Accounting News Deloitte Czech Republic. December 2017

Transcription

1 Accounting News Deloitte Czech Republic December 2017

2 Amendment to the Insolvency Act 2 An extensive amendment to the Insolvency Act and some other regulations took effect on 1 July In today s article, we will focus on changes, the knowledge of which may aid you if someone files an insolvency petition against your company or if you want to lodge the petition. The amendment to the Insolvency Act (Act No. 182/2006 Coll., hereinafter the IA ) was implemented by Act No. 64/2017 Coll. (hereinafter the Amendment ). The amendment has introduced noticeable changes for insolvency administrators, insolvency courts, debtors, creditors, as well as auditors, insolvency advisors and court-appointed experts. We will only focus on the two changes triggered by the amendment in the area of business insolvency that are linked to accounting and auditing. While the first change shall constitute a tool for the debtor s defence against creditor petitions, the latter one relates to creditor insolvency petitions. Assessing the Debtor s Insolvency With respect to assessing the debtor s insolvency, the amendment has introduced the so-called negative presumption of insolvency (Section 3 (3) of the IA) referred to as the coverage gap. The new provision has introduced a rebuttable assumption of the non-existence of cash-flow insolvency in the event that the difference between the amount of the debtor s financial liabilities falling due and the amount of its available resources is less than a tenth of its financial liabilities falling due, or if the coverage gap is to decrease in the foreseeable future as required. This provision aims to promptly assess as to whether the actual economic criteria of insolvency have been met or whether the debtor s situation is of a temporary nature, not necessarily resulting in insolvency. The statements of liquidity The so-called statements of liquidity (ie the liquidity statement and the liquidity development statement) have been introduced to demonstrate the required coverage gaps, establishing the presumption of the non-existence of cash-flow insolvency. The content and preparation of these statements is provided for in Regulation No. 190/2017 Coll. (hereinafter the Regulation ). The liquidity statements are submitted to the insolvency court by the debtor, but the persons authorised to prepare such statements are the statutory auditor, expert or a person engaged in economic advisory in the area of insolvency and restructuring (once again by an auditor or expert).

3 3 Statements of liquidity must be submitted no later than within 14 days from publishing the announcement of the commencement of insolvency proceedings. The liquidity statement is prepared as of the last day of the calendar month preceding the month in which the insolvency proceedings of the debtor were commenced. All supporting documents for preparing the statement are provided by the debtor who also prepares the interim financial statements (which do not have to be audited by an auditor). The Regulation sets forth the structure of the statement, requirements and manner of including assets and liabilities items as well as the course of action to be taken by preparer. If the liquidity statement indicates a coverage gap exceeding a tenth of the debtor s financial liabilities falling due, the debtor will have to submit another statement to the insolvency administrator, namely the liquidity development statement, presenting the short-term plan of the development of the debtor s current assets, short-term liabilities and cash flows. The liquidity development statement is prepared for a period of eight, or 12, weeks from the liquidity assessment date and submitted in the form of weekly overviews. The objective is to assess whether it may be expected that the coverage gap of the debtor s liabilities falling due is to decrease under the amount as equal to a tenth of such liabilities. Submitting statements of liquidity is thus an opportunity for debtors to defend themselves against unauthorised and frivolous petitions by creditors. Nevertheless, the 14-day deadline for preparing statements of liquidity may be rather problematic. Within this period, the debtor needs to contact the preparer (an auditor/ expert) who must decide whether or not he will accept the engagement and, subsequently, the interim financial statements and the statement(s) of liquidity must be prepared. From the auditor s/expert s viewpoint, it is an extremely demanding and risky engagement. The auditor/expert as the preparer of statements of liquidity will be held responsible (or jointly responsible) for the accuracy and completeness of data used in the preparation of the statements. Statements of liquidity serve as evidence in court proceedings in progress that are often complicated and challenged by all participants as far as insolvency is concerned.

