June Deloitte Czech Republic. Accounting news Czech Accounting, IFRS and US GAAP. Tax news Direct, indirect and other taxation

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1 Accounting news Czech Accounting, IFRS and US GAAP Tax news Direct, indirect and other taxation Legal news Newly proposed legislative changes Grants & Incentives news News from Grants and incentives area Deloitte Czech Republic

2 Accounting news Czech Accounting New Interpretation of the National Accounting Council on Determining the Moment Tangible Fixed Assets are Brought into Use IFRS IFRS Tips New IFRS Publication by Deloitte IFRS EU Endorsement Process Accounting news Deloitte Czech Republic US GAAP What are the key differences in the area of Contingencies between U.S. GAAP and IFRSs

3 Accounting news New Interpretation of the National Accounting Council on Determining the Moment Tangible Fixed Assets are Brought into Use Czech Accounting New Interpretation of the National Accounting Council on Determining the Moment Tangible Fixed Assets are Brought into Use IFRS IFRS Tips New IFRS Publication by Deloitte IFRS EU Endorsement Process US GAAP What are the key differences in the area of Contingencies between U.S. GAAP and IFRSs About the National Accounting Council The National Accounting Council (the NAC ) is an independent specialist institution promoting professional competencies and ethics in the development of the accounting professions and in respect of the accounting and financing methods. Its members include representatives of significant professional organisations (Czech Chamber of Auditors, Czech Chamber of Tax Advisors, Accountants Union) and academia (University of Economics). Its primary mission is to cooperate with the Ministry of Finance, and governmental, legislative and other institutions in drafting legislation and related norms focused on accounting, and to create, update, publish and distribute Czech Accounting Standards and interpretations of the National Accounting Council. Interpretations of the National Accounting Council Interpretations express the expert opinions of the National Accounting Council on the practical application of Czech accounting rules. Interpretations are not legally binding. Their aim is to contribute to forming optimal and unified accounting and reporting procedures. They namely concern issues that are not addressed by Czech accounting regulations or not addressed sufficiently, and areas that the accounting practice does not treat in a unified way. One of the areas on which the NAC s interpretations frequently focus are fixed assets. As of today, the following interpretations directly related to fixed assets have been published: I-5 Determination of the moment at which to commence accounting for related costs associated with the acquisition of fixed assets; I-26 Discounts on the acquisition cost of tangible fixed assets in the following reporting period subsequent to their release into use (on the acquirer s side); I-27 Subsequent acquisition of a subsidy for fixed assets; I-28 Subsequent refund of a subsidy for fixed assets; and I-33 Determination of the moment tangible fixed assets are brought into use. We discussed the I-26 interpretation in the September 2013 issue of the Accounting News, while the I-27 and I-28 interpretations were discussed in the October 2014 issue of the Accounting News. Today s issue of the Accounting News will briefly summarise the main points of the interpretations discussing the determination of the moment asset acquisition is commenced (Interpretation I-5) and the determination of the moment asset acquisition is concluded and the asset is brought into use (I-33). The correct determination of the period during which a tangible fixed asset is in the acquisition phase is vital for correctly determining the acquisition cost of the asset in bringing it into use. I-5 Determination of the moment at which to commence accounting for related costs associated with the acquisition of fixed assets The interpretation was issued back in 2006, defining the moment from which items become part of the valuation of fixed assets as the moment when the reporting entity decides to deal with an issue in hand by making a new investment. 2

4 Accounting news Czech Accounting New Interpretation of the National Accounting Council on Determining the Moment Tangible Fixed Assets are Brought into Use IFRS IFRS Tips New IFRS Publication by Deloitte IFRS EU Endorsement Process US GAAP What are the key differences in the area of Contingencies between U.S. GAAP and IFRSs According to the Interpretation, the following may serve as evidence: Minutes taken during the meeting of the Board of Directors; A written decision of the Company s statutory executive on commencing work related to the acquisition of the investment; and The date stated in the written project documentation. All the costs that relate, on an accrual basis, to the moment a decision to make an investment is passed will constitute operating costs, particularly the costs incurred on: Determining the concept; Marketing; Market research; A selection procedure or a tender; and Disposal of a structure (without a direct relation to the decision to start a new construction project). Costs incurred by the reporting entity subsequent to the determination of the moment from which items are part of the valuation of fixed assets ie after an aim which is to be named and defined in the decision has been set will constitute related costs incurred on the acquisition of fixed assets. The reporting entity will recognise them in the costing account of accounting group 04 Acquisition of fixed assets. The examples of related costs incurred on the acquisition of fixed assets are stated in Section 47 of Regulation No. 500/2002 Coll., for reporting entities that are businesses maintaining double-entry accounting records ( Regulation No. 500/2002 Coll. ). I-33 Determination of the moment tangible fixed assets are brought into use The interpretation was published in January 2016 in response to the fact that the accounting regulations provide ambiguous guidance as to the determination of the moment fixed assets are brought into use. The new I-33 Interpretation partially substitutes the revoked I-6 Interpretation Fulfilment of conditions for bringing tangible fixed assets into use. The correct determination of the moment fixed assets are brought into use tends to be more complicated namely in relation of technology- or financeintensive investments. The moment of bringing fixed assets into use is governed by Regulation No. 500/2002 Coll. Pursuant to Section 7 (11), by putting the assets under acquisition into a state in which they are eligible for use, which means completing the asset and fulfilling the technical functions and requirements set forth by special legal regulations for use (eligibility for operation), the assets become tangible fixed assets. A similar procedure is adopted in respect of technical improvements. This provision is not to be used in relation to acquired assets which had been put into a state in which they are eligible for use prior to acquisition and which do not require assembly on the part of the acquirer. The new interpretation provides an accounting treatment for determining the moment tangible fixed assets are put into use if the completion of the asset differs from the moment a legal certificate of the eligibility of the asset for operation is awarded and arrives at the following conclusions: a) If putting the acquired asset into use is conditioned by the issue of a certificate by a relevant public institution, the economic finalisation of 3

