Accounting News Deloitte Czech Republic. June 2017

Transcription

1 Accounting News Deloitte Czech Republic June 2017

2 Capping the goodwill 120 months subsequent to the 2 17 Insurance contract The amendment to Regulation No. 500/2002 Coll., effective for entrepreneurs from, has brought a change relating to the depreciation period of goodwill. In this article, we will take a look at how this change may be reflected in the financial statements of reporting entities. Legal regulation Guidance on goodwill is given in Section 6 (3c) of Regulation No. 500/2002 Coll., for entrepreneurs (the Regulation ). Goodwill is a positive or negative difference between the valuation of a business acquired through transfer or assignment in return for payment, investment or valuation of assets and liabilities as part of transformations of a business corporation, and the aggregate of its individually revalued asset items less acquired debts. Goodwill (or negative goodwill) is amortised on a straight line basis within 60 months at the latest from the acquisition of a business in expenses (or income), in case of a transformation of a business corporation, this goodwill is charged off through expenses (or income) from the effective date of the transformation. Wording of the Regulation until 31 December 2015: The reporting entity may decide on the depreciation period of goodwill or negative goodwill exceeding 60 months; this fact is to be disclosed and clarified by the reporting entity in the notes to the financial statements. Wording of the Regulation from 1 January 2016: The reporting entity may decide on the depreciation period of goodwill or negative goodwill exceeding 60 months, however, 120 months maximum; this fact is to be disclosed and clarified by the reporting entity in the notes to the financial statements. Recommended Accounting Treatment Given that there are no transitory provisions regarding this section of the Amendment to the Regulation, the capping of depreciation also applies to goodwill prior to the Amendment s effective date. By its nature, depreciation is an accounting estimate. A change in the depreciation period (so called depreciation capping), even though forced by the legislation, is a change in the accounting estimate performed prospectively, and its impact will reflect in the profit or loss of the current reporting period. Comparative data are not to be adjusted.

3 3 17 Insurance contract A one-time impact on the profit and loss account may be significant predominantly with those companies that have set a depreciation plan for substantially more than 120 months before the Amendment s effective date. Our experience suggests that some companies depreciate goodwill over 25 or even more years. Since, the depreciation period of goodwill is to be shortened back to 120 months. A possibility to reduce the impact on the profit and loss account may be Section (56) (3) of the Regulation: Given the materiality and the true and fair view of the subject of accounting as well as the financial position of the reporting entity, the reporting entity may, upon the depreciation of assets, consider the anticipated residual value. For the purpose of this Regulation, the anticipated residual value means an estimated positive value rationalised by the reporting entity, which the reporting entity might gain at the moment of the anticipated disposal of assets, eg by sale, subsequent to the deduction of anticipated costs related to the disposal. Should you consider opting for this possibility, we recommend that you discuss with Deloitte s specialists the appropriateness of the treatment in the specific conditions prevailing in your company. Another opinion on how to eliminate the impact on the profit and loss account, is to interpret the Amendment with no transitory provisions by applying the 120- month period not from the date of the goodwill capitalisation but from 1 January However, we consider this approach to be very aggressive, thus, we cannot recommend it.

4 The IASB proposes to amend 4 17 Insurance contract On 21 April 2017, the International Accounting Standards Board (IASB) published an exposure draft Prepayment Features with Negative Compensation (Proposed amendments to 9) to address the concerns about how 9 Financial Instruments classifies particular prepayable financial assets. Why are amendments being proposed? 9.B4.1.11(b) states that the prepayment of a debt instrument at an amount that includes reasonable additional compensation for the early termination of the instrument results in contractual cash flows that are solely payments of principal and interest on the principal amount outstanding ( SPPI ). A question has arisen in practice as to whether the term compensation includes negative compensation, i.e. where the party exercising the option receives compensation from, as opposed to paying compensation to, the other party for early termination. Negative compensation can occur, for example, when the instrument is prepayable at an amount that reflects the remaining contractual cash flows discounted at the current market interest rate. Depending on the interest rate movements since initial recognition of the instrument, the option holder may end up paying more (i.e. paying compensation) or less (i.e. receiving compensation) than the outstanding principal and interest at the time of prepayment. The IASB was concerned that in applying 9 these instruments would fail the SPPI condition and need to be measured at FVTPL. Such prepayment features are prevalent in particular types of otherwise plain vanilla lending instruments, such as corporate loans and retail mortgages. The IASB decided that measuring such assets at amortised cost, and including them in key metrics like net interest margin, would provide more useful and relevant information to users of financial statements about these financial assets performance than FVTPL.

