Accounting news 04 IFRS 07 US GAAP. in Czech Accounting. What is your view? Financial Reporting Optimisation

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1 What is your view? Accounting news Czech Accounting, IFRS and US GAAP November 2013, Deloitte Czech Republic 02 Czech Accounting Financial Reporting Optimisation Invitation - seminar News in Czech Accounting 04 IFRS IFRS Conceptual Framework project IFRS EU Endorsement Process Invitation - seminar IFRS News US GAAP Accounting for Obligations Resulting From Joint and Several Liability Arrangements

2 Czech Accounting Financial Reporting Optimisation A long-term period of economic stagnation creates significant pressure to reduce costs. CEOs and CFOs have clearly used up all their inventiveness and energy to optimise the main cost items. The effectiveness of vendor selection and price negotiation processes was improved and headcounts were optimised. At this moment, when the principal items have been dealt with, it is necessary to hold on and fight small victories. However, in some cases our imaginations are coming up short. The following article offers a reflection of possible savings in financial reporting. It is clear that the amount of the savings differs by type of company. The biggest savings will be achieved mostly in companies with complicated processes where financial reporting is demanding in terms of time and data volume. 02 Large volume of data Complex Occurence of errors Incomprehensibility Appropriate data Simple No errors Well structured The reasons why financial reporting in certain companies historically increased inadequately are different. Some firms complied with the Sarbanes Oxley requirements by implementing an excessive number of controls while other firms meet the complicated requirements of their owners. In other companies the financial reporting module was amended and extended over numerous years without any conceptual review in order to reflect the current reality of the company. It is important to realise the positive fact that financial reporting is a single transformation of input accounting data to output financial reporting. This is usually precisely defined by financial reporting users (eg banks, owners, management). The entire process of data transformation should be overseen through the implementation of controls so as to prevent any material errors. In the Czech conditions, the most frequent financial reporting framework is International Financial Reporting Standards (IFRS) and an element of subsidiaries consolidation is often contained. For this reason, we will further discuss individual elements. Input Data processing (consolidation, IFRS adjustments) Try to think about your financial reporting module at this moment. In the following paragraphs, I will seek to provide you with a tool to weed out your extensive financial reporting process. Outputs It may be surprising for you but let s start from the end. Output At first, it is important for management to think about the requirements of financial statements users. In most practical situations, there are two external users shareholders and banks. The requirements of other users, such as taxation authorities, insurers, suppliers, etc. are usually satisfied by the publication of the financial statements. Management of the company uses both the statutory accounting for the detailed monitoring of performance and financial reporting for the communication with capital providers. For effective financial reporting, it is appropriate to consider the possibilities of simplifying and making the outputs more understandable at the start of the process. Let us review and answer the following questions: Are we able to reduce the scope of the users requirements for financial reporting? Are we able to align the requirements of all users into one output format? Are the outputs excessively detailed? What requirements are specific (bank covenants, shareholder group transactions)? Which outputs are generated automatically and which outputs require manual interventions? If you see the opportunity for optimisation, there is the second, equally important, step - negotiate and agree on the simplification of financial reporting with the users of this information. Inputs The key input data sets necessary for the preparation of the balance sheet, income statement and statement of cash flows under IFRS are as follows: Statutory accounting data Consolidation adjustments IFRS adjustments Time adjustments Cash flow adjustments For an effective use of data from the trial balance, an appropriate structure of used accounts is significant. We often encounter a situation when the structure of accounts does not comply with the need of users for adequate information. The structuring of bank accounts is usually clear; by contrast, sales are usually not structured in such detail which is required by the user. continues on next page