5 Accounting news Czech Accounting New Interpretation of the National Accounting Council on Determining the Moment Tangible Fixed Assets are Brought into Use IFRS IFRS Tips New IFRS Publication by Deloitte IFRS EU Endorsement Process US GAAP What are the key differences in the area of Contingencies between U.S. GAAP and IFRSs the asset is dependent on the legal status of the asset and the reporting entity is to put the asset into use as of the date on which the certificate of the eligibility for operation became effective; b) If the certificate of the eligibility for operation is in the form of a subsequent or a conditionally subsequent certificate, and the statement on the fulfilment of all the conditions and the asset may be used prior to the issue of the certificate, the reporting entity is to put the asset into use as of the date on which the asset was put into the state in which it could be used for the intended purpose; c) If the certificate of the eligibility for operation is acquired prior to the asset being finalised in economic terms, the reporting entity is to put the asset into use as of the moment at which the asset is in a state in which it can be used for the intended purpose. The reporting entity will put the asset into use as of the moment the conditions for the eligibility for operation are fulfilled, whereby the conditions relate to the main functional characteristics of the asset under acquisition in compliance with clause (a) or (b) depending on the nature of the certificate of the eligibility for operation. If the receipt of the certificate of the eligibility for operation is in the form of several steps that are successive in terms of time, the reporting entity is to assess whether the provisions of clauses (a) or (b) relate to the given step. In assessing whether all the conditions for obtaining a certificate of eligibility for the operation of the asset under acquisition are met, the reporting entity is to take into account all the available information, ie: a) Internal information on fulfilling all the conditions set forth by legal regulations and to be assessed by the relevant authority; and b) The results of the continuous phases of the approval process and potential partial statements of the affected bodies. The interpretation also contains the definition of a finalisation of an asset which is used but not defined in Section 7 (11) of Regulation No. 500/2002 Coll. (see the above text in italics). According to the Interpretation, the finalisation of an asset includes putting the asset in the place and state in which the asset is able to continuously generate income in the manner intended by the reporting entity. The interpretation also contains four illustrative cases. For the full text of both interpretations, visit the website of the National Accounting Council Source: 4

6 Accounting news IFRS Tips Czech Accounting New Interpretation of the National Accounting Council on Determining the Moment Tangible Fixed Assets are Brought into Use IFRS IFRS Tips New IFRS Publication by Deloitte IFRS EU Endorsement Process US GAAP What are the key differences in the area of Contingencies between U.S. GAAP and IFRSs This issue will focus on the questions of our clients regarding IAS 1 Presentation of Financial Statements. Questions relating to this standard are quite frequent as it is one of the core standards applied by all entities. This Standard prescribes the basis for presentation of general purpose financial statements, sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. Below is a list of selected questions and answers. Presentation in the Statement of Financial Position of Cash and Cash Equivalents Question IAS 1.54(i) requires the presentation of a separate line item in the statement of financial position for cash and cash equivalents. Should this line item correspond to cash and cash equivalents as defined in IAS 7 Statement of Cash Flows? Answer Not necessarily. IAS 7.45 acknowledges this fact by requiring entities to present a reconciliation of the amounts of cash and cash equivalents in their cash flow statements with the equivalent items reported in the statement of financial position. IAS 7.8 states that bank overdrafts repayable on demand may be classified as a component of cash and cash equivalents for the purposes of the statement of cash flows when they form an integral part of an entity s cash management. IAS 7.8 notes that a characteristic of such banking arrangements is that the balance often fluctuates from being positive to overdrawn. Even where such overdrafts are classified as a component of cash and cash equivalents under IAS 7, it will not generally be appropriate for them to be netted against cash and cash equivalent assets for the purposes of presenting the cash and cash equivalents line item in the statement of financial position. Such overdrafts should be netted against positive cash balances only when the more restrictive offset criteria in paragraph 42 of IAS 32 Financial Instruments: Presentation are met. When the amounts presented for cash and cash equivalents in the statements of financial position and cash flows are different, entities may wish to consider using different descriptions so as to avoid confusion. For example, the amount presented in the statement of financial position could be described as cash and bank balances. IAS 1.57 permits the use of alternative descriptions in this manner. However, even where different descriptions are used in the two statements, the requirement to present a reconciliation under IAS 7.45 (see above) applies. Disclosure required for Deferred Tax under IAS 1.61 Background IAS 1.60 requires that an entity shall present current and non-current assets, and current and non-current liabilities, as separate classifications in its statement of financial position in accordance with paragraphs except when a presentation based on liquidity provides information that is reliable and more relevant. Classification by liquidity is predominantly applied by banks. In addition, IAS 1.61 requires that whichever method of presentation is adopted, an entity shall disclose the amount expected to be recovered or settled after more than twelve months for each asset and liability line item that combines amounts expected to be recovered or settled: 5

