, joint-stock companies are required to publish their annual accounting reports and balance sheets. The Tax Code (2000) also contains certain provisions dealing with accounting matters, such as depreciation. Depreciation is accrued in accordance with a declining balance method, and the following rates apply to these selected categories of assets:
* Buildings and structures – up to 7% p.a. on a reducing balance basis;
* Machinery, equipment and computers – up to 25% p.a. on a reducing balance basis;
* [Motor] vehicles – up to 25% p.a. on a reducing balance basis;
* Geological exploration costs and development costs preparatory to the extraction of natural resources (including the cost of acquiring the right to explore, develop or exploit natural resources) – up to 25% p.a. on a reducing balance basis; and
* Intangible assets with a life of more than one year – depreciated over the useful life of the asset or, where the useful life cannot be determined, at up to 10% p.a. on a reducing balance basis.
As mentioned above, a separate chart of accounts based on Western accounting principles was adopted by Azerbaijani commercial banks a few years ago.
AAL differs from IFRS and generally accepted accounting principles in other countries (e.g., the United States). Below is a summary of the most significant differences.