3 Czech Accounting Consolidation adjustments are usually based on the routine reconciliation of balances and transactions in the group in combination with a timely identification of unique transactions, eg sale of a subsidiary. In this issue, the timely and reliable collection of information is crucial. IFRS adjustments result from different accounting policies used for certain transactions. Typical examples include finance leases, construction contracts or provisions for repair costs. We recommend that you consider the features of each adjustment materiality (is the impact of the adjustment material in terms of profit or loss) and complexity (is it difficult to process/interpret the adjustment)? Try to fill in the below matrix. 03 Material Simple Immaterial Simple Material Complex Immaterial Complex In respect of adjustments that were placed on the left bottom side, we recommend considering the necessity of their implementation. On the contrary, most attention should be given to adjustments that are material and complex. An example of a typical transaction from the upper right segment is acquisition accounting (IFRS 3) where the financial impacts are extensive and complex (it is necessary to maintain two different registers of assets). Suggestions for optimisation may include adjustments that are immaterial but complex and their preparation is time-consuming, for example, due to the requirement of the parent company. Time adjustments result for the time lag between the preparation of the financial statements and preparation of reporting. A typical example of these differences may be the specification of estimated items. In companies with early reporting to the group the number of differences increases. It is necessary to say that these time adjustments are not desirable and ways to prevent them should be searched for. Certain companies have inputs necessary for cash flow well prepared, other companies do not. If we think about the requirements and needs of principal users shareholder and banks, it is clear that the reliability of cash flow reporting is of vital importance and it is appropriate to be well-prepared. An example of best practice is the routine collection of a limited amount of information on transactions and payments in several determined areas (interest expenses/expenditures, tax costs/expenditures, expenditures for the purchase of assets, etc.). Data Processing In practice, we encounter a wide range of technical data processing methods, from the records in Excel to sophisticated information systems. In both cases, data are purposefully aggregated into basic financial statements and subsequently analysed by individual positions. An advantage of the information system is a better control over adjustments and prevention of manual errors. The disadvantages usually include high costs as compared to spreadsheets. Controls The correctness of the output is due to reviews of the input data and data processing process. Internal controls in financial reporting may be often set mechanically without actually focusing on the objective of revealing an error. In defining the controls, it is appropriate to consider whether you have set processes in the following areas: Control over the correctness of statutory data transfer; Identification of unique transactions in the consolidation group; Four-eye principle in respect of IFRS adjustments that are material; Four-eye principle in respect of cash-flow adjustments; and Control over the correctness of data processing. If you can positively answer all these five questions, it is an attestation that you have the financial reporting process under good control. Conclusion A brief reflection and consideration of the current financial reporting certainly pays off. I am sure that it may help some of you open the way to simplifying and better structuring your financial reporting. A fast and elaborated implementation of necessary changes may lead to interesting time, reputational and eventually financial savings. The financial team will be able to deal with financial reporting in a shorter period of time and always provide the users with reliable information. Invitation Seminar News in Czech Accounting Prague, Brno, Ostrava As in prior years, we have prepared a popular seminar on the news in Czech accounting, this year providing a summary in accounting legislation and the legal and tax news having an impact on companies financial statements. The seminar is predominantly intended for accountants, economists and financial managers preparing or involved in the preparation of financial statements under Czech accounting legislation and the related tax and legal regulations and for all of you who want to learn more about Czech accounting and the latest tax and legal developments. Seminars will be held in Czech in November and December in Prague, Brno and Ostrava and will be delivered by our professionals. Timing Prague: 14 November 2013 and 12 December 2013 Brno: 21 November 2013 Ostrava: 11 December 2013 More information on:

4 IFRS IFRS Conceptual Framework project The International Accounting Standards Board (IASB) is currently in the process of updating its Conceptual Framework. Because of the paramount importance of the new Conceptual Framework for the development of new standards and the revision of existing standards and the fact that it will have to be considered when dealing with issues that are not addressed in the standards, the new Conceptual Framework will have a long-lasting and substantial influence. Let us first look at the interesting history of the project. Former Framework for the Preparation and Presentation of Financial Statements The former Framework for the Preparation and Presentation of Financial Statements (the Framework ) was issued by the IASC in April 1989 and adopted by the IASB in April The IFRS Framework describes the basic concepts that underlie the preparation and presentation of financial statements for external users. The IFRS Framework serves as a guide to the International Accounting Standards Board (IASB) in developing future IFRSs and as a guide to resolving accounting issues that are not addressed directly in an International Accounting Standard or International Financial Reporting Standard or Interpretation. In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the IFRS Framework. The IFRS Framework addresses: The objective of financial reporting; The qualitative characteristics of useful financial information; The reporting entity; The definition, recognition and measurement of the elements from which financial statements are constructed; and Concepts of capital and capital maintenance. IASB-FASB Joint Project on the Conceptual Framework At their joint meeting in October 2004, the IASB and the US FASB (US Financial Accounting Standards Board) decided to add to their respective agendas a joint project to develop a common conceptual framework, based on and built on both the existing IASB Framework and the FASB Conceptual Framework, that both Boards would use as a basis for their accounting standards. The objective of the conceptual framework project was to create a sound foundation for future accounting standards that are principles-based, internally consistent and internationally converged. The two boards reached the following tentative decisions about the approach to the project: The project should initially focus on concepts applicable to business entities in the private sector. Later, the boards should consider the applicability of those concepts to other sectors, beginning with not-for-profit organisations in the private sector. The project should be divided into phases, with the initial focus being on achieving the convergence of the frameworks and improving particular aspects of the frameworks dealing with objectives, qualitative characteristics, elements, recognition, and measurement. The converged framework should be in the form of a single document. In September 2010, the IASB and the FASB completed the first phase of their joint project to develop an improved and converged conceptual framework for IFRSs and US generally accepted accounting principles (US GAAP) with their issue of Chapter 1: The objective of general purpose financial reporting and Chapter 3: Qualitative characteristics of useful financial information. These two chapters were issued by the IASB as part of the Conceptual Framework which superseded the Framework for the Preparation and Presentation of Financial Statements that was published in The new chapters replaced the relevant paragraphs in the former Framework. When the conceptual framework project is completed, the IASB will have a complete, comprehensive and single document called the Conceptual Framework for Financial Reporting. During late 2010, the IASB effectively deferred further work on the joint project until after other more urgent convergence projects were finalised. IASB-only Comprehensive Project In September 2012, the IASB decided to reactivate the Conceptual Framework project as an IASB-only comprehensive project. Before being suspended, the joint IASB-FASB Conceptual Framework project was being conducted in a number of phases. The table below summarises the progress of each phase, and the IASB s future plans for that phase: 04 continues on next page