7 Accounting news Czech Accounting New Interpretation of the National Accounting Council on Determining the Moment Tangible Fixed Assets are Brought into Use IFRS IFRS Tips New IFRS Publication by Deloitte IFRS EU Endorsement Process US GAAP What are the key differences in the area of Contingencies between U.S. GAAP and IFRSs a) no more than twelve months after the reporting period, and b) more than twelve months after the reporting period. The length of the entity s operating cycle is assumed to be twelve months. Question Should an entity disclose the amount of deferred tax assets (liabilities) that are expected to be recovered (settled) within twelve months after the reporting period? Answer No. IAS 1.56 requires that deferred tax assets (liabilities) should not be classified as current assets (liabilities) even when the entity presents current and non-current assets and current and non-current liabilities as separate classifications. Given that the Standard does not require deferred tax assets (liabilities) to be analysed as current, it follows that the additional disclosure in IAS 1.61 is not required for deferred tax balances because this would otherwise negate the relief provided in IAS 1.56 (although such information may be presented if the entity wishes to do so). Entity has no items of Other Comprehensive Income Question When an entity has no items of other comprehensive income to recognise in either the current or the comparative reporting period, how should the statement of comprehensive income be presented? Note: This question is relatively frequent as Czech accounting legislation has no equivalent of the statement of comprehensive income which includes components of profit or loss and components of other comprehensive income. Items of other comprehensive income usually include: changes in revaluation surplus of property, plants and equipment or intangible assets; gains and losses arising from translating the financial statements of a foreign operation; gains and losses on remeasuring available-for-sale financial assets; the effective portion of gains and losses on hedging instruments in a cash flow hedge. Answer In the absence of explicit guidance in IAS 1, the following treatments, among others, are acceptable: presentation of a statement of profit or loss ending with profit for the year, followed by a narrative statement to the effect that there were no items of comprehensive income in the current or prior year other than the profit for the year and, accordingly, no statement of comprehensive income is presented; or presentation of a single statement of comprehensive income ending with a total line for profit for the year and total comprehensive income. Classification of Exchange Gains and Losses in Profit or Loss Question How should an entity classify foreign exchange gains and losses in profit or loss? Answer Paragraph 52(a) of IAS 21 The Effects of Changes in Foreign Exchange Rates requires an entity to disclose the amount of exchange differences recognised in profit or loss except for those arising on financial instruments measured at fair value through profit or loss in accordance with IFRS 9 Financial Instruments (or, prior to the adoption of IFRS 9, IAS 39 Financial Instruments: Recognition and Measurement). 6

8 Accounting news Czech Accounting New Interpretation of the National Accounting Council on Determining the Moment Tangible Fixed Assets are Brought into Use IFRS IFRS Tips New IFRS Publication by Deloitte IFRS EU Endorsement Process US GAAP What are the key differences in the area of Contingencies between U.S. GAAP and IFRSs IAS 21 is silent regarding the appropriate classification in profit or loss of foreign exchange gains and losses. Foreign exchange gains and losses should be classified based on the nature of the transactions or events that give rise to those foreign exchange gains or losses. For example, it may be appropriate to record foreign currency gains and losses on operational items (trade receivables, payables, etc.) within income from operations and foreign exchange gains and losses on issued debt as part of finance costs (but not within interest costs). Classification of foreign exchange gains or losses in profit or loss is a matter of accounting policy that must be disclosed and applied consistently yearon-year. In addition, when the impact of foreign exchange gains or losses is material, in accordance with IAS 1.97, the nature and amount of the gains and losses should be disclosed separately, either in the statement of comprehensive income or in the notes. Therefore, for example, when an entity classifies foreign exchange gains or losses on operating items within income from operations, and the impact of these is material, the entity may elect to present foreign exchange gains and losses on operating items as a separate line item within income from operations. Please note that under IAS 23 Borrowing Costs foreign exchange rate differences arising from foreign currency loans are included in borrowing costs that (if they are directly attributable to the acquisition, construction or production of a qualifying asset) are capitalised as part of the cost of that asset. The capitalisation of foreign exchange rate differences is not allowed by the Czech accounting legislation. Disclosures required when Events or Conditions cast Significant Doubt over the Entity s Ability to continue as a Going Concern Background In the course of preparing its financial statements, Entity A considers (as required by IAS 1.25) whether events or conditions exist that cast significant doubt upon its ability to continue as a going concern. Management s initial assessment indicates that such conditions may exist. However, after detailed consideration of the extent of the risk and of the feasibility and effectiveness of Entity A s planned mitigation, it is concluded that no material uncertainty exists related to these conditions that requires disclosure in accordance with IAS Reaching this conclusion involves the application of significant judgement on the part of management and those charged with governance. IAS requires an entity to disclose the judgements made in applying its accounting policies and that have the most significant effect on the amounts recognised in the financial statements. Question Should Entity A disclose the significant judgement applied in concluding that no material uncertainty exists that requires disclosure under IAS 1.25? Answer Yes. As reported in the July 2014 IFRIC Update (which summarizes the tentative decisions reached by the IFRS Interpretations Committee in its public meetings), the IFRS Interpretations Committee concluded that the requirements of IAS apply to the judgements made in concluding that there remain no material uncertainties related to events or conditions that may cast significant doubt upon the entity s ability to continue as a going concern. While, in the circumstances described, Entity A has concluded that there are no material uncertainties of this nature, the process of reaching that conclusion required the exercise of significant judgement. The going concern assumption can significantly affect the amounts recognised in the financial statements and, as such, the requirements of IAS must be applied. The disclosure requirements of IAS 1 in relation to the use of the going concern assumption are summarised in the decision tree below. 7

