Accounting news Deloitte Czech Republic
New Interpretation of the on Determining the Moment About the The (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 Standards and interpretations of the National Accounting Council. Interpretations of the 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
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
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 www.nur.cz Source: www.nur.cz 4
Tips 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 66 76 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
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 9 Financial Instruments (or, prior to the adoption of 9, IAS 39 Financial Instruments: Recognition and Measurement). 6
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 1.25. Reaching this conclusion involves the application of significant judgement on the part of management and those charged with governance. IAS 1.122 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 Interpretations Committee in its public meetings), the Interpretations Committee concluded that the requirements of IAS 1.122 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 1.122 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
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
New Publication by Deloitte Deloitte s igaap 2016 A Guide to Reporting In May 2016, Deloitte published igaap 2016 A Guide to Reporting. This book sets out comprehensive guidance by: (1) Focusing on the practical issues faced by reporting entities; (2) Explaining clearly the requirements of s; (3) Adding interpretation and commentary when s are silent, ambiguous or unclear; and (4) Providing many illustrative examples. The new material includes: Updated guidance on applying 15 Revenue from Contracts with Customers; and New requirements of 9 Financial Instruments, effective from 1 January 2018. 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 reporting This two-part volume covers all s other than those dealing exclusively with financial instruments. Volume B: Financial Instruments 9 and related Standards This volume provides guidance on the application of the complex s dealing with financial instruments for entities that have adopted, or are planning to adopt, 9 Financial Instruments. Volume C: Financial Instruments IAS 39 and related Standards This volume provides guidance on the application of the complex s dealing with financial instruments for entities that have not yet adopted 9 Financial Instruments. Volume D: disclosures in practice This new volume, sourced from 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
EU Endorsement Process 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 17 May 2016. Amendments Amendments to 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (issued in September 2014) As of 24 May 2016, the following IASB pronouncements are awaiting European Commission endorsement for use in the EU: Standards 9 Financial Instruments (issued in July 2014) 15 Revenue from Contracts with Customers (issued in May 2014) 16 Leases (issued in January 2016) Amendments to 10, 12 and IAS 28 Investment Entities: Applying the Consolidation Exception (issued in December 2014) 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 10
What are the key differences Under U.S. GAAP, the guidance on contingencies is primarily contained in ASC 450 and ASC 460. Entities reporting based on will follow IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Difference in area U.S. GAAP s 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
Difference in area U.S. GAAP s Recoveries of contingent losses (reimbursements) Onerous contracts Disclosure of prejudicial information Gain contingencies (U.S. GAAP) versus contingent assets (s) 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 s 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 450-20 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 450-20-05-3 and ASC 450-20-05-10). Under s, 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 450-20- 25-2(a)). Under s, 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).
A key difference 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 450-20-20 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 s (i.e., greater than 50 percent). Therefore, more contingencies may qualify for recognition as liabilities under s than under U.S. GAAP. Measurement of Contingent Losses/Provisions Range of Estimates Under both U.S. GAAP and s, 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 450-20-30-1 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 450-20-30-1). In contrast, under s, 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 s, an entity is required to recognize and measure the present obligation under an onerous contract as a provision (paragraphs 66 69 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 s, 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 s, 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
Contact If you have any questions regarding any of the articles in this publication, please contact one of the following audit experts: Anna Bezděková Jarmila Rázková and Martin Tesař Soňa Plachá Gabriela Jindřišková abezdekova@deloittece.com jrazkova@deloittece.com mtesar@deloittece.com splacha@deloittece.com gjindriskova@deloittece.com Deloitte Advisory s.r.o. Nile House Karolinská 654/2 186 00 Praha 8 - Karlín Česká republika Tel.: +420 246 042 500 Fax: +420 246 042 555 www.deloitte.cz Subscribe to dreport and other newsletters and invitations here http://www2.deloitte.com/cz/subscribe-en 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 www.deloitte.com/cz/about 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. 2016 Deloitte Czech Republic