5 IFRS Phase Phase A: Objectives and qualitative characteristics Phase B: Elements and recognition Phase C: Measurement Phase D: Reporting entity Phase E: Presentation and disclosure Phase F: Purpose and status Status Completed, Conceptual Framework for Financial Reporting 2010 issued in September 2010 To be further considered as part of the IASB-only comprehensive project To be further considered as part of the IASB-only comprehensive project Exposure Draft ED/2010/2 Conceptual Framework for Financial Reporting: The Reporting Entity published in March To be further considered as part of the IASB-only comprehensive project To be further considered as part of the IASB-only comprehensive project. Work on this phase is to be discontinued as the project is being continued as an IASB-only project. One of the objectives of this phase was to reach a converged IASB-FASB view on the secondary purpose of the framework to assist preparers in preparing financial statements (which is not present in US GAAP) Work on this phase will be discontinued as the current focus of the IASB is on business entities in the private sector This phase will not needed as the remaining topics to be considered as part of the IASB-only project are intended to be developed and issued together The objectives of the new IASB-only project are less ambitious. It no longer aims at a substantial revision of the framework but is focused on those topics that are not yet covered (e.g. presentation and disclosure) or that show obvious shortcomings that need to be dealt with. As opposed to the earlier project these areas are not dealt with by themselves - the discussion paper covers all aspects of the framework project. Discussion Paper DP/2013/1 A Review of the Conceptual Framework for Financial Reporting was published in July Included in the DP are proposals to: Revise the definitions of an asset and a liability; Introduce guidance on derecognition; Clarify the objective and purpose of other comprehensive income; and Set a framework for presentation and disclosure. The publication of the discussion paper marks the end of the first phase of the new project. After considering the comment letters on the Discussion Paper, the Board intends to publish an exposure draft in the third quarter of 2014 and finalise the new conceptual framework by September EFRAG s Strategy regarding the IFRS Conceptual Framework EFRAG (the European Financial Reporting Advisory Group) and the National Standard Setters of France, Germany, Italy and the UK are collaborating to investigate aspects of the Conceptual Framework they believe are particularly significant to European constituents. In February 2013, EFRAG posted to its website a strategy document entitled Getting a Better Framework Our Strategy. The aim of the document is to ensure ultimately that the IASB s Conceptual Framework for Financial Reporting reflects an underlying accounting model that European stakeholders believe is conducive to robust and effective financial reporting standards. Starting in April 2013, EFRAG and the above mentioned National Standard Setters have published Bulletins Getting a better Framework, which discuss the issues that arise in the course of the IASB s Conceptual Framework project. Conclusion The work on the Conceptual Framework is the most important development in financial reporting since the restructuring of the IASB and the adoption of IFRS for use in Europe. You can find more information about the project on Deloitte s website Phase G: Application to not-for-profit entities Phase H: Remaining issues 05 continues on next page

6 IFRS IFRS EU Endorsement Process The European Financial Reporting Advisory Group (EFRAG) updated its report showing the status of endorsement of each IFRS, including standards, interpretations, and amendments, most recently on 12 September As of 25 October 2013, the following IASB pronouncements are awaiting European Commission endorsement for use in the EU: Standards IFRS 9 Financial Instruments (issued in November 2009) and subsequent amendments (amendments to IFRS 9 and IFRS 7 issued in December 2011) Amendments Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities (issued in October 2012) Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets (issued in May 2013) Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting (issued in June 2013) Interpretation IFRIC 21 Levies (issued in May 2013) Click here for the Endorsement Status Report. Invitation Seminar IFRS News 2013 Prague, Brno, Ostrava Dear All, We would like to invite you to Deloitte s traditional autumn seminar on International Financial Reporting Standards (IFRS). You will have an opportunity to learn which new standards, amendments and interpretations will have to be taken into account in preparing financial statements for 2013 and which in the following periods. We will introduce new rules which are either already effective or will become effective in the near future and will show their practical application on a number of examples. The seminar is predominantly intended for accountants, economists and financial managers of projects relating to IFRS and for all who want to know more about IFRS. Seminars will be held in Prague, Brno and Ostrava in Czech and will be delivered by our professionals. Timing Prague: 27 November 2013 Brno: 12 November 2013 Ostrava: 13 November 2013 More information on: 06