9 Accounting news Czech Accounting New Interpretation of the National Accounting Council on Determining the Moment Tangible Fixed Assets are Brought into Use IFRS IFRS Tips New IFRS Publication by Deloitte IFRS EU Endorsement Process US GAAP What are the key differences in the area of Contingencies between U.S. GAAP and IFRSs Prepare financial statements on a basis other than going concern. Disclose that fact, the basis of preparation used, and the reason why the entity is not regarded as a going concern (IAS 1.25) Does management intend to liquidate the entity or to cease trading, or does it have no realistic alternative but to do so? (IAS 1.25) Yes Disclose uncertainties (IAS 1.25) Do material uncertainties exist that may cast significant doubt upon the entity s ability to continue as a going concern? (IAS 1.25) Yes No Prepare financial statements on a going concern basis (IAS 1.25) Was significant judgement required to reach that conclusion? Yes No No 8 Disclose significant judgements made (IAS 1.122) No disclosure reguired under IAS 1 In addition to the requirements detailed above, entities should also consider any requirements of law or regulation in their jurisdiction to disclose details of risks relating to their ability to continue as a going concern. Reference: IFRIC Update, July 2014

10 Accounting news New IFRS Publication by Deloitte Czech Accounting New Interpretation of the National Accounting Council on Determining the Moment Tangible Fixed Assets are Brought into Use IFRS IFRS Tips New IFRS Publication by Deloitte IFRS EU Endorsement Process US GAAP What are the key differences in the area of Contingencies between U.S. GAAP and IFRSs Deloitte s igaap 2016 A Guide to IFRS Reporting In May 2016, Deloitte published igaap 2016 A Guide to IFRS Reporting. This book sets out comprehensive guidance by: (1) Focusing on the practical issues faced by reporting entities; (2) Explaining clearly the requirements of IFRSs; (3) Adding interpretation and commentary when IFRSs are silent, ambiguous or unclear; and (4) Providing many illustrative examples. The new material includes: Updated guidance on applying IFRS 15 Revenue from Contracts with Customers; and New requirements of IFRS 9 Financial Instruments, effective from 1 January The titles are available in print books, ebooks, or online. They can be purchased as a pack or as individual volumes: Volume A: A guide to IFRS reporting This two-part volume covers all IFRSs other than those dealing exclusively with financial instruments. Volume B: Financial Instruments IFRS 9 and related Standards This volume provides guidance on the application of the complex IFRSs dealing with financial instruments for entities that have adopted, or are planning to adopt, IFRS 9 Financial Instruments. Volume C: Financial Instruments IAS 39 and related Standards This volume provides guidance on the application of the complex IFRSs dealing with financial instruments for entities that have not yet adopted IFRS 9 Financial Instruments. Volume D: IFRS disclosures in practice This new volume, sourced from IFRS accounts from around the world, covers many different areas of the Standards providing real-life examples of good disclosure practice. It is available as an ebook only. More information on the Deloitte manuals and details of how to order can be found here. 9

11 Accounting news IFRS EU Endorsement Process Czech Accounting 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 17 May Amendments Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (issued in September 2014) New Interpretation of the National Accounting Council on Determining the Moment Tangible Fixed Assets are Brought into Use IFRS IFRS Tips New IFRS Publication by Deloitte IFRS EU Endorsement Process As of 24 May 2016, the following IASB pronouncements are awaiting European Commission endorsement for use in the EU: Standards IFRS 9 Financial Instruments (issued in July 2014) IFRS 15 Revenue from Contracts with Customers (issued in May 2014) IFRS 16 Leases (issued in January 2016) Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception (issued in December 2014) Amendments to IFRS 15 Clarifications to IFRS 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 10 US GAAP What are the key differences in the area of Contingencies between U.S. GAAP and IFRSs