4 4 The Regulation was formulated with the assumption that statements of liquidity will be primarily prepared by the existing auditors of debtors as they have an in-depth knowledge and understanding of their clients. Nevertheless, this may pose an ethical issue in practice; the auditor s independence would be jeopardised if the auditor prepared statements of liquidity for the client and, subsequently, were to issue an audit report commenting on material uncertainty regarding the company s going concern. Creditor insolvency petitions The amendment also introduced a wide range of changes regarding creditor insolvency petitions. In terms of accounting, the amended Section 105 of the Insolvency Act seems to be interesting. In case an insolvency petition is filed by a creditor, such creditor will have to demonstrate a receivable from the debtor falling due. If the debtor is a legal entity, the creditor filing the petition and maintaining accounting and tax records will have to prove the existence of the receivable in one of the below-listed manners: By the acknowledgment of the debtor using an authorised signature; By an enforceable decision; By a notarial deed to the enforcement of which a consent has been granted; By an executionary deed to the enforcement of which a consent has been granted; and By a confirmation of the auditor, court-appointed expert or tax advisor that the receivable in question is accounted for by the proposer. In their confirmation issued for the proposing creditor, the auditor, courtappointed expert or tax advisor may only comment on whether or not the receivable is accounted for by the creditor. This provision aims to prevent creditors from filing insolvency petitions arising from off-balance sheet or fictitious receivables. The court is also authorised to impose a penalty on the unsuccessful proposer up to the new amount of CZK 500 thousand. A new procedural phase has also been introduced, the so-called preliminary assessment of the creditor insolvency petition by the insolvency court. If the insolvency judge has any doubt as regards the creditor insolvency petition s credibility, they will not publish the petition in the insolvency register and may reject it as apparently groundless within seven days, in which case the petition will not be published in the insolvency register at all.

5 5 These new provisions of the IA are intended to prevent lodging frivolous insolvency petitions. For the sake of completeness, set out below is a list of some other significant changes introduced by the amendment to the IA: Changes in registering and assigning receivables; Changes in appointing an insolvency administrator; Changes in the regulation of creditors voting rights; Increasing computerisation in insolvency proceedings; Opportunity to recover collateral with respect to contingent and future receivables; Sale of assets by a licensed enforcement agent; and Changes in discharge from debts by performance. In conclusion, let us wish you all the best that you never become a party, as either a claimant or defendant, to any insolvency proceedings.

6 Invitation to a Seminar 6 News in Czech Accounting Prague, Ostrava, Pilsen We would like to invite you to Deloitte s traditional autumn seminar focusing on the possible obstacles in preparing financial statements. The seminar will comprise practical examples and tips in the areas where, as advisors and auditors, we come across the most findings. Furthermore, we will discuss the changes to the Accounting Act which have been brought about by the amendments effective as of 1 January As the tradition goes, the programme will also include new tax developments and their 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 most recent tax and legal developments. The seminar is not intended for the employees of companies engaged in accounting advisory. Seminars will be held in Czech in November and December in Prague, Brno, Ostrava, Pilsen and Hradec Kralove and will be delivered by our professionals. Dates Prague: 6 December 2017 Ostrava: 5 December 2017 Pilsen: 13 December 2017 More information on:

7 16 endorsed for use in the EU 7 On 31 October 2017, 16 Leases was endorsed by the European Commission for use in the European Union. 16 is the IASB s replacement of IAS 17 Leases and related interpretations. The EU effective date is the same as the IASB s effective date (annual periods beginning on or after 1 January 2019). Earlier adoption of 16 is permitted if 15 Revenue from Contracts with Customers has also been applied. Practical implications of the adoption of the new standard were described in detail in the Accounting News in April In today s article, we will summarise key changes arising from 16. The new standard provides a comprehensive model for the identification of lease arrangements and their treatment in the financial statements of both lessees and lessors. the majority of contracts, the classification under the new Standard as either a lease or a service contract may not be different to the classification under the IAS 17 risks and rewards model, divergence may emerge in some cases. Importantly, both lessors and lessees are entitled to grandfather assessments regarding whether a contract existing at the date of initial application of 16 contains a lease so that entities are not required to incur the costs of detailed reassessments. 16 was issued in January We informed in detail about the new standard in the Accounting News in March 2016, where we focused on the history of the leases project and the most significant requirements of the new standard, namely its scope, definition of leases, treatment of leases in the financial statements of both the lessee and the lessor, effective date of the standard and its transitory provisions. 16 sets out a comprehensive model for the identification of lease arrangements and their treatment in the financial statements of both lessees and lessors. 16 applies a control model for the identification of leases, distinguishing between leases and service contracts on the basis of whether there is an identified asset controlled by the customer. While, for One of the most notable aspects of 16 is that the lessee and lessor accounting models are asymmetrical. While the IASB has retained IAS 17 s finance lease/operating lease distinction for lessors (and carried into 16 the related requirements virtually intact), the distinction is no longer relevant for lessees.

8 8 Accounting model for the lessors For lessors, the changes introduced by 16 are not significant and, except in respect of subleases, a lessor is not required to make any adjustments on transition for leases in which it is a lessor. Additional requirements have been introduced for subleases and lease modifications, and lessor disclosure requirements have been expanded. Accounting model for the lessees For lessees, the picture is fundamentally different and 16 can be expected to have a significant impact, particularly for entities that have previously kept a large proportion of their financing off-balance sheet in the form of operating leases. This operating lease-style accounting treatment is no longer available, except for shortterm leases (lease term of 12 months or less) and leases of low-value assets ( low value is not specifically defined but the IASB has indicated that it has in mind assets with a value, when new, in the order of magnitude of US$5,000 or less). All other leases within the scope of 16 are required to be brought on-balance sheet by lessees recognising a right-ofuse asset and the related lease liability at commencement of the lease, with subsequent accounting generally similar to the finance lease model under IAS 17. Effect on a lessee s financial statements How these new requirements affect a lessee s financial statements will obviously depend on the mix of lease agreements in place, and also on which of the Standard s exceptions and practical expedients are applied. However, the expectation for lessees will be: an increase in recognised assets and liabilities (right-of-use assets and liabilities recognised other than for short-term leases and leases of low-value assets); more lease expenses recognised in the early periods of a lease, and less in the later periods ( front-loaded finance charge on lease liability versus straight-line expense under IAS 17 s operating lease approach); a shift in lease expense classification from operating expenses to financing costs and amortisation (i.e. moving below metrics such as operating profit, EBITDA or EBIT). There are some exceptions: any variable lease payments not included in the initial measurement of the lease liability are classified as operating expenses, as are the expenses associated with shortterm and low-value asset leases for which recognition exemptions are applied; and

9 9 for entities that present cash flows related to interest on leases as financing flows, a shift of the payments previously associated with operating leases to the financing category (unless they change their policy regarding presentation of interest cash flows). Cash from operations and financing activity outflows will both increase for these entities. A number of aspects of the application of 16 will require the exercise of judgement particularly in respect of the definition of a lease and the assessment of the lease term. Entities will also need to take time to consider whether to avail of practical expedients and recognition exemptions (including, in particular, reliefs available on transition). Business considerations In addition, there are important business considerations including: whether changes are needed to systems and processes (e.g. to track leases individually or at a portfolio level, or to accumulate the information needed for disclosures); any potential tax impacts (if the treatment of a lease for tax purposes is based on its treatment in the financial statements); and the impact of changes in the amounts reported on key metrics, debt covenants and management compensation. How can we be of assistance to you with respect to the new standard 16? 16 introduces major changes in classifying and reporting leases namely in relation to lessees. In this regard, Deloitte offers the following: Further dreport articles covering the topic; Publications in English available on www. iasplus.com; Consultation with Deloitte experts regarding the specific impacts of 16 on your reporting entity; Assistance in implementing the requirements set out by the new standard; and Autumn and spring seminars on 16. To learn more about our advisory services, please contact Lenka Neuvirtová (lneuvirtova@deloittece.com). Sources:

10 European Union adopted four amendments 10 At the end of October 2017, the European Commission endorsed several amendments for use in the European Union. All of them were published in the Official Journal of EU on 9 November The following amendments to the existing standards have been endorsed: Amendments Published Subject of the amendments Effective date For more information by the IASB in the EU see the Accounting News from IAS 12 in January 2016 Clarify how to account for deferred tax assets for 1 January 2017 February 2016 Recognition of unrealised losses on debt instruments measured at Deferred Tax Assets fair value. for Unrealised Losses The amendments consist of some clarifying paragraphs and an illustrating example. IAS 7 in January 2016 The amendments require an entity to provide 1 January 2017 March 2016 Disclosure Initiative disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non cash changes.

11 11 Amendments Published by the IASB Subject of the amendments Effective date in the EU For more information see the Accounting News from 15 Clarifications to 15 Revenue in April 2016 The amendments do not change the underlying principles of the Standard but clarify how those principles should be applied. 1 January 2018 May 2016 from Contracts with Customers Amendments address three topics (identifying performance obligations, principal versus agent considerations and licensing) and provide some transition relief for modified contracts and completed contracts. 4 in September 2016 The amendments provide two options for entities 1 January 2018 October 2016 Applying that issue insurance contracts within the scope 9 Financial of 4: the so-called overlay approach and the Instruments with so-called deferral approach. The application of both 4 Insurance approaches is optional. Contracts The European Union effective date is the same as the IASB in case of all pronouncements. However, the text adopted for the 4 amendments includes a top up that allows a financial conglomerate to elect that none of its entities operating in the insurance sector apply 9 in the consolidated financial statements for financial years the commencement of which precedes 1 January 2021 where certain conditions are met.

12 EU Endorsement Process 12 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 10 November As of 27 November 2017, the following IASB pronouncements are awaiting European Commission endorsement for use in the EU: Standards 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 17 Insurance contracts (issued in May 2017) Amendments Amendments to 2 Classification and Measurement of Share-based Payment Transactions (issued in June 2016) Amendments to 9 Prepayment Features with Negative Compensation (issued in October 2017) 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 28 Long-term Interests in Associates and Joint Ventures (issued in October 2017) 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) IFRIC 23 Uncertainty over Income Tax Treatments (issued in June 2017) Click here for the Endorsement Status Report.

13 Deloitte s new publications 13 We are proud to share with you the updates on the new publications issued by Deloitte. As you may have noticed, Deloitte is very active in publishing numerous publications covering various accounting and presentation areas of. In the past few months there have been several new publications published and are now available at en-us/tag-types/united-states/roadmapseries. The series of Roadmaps publications from 2017 now offers to readers the following topics: Roadmap to accounting for shared-based payment awards Roadmap to non-gaap financial measures Roadmap to segment reporting Roadmap to accounting for assets acquisitions Roadmap to applying the new revenue recognition standard Roadmap to consolidation Roadmap to distinguishing liabilities from equity Roadmap to foreign currency transactions and translations Roadmap to accounting for noncontrolling interest Roadmap to the preparation of the statement of cash flows Roadmap to accounting for income taxes Roadmap to accounting for contracts on an entity s own equity In case you look for any of the topics listed above, you will certainly find our publication useful as it contains references to the codification, various examples as well as an executive summary of individual sections. While the publications are not intended to supplement the judgements and assumptions made by the company neither are they intended to supplement consultations of Deloitte specialists on specific and complex matters, they may certainly support you in your accounting and reporting considerations.

14 Contact Should you have any questions regarding the matters outlined in this publication, please reach out to your contact person from Deloitte s Audit function, Deloitte s technical desk at CZ_TechnicalDesk@deloittece.com or one of the following specialists: Czech Accounting Jarmila Rázková jrazkova@deloittece.com and Martin Tesař mtesar@deloittece.com Soňa Plachá splacha@deloittece.com Gabriela Jindřišková gjindriskova@deloittece.com 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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