5 5 17 Insurance contract What are the proposed amendments? The IASB proposes a narrow-scope exception to 9 to allow a prepayable financial asset to be measured at amortised cost if: (a) the financial asset would otherwise meet the requirements of 9.B4.1.11(b) but fails it only because the option holder may receive reasonable additional compensation for early termination; and (b) the fair value of the prepayment feature is insignificant when the entity initially recognises the financial asset. The ED also contains proposed amendments to 7 and 1 for cases where it is impracticable to assess whether the fair value of a prepayment feature was insignificant at initial recognition. Effective date, transition requirements and comment period The IASB is proposing an effective date of 1 January 2018 for the amendments with retrospective application. Specific transition provisions apply. The 30-day comment period ends on 24 May The issue of the final amendment is expected by the end of October Note The tight comment deadline was set in view of the narrowness of the scope of the proposed amendment and the urgency to resolve the issue to meet the proposed 1 January 2018 effective date. This date was set to align with the effective date of 9 to avoid preparers having to apply fair value accounting to financial assets containing such prepayment options and then having to change back to amortised cost once the proposed amendments become effective. Source:

6 ESMA publishes report on 6 17 Insurance contract On 10 April 2017, the European Securities and Markets Authority (ESMA) published a report on the enforcement and regulatory activities of accounting enforcers within the European Union (EU) in ESMA is an independent EU Authority that was established on 1 January ESMA s mission is to enhance the protection of investors and promote stable and well-functioning financial markets in the European Union (EU). ESMA and the accounting enforcers in the EU are regularly examining compliance of financial information provided by listed issuers on regulated markets with the applicable financial reporting framework (). In 2016, ESMA and European enforcers evaluated the level of compliance with on a sample of the interim and/or annual financial statements for 2015 of more than 1,200 issuers representing an average examination rate of 21% of all issuers with securities listed on regulated markets. These examinations resulted in 311 actions taken to address material departures from. As in 2015, the main deficiencies were identified in the areas of financial statements presentation, impairment of non-financial assets, and accounting for financial instruments. Furthermore, ESMA, together with European enforcers, identified a set of common enforcement priorities highlighting topics significant for European issuers when preparing their 2016 financial statements. ESMA included: the presentation of financial performance; the distinction between equity instruments and financial liabilities; and disclosures of the impact of the new standards issued by the IASB, but not yet mandatorily applicable ( 9 Financial Instruments, 15 Revenue from Contracts with Customers and 16 Leases). ESMA and European enforcers also urge issuers to provide disclosures on their exposure to risks arising from the UK s decision to leave the EU and its expected impacts and how management handles and plans to mitigate those risks. Please click to access the full report on the ESMA website. Source:

7 The IASB issued a new standard 17 Insurance contract 7 17 Insurance contract On 17 May 2017, the International Accounting Standards Board (IASB) published a new standard, 17 Insurance contracts. 17 supersedes 4 Insurance Contracts and related interpretations and is effective for periods beginning on or after 1 January 2021, with earlier adoption permitted if both 15 Revenue from Contracts with Customers and 9 Financial Instruments have also been applied. We will bring more information about the new standard in the next issue of the Accounting news.

8 EU Endorsement Process 8 17 Insurance contract The European Financial Reporting Advisory Group (EFRAG) updated its report showing the status of endorsement of each, including standards, interpretations, and amendments, most recently on 18 May As of 21 May 2017, the following IASB pronouncements are awaiting European Commission endorsement for use in the EU: Standards Amendments Amendments to 2 Classification and Measurement of Share-based Payment Transactions (issued in June 2016) Amendments to 4 Applying 9 Financial Instruments with 4 Insurance Contracts (issued in September 2016) Amendments to 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (issued in September 2014) Amendments to IAS 40 Transfers of Investment Property (issued in December 2016) Annual Improvements to Standards Cycle (issued in December 2016) Interpretation IFRIC 22 Foreign Currency Transactions and Advance Consideration (issued in December 2016) 14 Regulatory Deferral Accounts (issued in January 2014) - the European Commission has decided not to launch the endorsement process of this interim standard and to wait for the final standard 16 Leases (issued in January 2016) 17 Insurance contracts (issued in May 2017) Amendments to 15 Clarifications to 15 (issued in April 2016) Amendments to IAS 7 Disclosure Initiative (issued in January 2016) Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses (issued in January 2016) Click here for the Endorsement Status Report

9 Update of FASB, Topic Insurance contract The FASB has recently issued another Accounting Standards Update ASU , Scope of Modification Accounting. This Update, which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Current practice shows that there is a wide diversity in practice for now and the goal is to improve comparability of the financial information. Specifically, the ASU states that an entity would not apply modification accounting as per Topic 718 if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. For all entities, the ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, Early adoption is permitted.

10 Contact If you have any questions regarding any of the articles in this publication, please contact one of the following audit experts: 17 Insurance contract Czech Accounting Jarmila Rázková and Martin Tesař Soňa Plachá Gabriela Jindřišková Deloitte Advisory s.r.o. Nile House, Karolinská 654/2, Praha 8 - Karlín, Czech Republic Tel.: Subscribe to dreport and other newsletters and invitations here

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