12 Accounting news What are the key differences in the area of Contingencies between U.S. GAAP and IFRSs Czech Accounting New Interpretation of the National Accounting Council on Determining the Moment Tangible Fixed Assets are Brought into Use IFRS IFRS Tips New IFRS Publication by Deloitte IFRS EU Endorsement Process US GAAP What are the key differences in the area of Contingencies between U.S. GAAP and IFRSs Under U.S. GAAP, the guidance on contingencies is primarily contained in ASC 450 and ASC 460. Entities reporting based on IFRS will follow IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Difference in area U.S. GAAP IFRSs Below you will find a summary of key differences with further explanation of the differences: Scope ASC 450 applies to asset impairments. IAS 37 does not apply to asset impairments. Terminology Recognition of contingent losses/provisions Measurement of contingent losses/ provisions range of estimates Measurement of contingent losses/provisions discounting Defines 3 categories: Estimated loss accrued for a loss contingency (i.e., a contingent loss that is recognized as a liability). Contingent loss that is not recognized as a liability. Contingent gain. One of the conditions for loss accrual is that it is probable that (1) an asset has been impaired or (2) a liability has been incurred. "Probable" is defined as likely, which is a higher threshold than "more likely than not." If no amount in the range is more likely than any other amount in the range, the minimum amount in the range is used to measure the amount to be accrued for a loss contingency. Discounting is permitted only when the timing of related cash flows is fixed or reliably determinable. Defines following 3 categories: Provision. Contingent liability. Contingent asset. One of the conditions for recognizing a provision (as a liability) is that it is probable that an outflow of resources will be required to settle the obligation. "Probable" is defined as more likely than not. If no amount in the range is more likely than any other amount in the range, the midpoint of the range is used to measure the liability. Discounting is required if the effect of discounting is material. 11

13 Accounting news Czech Accounting New Interpretation of the National Accounting Council on Determining the Moment Tangible Fixed Assets are Brought into Use IFRS IFRS Tips New IFRS Publication by Deloitte IFRS EU Endorsement Process US GAAP What are the key differences in the area of Contingencies between U.S. GAAP and IFRSs Difference in area U.S. GAAP IFRSs Recoveries of contingent losses (reimbursements) Onerous contracts Disclosure of prejudicial information Gain contingencies (U.S. GAAP) versus contingent assets (IFRSs) Gain contingencies related to the recovery of contingent losses are recognized when recovery is deemed probable. 1) Losses on firmly committed onerous contracts are usually not recognized. Exemptions from disclosure of information that may be prejudicial to an entity are not permitted. When realization of a gain contingency is assured beyond a reasonable doubt, recognition is appropriate. 1) Expected reimbursement by other parties is recognized only when it is virtually certain that the reimbursement will be received. 1) If an entity has a contract that is onerous (e.g., an operating lease), the present obligation under the contract should be recognized as a liability. In extremely rare cases, if disclosure of certain information could prejudice the position of the entity in a dispute with other parties, that information does not need to be disclosed. However, an entity must disclose the nature of the dispute, along with the reason why the information has not been disclosed. When realization of a contingent asset is virtually certain, recognition is appropriate. 1) 1) While the guidance on this issue is worded differently under IFRSs and U.S. GAAP, the guidance under both sets of standards may be applied similarly so that no difference arises in practice. 12 Scope Under U.S. GAAP, the accounting requirements for contingencies in ASC apply to impairment of assets for example, assessing the collectibility of receivables or the risk of loss or damage of the entity s property (see, for instance, ASC and ASC ). Under IFRSs, the accounting requirements for contingencies in IAS 37 do not address impairment or other adjustments to the carrying amounts of recognized assets (see paragraph 7 of IAS 37). IAS 36 Impairment of Assets and IAS 39 Financial Instruments: Recognition and Measurement contain guidance on asset impairment. Recognition of Contingent Losses/Provisions Under U.S. GAAP, one of the conditions that must be met before an entity can accrue an estimated loss from a loss contingency is that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements that is, it must be probable that one or more future events will occur confirming the fact of the loss (ASC (a)). Under IFRSs, one of the conditions for recognizing a provision as a liability is that it is probable that an outflow of resources... will be required to settle the obligation (paragraph 14 of IAS 37).