7 US GAAP Accounting for Obligations Resulting From Joint and Several Liability Arrangements In this issue of the accounting newsletter we would like to bring to your attention to an expected change in the FASB codification which affects entities that are jointly and severally liable with other entities, when the total amount of the obligation is fixed as of the reporting date. Discussions on this topic were finalized early 2013 and we will introduce this area in following article. In a joint-and-several liability arrangement, the total amount of the obligation can be enforced against any of the obligors under the arrangement. An example would be a lending arrangement in which the lender can demand payment for the total amount of the indebtedness from any of the multiple parties (obligors) that are jointly and severally liable. Another example would be a situation in which multiple parties are jointly and severally liable for settled litigation. Some entities recognize the total obligation when they are jointly and severally liable. For example, if two entities are jointly and severally liable for $100 million in borrowings (assume that each entity had received only $50 million in proceeds), each entity would record a $100 million liability for the borrowing. Other entities would record something less than the total obligation, such as an allocated portion of the total joint-and-several obligation based on the amount that each of the joint-and-several parties agrees to be responsible for (i.e., its share of the total) plus any amounts that it is expected to pay on behalf of other co-obligors. In this example, that amount might be $50 million because each of the two entities received such an amount and agreed that the amount was its respective portion of the total obligation (and did not expect to pay more since the other party was creditworthy). This new guidance addresses how a reporting entity should account for a joint-and-several obligation when the total amount of this obligation is fixed as of the reporting date. It is going to be part of the codification under section For the total amount of an obligation under an arrangement to be considered fixed at the reporting date there can be no measurement uncertainty at the reporting date relating to the total amount of the obligation. However, the total amount of the obligation may change subsequently because of factors that are unrelated to measurement uncertainty. For example, the amount may be fixed at the reporting date but change in future periods because an additional amount was borrowed under a line of credit for which an entity is jointly and severally liable or because the interest rate on a joint and several liability arrangement changed. Obligations resulting from joint and several liability arrangements included in the scope of this Subtopic initially shall be measured as the sum of the following: a. The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors. b. Any additional amount the reporting entity expects to pay on behalf of its co-obligors. If some amount within a range of the additional amount the reporting entity expects to pay is a better estimate than any other amount within the range, that amount shall be the additional amount included in the measurement of the obligation. If no amount within the range is a better estimate than any other amount, then the minimum amount in the range shall be the additional amount included in the measurement of the obligation. An entity shall disclose the following information about each obligation, or each group of similar obligations, resulting from joint and several liability arrangements: a. The nature of the arrangement, including: How the liability arose, The relationship with other co-obligors, terms and conditions of the arrangement. b. The total outstanding amount under the arrangement, which shall not be reduced by the effect of any amounts that may be recoverable from other entities c. The carrying amount, if any, of an entity s liability and the carrying amount of a receivable recognized, if any d. The nature of any recourse provisions that would enable recovery from other entities of the amounts paid, including any limitations on the amounts that might be recovered e. In the period the liability is initially recognized and measured or in a period the measurement changes significantly: The corresponding entry Where the entry was recorded in the financial statements. This Issue will be effective for public entities for fiscal years beginning on or after December 15, For nonpublic entities, the Issue will be effective for the first annual period ending on or after December 15, This Issue will be applied retrospectively to obligations with joint-and-several liabilities existing at the beginning of an entity s fiscal year of adoption. Entities that elect to use hindsight in measuring their obligations during the comparative periods will be required to disclose that fact. Early adoption will be permitted. 07

8 If you have any questions regarding any of the articles in this publication, please contact one of the following audit experts: Czech Accounting Stanislav Staněk: IFRS and US GAAP Martin Tesař: Soňa Plachá: Gabriela Jindřišková Deloitte Advisory s.r.o. Nile House Karolinská 654/ Prague 8 - Karlín Czech Republic Tel.: Fax: This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, any of its member firms or any of the foregoing s affiliates (collectively the Deloitte Network ) are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication. *** Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte's approximately 195,000 professionals are committed to becoming the standard of excellence Deloitte Czech Republic