14 Accounting news Czech Accounting New Interpretation of the National Accounting Council on Determining the Moment Tangible Fixed Assets are Brought into Use IFRS IFRS Tips New IFRS Publication by Deloitte IFRS EU Endorsement Process US GAAP What are the key differences in the area of Contingencies between U.S. GAAP and IFRSs A key difference between U.S. GAAP and IFRSs in applying the above conditions lies in the definition of probable. Paragraph 23 of IAS 37 defines probable as more likely than not to occur (i.e., the probability that the event will occur is greater than the probability that it will not ). ASC defines probable as likely to occur. While the assessment of these terms is subject to an entity s judgment, likely under U.S. GAAP typically is considered a much higher threshold (i.e., approximately 80 percent) than more likely than not under IFRSs (i.e., greater than 50 percent). Therefore, more contingencies may qualify for recognition as liabilities under IFRSs than under U.S. GAAP. Measurement of Contingent Losses/Provisions Range of Estimates Under both U.S. GAAP and IFRSs, the amount recorded as a loss contingency or provision should be the best estimate of the expenditure required to settle the obligation. If the best estimate of the expenditure is a range, and if one amount in that range represents a better estimate than any other amount within the range, that amount should be recorded (ASC and paragraph 36 of IAS 37). Under U.S. GAAP, if no amount in the range is a better estimate than any other amount, an entity should use the minimum amount in the range for recording the liability (ASC ). In contrast, under IFRSs, if no amount in the range is a better estimate than any other amount, an entity should use the midpoint of the range for recording the liability (paragraph 39 of IAS 37). If the obligation involves a large population of items, an entity should estimate the liability by weighting all possible outcomes by their associated probabilities (i.e., the probability-weighted expected value is used to measure the liability). Onerous Contracts Under U.S. GAAP, losses on firmly committed executory contracts (e.g., purchase, sale, or operating lease contracts) typically are not recognized. Under IFRSs, an entity is required to recognize and measure the present obligation under an onerous contract as a provision (paragraphs of IAS 37). An onerous contract is one in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it. Gain Contingencies Versus Contingent Assets Under both U.S. GAAP and IFRSs, the standard for recognition of a gain contingency (or contingent asset) is substantially higher than the standard for recognition of a loss contingency. Under U.S. GAAP, a gain contingency is recognized if realization is assured beyond a reasonable doubt. Therefore, virtually all uncertainties, if any exist, about the timing and amount of realization of a gain contingency should be resolved before the gain is recognized in the financial statements. Under IFRSs, a contingent asset is not recognized in the financial statements. Paragraph 33 of IAS 37 states that when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate. 13

15 Accounting news Contact If you have any questions regarding any of the articles in this publication, please contact one of the following audit experts: Czech Accounting New Interpretation of the National Accounting Council on Determining the Moment Tangible Fixed Assets are Brought into Use IFRS IFRS Tips New IFRS Publication by Deloitte Czech Accounting Anna Bezděková Jarmila Rázková IFRS and US GAAP Martin Tesař Soňa Plachá Gabriela Jindřišková Deloitte Advisory s.r.o. Nile House Karolinská 654/ Praha 8 - Karlín Česká republika Tel.: Fax: IFRS EU Endorsement Process US GAAP What are the key differences in the area of Contingencies between U.S. GAAP and IFRSs Subscribe to dreport and other newsletters and invitations here Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a more detailed description of DTTL and its member firms. Deloitte provides audit, tax, consulting, financial advisory and legal services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries and territories, 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 more than 225,000 professionals are committed to becoming the standard of excellence Deloitte Czech Republic

16 Tax news Direct Taxes The Tax Administration Informed about the Results of Transfer Pricing Inspection International Initiatives against Direct Tax Avoidance as Seen by the Czech Ministry of Finance Period for Tax Assessment in Connection with Investment Incentives in the Form of Tax Relief Indirect Taxes Experience with Local Sales/Purchases Reporting Further Extension of the Reverse Charge System as of 1 July 2016 Limitations to Entities/Exporters as of 1 May 2016 Tax news Deloitte Czech Republic Others Totalisation Agreement with the USA Extension to Include Health Insurance Security Payment Order: When Are the Concerns of the Tax Authority Sufficient Enough To Issue a Security Payment Order? International Tax Public Country-by-Country reporting within the EU Tax Deductibility of Interest in Acquisition Financing Positive Interpretation in Italy BEPS developments Other tax news Appendix Tax liabilities Tax liabilities July 2016

17 Tax news The Tax Administration Informed about the Results of Transfer Pricing Inspection Direct Taxes The Tax Administration Informed about the Results of Transfer Pricing Inspection International Initiatives against Direct Tax Avoidance as Seen by the Czech Ministry of Finance Period for Tax Assessment in Connection with Investment Incentives in the Form of Tax Relief Indirect Taxes Experience with Local Sales/Purchases Reporting Further Extension of the Reverse Charge System as of 1 July 2016 Limitations to Entities/Exporters as of 1 May 2016 Others Totalisation Agreement with the USA Extension to Include Health Insurance Security Payment Order: When Are the Concerns of the Tax Authority Sufficient Enough To Issue a Security Payment Order? International Tax Public Country-by-Country reporting within the EU Tax Deductibility of Interest in Acquisition Financing Positive Interpretation in Italy BEPS developments Other tax news The Czech Tax Administration has been placing substantially increased emphasis on transfer pricing inspections as well as the overall circumstances of related party transactions. At a press conference, its representatives have openly described a specific case of group restructuring which resulted in a considerable additional assessment and where the correctness of the steps taken by the tax authority was also confirmed by the Supreme Administrative Court. The unusually open description of the case clearly shows that tax administrators will pay detailed attention not only to the formal aspects of intragroup transactions, but that they will also focus on reviewing aspects that have up until recently seemed elusive and have not been challenged. Tax payers must expect that they will be asked to provide evidence that transactions had other than tax-related purposes. Furthermore, they must be ready to submit conclusive evidence to substantiate their statements. All these new practical procedures are beginning to manifest themselves to a large degree in relation to transfer pricing. At the press conference, the representatives of the Tax Administration presented an additional tax assessment of CZK 450 million just for 2015 and a further CZK 500 million for the first months of 2016, pointing to a noticeable decline in the reporting of tax losses. In the context of international developments, it is evident that these procedures are to intensify in the near future, which the representatives of the Tax Administration openly declared as their intention. Therefore, from the perspective of enterprises, it is necessary to carefully prepare for inspections. Present experience shows that transfer pricing checks often start inconspicuously, as if regular business aspects were being reviewed. It is only after partial information has been collected, originally submitted by the taxpayer to clarify individual tax areas, that these snippets are pieced together to produce an overall image of the company as seen by the tax administrator. What comes as a most frequent surprise to companies is the tax administrator s opinion whereby an image of the company has been put together from available information showing full subordination to group interests and objecting that in the given distribution of functions and risks it is impossible for the company not to generate at least an average profit as indicated by databases of comparable enterprises in the industry. The threat of such developments is further exacerbated by the easy transfer of review findings into other periods open for tax review and the scope arising from the application related to the company s turnover. Only a clear and well-documented company position may prevent undesirable results and put a brake on tax authorities making additional assessments in relation to transfer pricing. We will address the topic in greater detail in an upcoming webcast on 31 May. 2 Appendix Tax liabilities Tax liabilities July 2016

18 Tax news International Initiatives against Direct Tax Avoidance as Seen by the Czech Ministry of Finance Direct Taxes The Tax Administration Informed about the Results of Transfer Pricing Inspection International Initiatives against Direct Tax Avoidance as Seen by the Czech Ministry of Finance Period for Tax Assessment in Connection with Investment Incentives in the Form of Tax Relief Indirect Taxes Experience with Local Sales/Purchases Reporting Further Extension of the Reverse Charge System as of 1 July 2016 Limitations to Entities/Exporters as of 1 May 2016 Others Totalisation Agreement with the USA Extension to Include Health Insurance Security Payment Order: When Are the Concerns of the Tax Authority Sufficient Enough To Issue a Security Payment Order? International Tax Public Country-by-Country reporting within the EU Tax Deductibility of Interest in Acquisition Financing Positive Interpretation in Italy BEPS developments Other tax news The Ministry of Finance of the Czech Republic has published a document entitled International Initiatives against Direct Tax Avoidance (this article is based on the version of the document dated 22 April 2016). In fact, this document basically sums up the OECD s Base Erosion and Profit Sharing project (BEPS), a proposal of the EU s so called Anti-Tax Avoidance Directive and a proposal of the EU s directive on exchange of information in relation to country-by-country reporting (provisions within the BEPS project and the proposals of the EU directives overlap to a certain extent). According to the authors, the document aims to elicit discussion. The document is of a rather descriptive nature; in some respect, however, the Czech Republic s stand on individual actions is indicated as well. This includes scepticism regarding the possibility to come to an agreement about the multilateral instrument mechanism through which some anti- BEPS measures should be implemented or about the specific LoB clause (limitation of benefits clause in double taxation agreements). In contrast, the document states that some actions might be applied in the Czech Republic already, ie without an explicit implementation of the instruments suggested under the BEPS programme or the Anti-Tax Avoidance Directive. This includes, for example, a narrow interpretation of the exceptions to the permanent establishment rule, denial of treaty benefits (by means of another mechanism than the complicated LoB) or prohibition of the abuse of law in general. However, with regard to most of the provisions it seems that the document merely sums up their advantages and disadvantages in a neutral way without anticipating the Czech Republic s position. It will be interesting to follow future developments, both legislative and interpretative. We believe that the interpretation sphere might be underestimated at the moment as not much attention is being paid to the question of which of the suggested actions (and if any, to which extent) might be already employed on the basis of the interpretation of current regulations (laws, international agreements). In other words, to which extent might the BEPS/the Anti-Tax Avoidance Directive be perceived (also) as an interpretative guideline or certain ideological impulse for a more stringent application of current regulations and to which extent these rules are really new and not stipulated (not even implicitly) by the legal regulations yet. We will address the topic in greater detail in an upcoming webcast on 31 May. 3 Appendix Tax liabilities Tax liabilities July 2016

19 Tax news Period for Tax Assessment in Connection with Investment Incentives in the Form of Tax Relief Direct Taxes The Tax Administration Informed about the Results of Transfer Pricing Inspection International Initiatives against Direct Tax Avoidance as Seen by the Czech Ministry of Finance Period for Tax Assessment in Connection with Investment Incentives in the Form of Tax Relief Indirect Taxes Experience with Local Sales/Purchases Reporting Further Extension of the Reverse Charge System as of 1 July 2016 Limitations to Entities/Exporters as of 1 May 2016 Others Totalisation Agreement with the USA Extension to Include Health Insurance Security Payment Order: When Are the Concerns of the Tax Authority Sufficient Enough To Issue a Security Payment Order? International Tax Public Country-by-Country reporting within the EU Tax Deductibility of Interest in Acquisition Financing Positive Interpretation in Italy BEPS developments Other tax news Appendix Tax liabilities Tax liabilities July 2016 In relation to the increased activity of tax authorities we often search for the answer to the question as to how far back into the past is the tax office allowed to investigate during a tax audit. Basic Period for Tax Assessment It is general knowledge that the basic period during which tax for a certain taxation period may be assessed or additionally assessed takes 3 years and, as a consequence of certain facts stipulated by law, it may be extended up to 10 years. The period for tax assessment, which has been governed by the Tax Code since 2011, commences on the last day of the period for filing a regular tax declaration (return, report, statement) for the taxation period in question (as for the income tax, it usually starts from 1 st April or, alternatively, 1 st July). Unless there is an obligation to submit a regular tax declaration, the period commences on the maturity day of the tax liability concerned. In respect of older taxation periods, the commencement of the tax assessment period is governed by the Act on the Administration of Taxes and Fees in force until the end of 2010 and depends on the end of the taxation period in which the tax obligation arose (as for the income tax, it usually starts from 1 st January) or directly on the origination of the tax obligation if no taxation period applies to the tax. Special Rules for the Recipients of Investment Incentives Regarding income taxes, situations may arise whereby the period for tax assessment is extended above 10 years, with the experts views varying as to the maximum limit to such an extension. Since 2000, the Income Taxes Act has stipulated special rules (Section 38r) for the period for tax assessment applicable to taxpayers to whom an investment incentive has been provided in the form of tax relief and taxpayers for whom a tax loss has been assessed. According to the rules in force since 2004 for the recipients of investment incentives in the form of tax relief and since 2008 for tax payers for whom a tax loss has been assessed, the taxation period in which an entitlement to tax relief originated or in which a tax loss was assessed, as well as all subsequent taxation periods in which the law allows tax relief to be claimed or a loss deducted from the tax base, may remain open to tax review and additional tax assessment until the expiration of the period for tax assessment for the last of the taxation periods concerned. The combination of a tax relief claim and a subsequent tax loss assessment or (another) tax loss assessment within the period in which a previously assessed loss can be deducted may therefore result in constant postponement of the deadline for tax assessment. Can the Tax Authority Still Review Tax Relief Applied between 2002 and 2012? Besides the issue as to whether it is acceptable to indefinitely prolong the period for the income tax assessment when an investment incentive has been provided or a loss assessed, historically, legislation also contains other disputable areas. In 2000, together with the adoption of the Act on Investment Incentives, a new provision was added to the Act on Income Taxes. Its purpose was to provide the tax administrator with an extra time frame for reviewing and additional tax assessment for all the taxation periods in which investment 4

20 Tax news Direct Taxes The Tax Administration Informed about the Results of Transfer Pricing Inspection International Initiatives against Direct Tax Avoidance as Seen by the Czech Ministry of Finance Period for Tax Assessment in Connection with Investment Incentives in the Form of Tax Relief Indirect Taxes Experience with Local Sales/Purchases Reporting Further Extension of the Reverse Charge System as of 1 July 2016 Limitations to Entities/Exporters as of 1 May 2016 Others Totalisation Agreement with the USA Extension to Include Health Insurance Security Payment Order: When Are the Concerns of the Tax Authority Sufficient Enough To Issue a Security Payment Order? incentives were applied in the form of tax relief, with the period extended to 15 years from the end of the calendar year in which the tax relief was claimed for the first time. In practice, it meant that within 5 years following the last-tenth-taxation period designated for the use of the investment incentives, the tax administrator was still allowed to assess additional tax for any of those ten taxation periods. In 2002, however, the time limit was reduced to 10 years on the grounds that a longer period is not economically justifiable. Consequently, the period for tax assessment in respect of all taxation periods in which it was allowed by the law to claim tax relief which had been claimed for the first time in 2002 was therefore to expire on 31 st December The expiration of period for tax assessment should then coincide with the expiration of the last taxation period in which the tax relief could have been claimed. On account of this change, the tax administrator was devoid of any extra time span to review the use of investment incentives. Apparently, this led to another amendment to the Income Taxes Act in As of that year, the taxation period in which an entitlement to tax relief originated as well as all the taxation periods in which the law allowed the tax relief to be claimed remained open to tax review and additional tax assessment until the expiration of period for tax assessment for the last of the taxation periods concerned. According to the Explanatory Memorandum, this amendment was a mere legislative and technical adjustment and rectification, which might indicate the legislator s intent to apply this, in fact entirely new, structure retroactively. However, a similar attempt at rectifying a legislative gap retrospectively has already been rejected by the Supreme Administrative Court with their interpretation of the effect of the extension of the period for tax assessment in respect of a taxpayer who had a tax loss assessed prior to 2008 and who had not been receiving investment incentives concurrently (eg refer to ruling Ref. No. 5 Afs 65/ ). Nevertheless, as previous experience suggests, it cannot be ruled out that the practice of tax authorities will be biased towards the interpretation that it is still possible to launch a tax audit or, generally, to additionally assess the tax (ie that the period for tax assessment has not expired yet). 5 International Tax Public Country-by-Country reporting within the EU Tax Deductibility of Interest in Acquisition Financing Positive Interpretation in Italy BEPS developments Other tax news Appendix Tax liabilities Tax liabilities July 2016