Accounting News Deloitte Czech Republic December 2016
Amendment to the Act on Accounting Valid 2 FASB s Accounting Standards On 9 November 2016, the Chamber of Deputies approved the governmental draft of the act which changes Act No. 563/1991 Coll., on Accounting, as amended (hereinafter the Amendment ). Although the Amendment still has to be approved by the Senate and signed by the President, no complications are expected, and we therefore provide information about the Amendment in today s article. The Amendment is expected to come into force on 1 January 2017. Reasons for the Amendment The reason for the amendment is the transposition of Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014, on the disclosure of non-financial information. The European Union sees corporate social responsibility as a tool which affects the performance of the companies and contributes towards reasonable and sustainable growth. It should therefore be beneficial not only to shareholders, but also to employees, investors, other stakeholders and citizens. The Amendment also contains some other adjustments, related primarily to the completion of the recodification of private law, and changes of a technical nature. Disclosure of Non-financial Information The requirements for disclosure of nonfinancial information are contained in four sections (Section 32 f Section 32 i) in the newly inserted Part 8 of the Act on Accounting. The obligation to disclose non-financial information will concern: Large reporting entities and consolidating reporting entities of large groups (i.e. with the total value of assets exceeding CZK 500 million and aggregate annual net turnover exceeding CZK 1 billion); That are public interest entities, i.e.: Issuers of investment securities accepted for trading on the European regulated market, Banks, savings banks and credit unions, insurance or reinsurance companies, pension companies or health insurance companies; and Whose average headcount in the reporting period exceeds 500 as of the balance sheet date. These three conditions have to bet simultaneously.
3 FASB s Accounting Standards Scope and structure of the disclosed non-financial information (Section 32 g) The above entities will disclose non-financial information to the extent necessary to understand the development of the reporting entity or group, its performance and position and the impact of its activities, concerning at least: The environment; Social issues; Employees; Respect of human rights; Fight against corruption; and Bribery. Non-financial information is presented in the following structure: a. Brief description of the reporting entity s or group s business model; b. Description of the measures that the reporting entity or group has adopted with respect to these matters; c. Description of the results of these measures; d. Description of the main risks related to these matters; e. Key non-financial performance indicators related to the respective business activity. According to the explanatory memo accompanying the Amendment, the disclosed non-financial information should primarily cover areas with a high risk of negative effects on society related to the business activities of companies. The aim is not only to present the positive aspects of corporate activities, but also to identify negative effects (existing and potential), prevent and mitigate them in relevant and appropriate cases with respect to supplier and sub-supplier chains. The reporting entity will choose whether it will disclose non-financial information in the annual report (or the consolidated annual report) or in a separate report published together with the annual report or made available to the public on the reporting entity s website within six months of the balance sheet date.
4 FASB s Accounting Standards To disclose non-financial information, the accounting entity or consolidating accounting entity may use the methodology of disclosing social responsibility reports 1. Exemption from the obligation to disclose non-financial information Information concerning future development or questions that are currently under negotiation do not have to be disclosed in exceptional cases, if in the duly justified opinion of the members of an administrative, managing or supervisory body, the disclosure of this non-financial information would significantly damage the reporting entity s business position and if its nondisclosure will not prevent an objective and balanced understanding of the reporting entity s development, performance and position and the impact of its activities. If the reporting entity or group discloses non-financial information pursuant to Section 32 g, it does not include information as per Section 21 (2) (e) (i.e. activities in the area of environmental protection and labour relations in the annual report). In accordance with Section 32 g (7), a consolidated reporting entity is exempt from the obligation to disclose non-financial information if the non-financial information is included in the consolidated annual report or a separate report of the consolidating reporting entity. This exemption applies as well to the consolidating reporting entity that is also a consolidated reporting entity itself. Audit of the disclosure of non-financial information The auditor will only verify if the required non-financial information has been disclosed in the annual report or the consolidated annual report or if a separate report has been prepared. The audit does not address the factual relevance of the provided data. 1 Point 9 of the recital of Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014, amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups
5 Other Changes in the Act on Accounting The Amendment brings several other minor changes, such as: Small terminological adjustments and fine-tuning of the provisions valid from 2016: aggregate annual net turnover instead of net turnover ; Public Register instead of Register of Companies ; reporting entity instead of business corporation ; Small additions to and specifications of transformations; Addition to Section 19 (8): For the purposes of reporting in the financial statements, assets can be divided into fixed assets and current assets. Addition to Section 37 of administrative offences of non-disclosure of non-financial information and the non-preparation of a report on payments to governments. Conclusion Non-financial reporting is already provided by many companies on a voluntary basis, as it is seen as a matter of prestige and as an opportunity to improve the company s position on the market by acquiring certain competitive advantages arising from a corporate policy of openness. The Amendment brings detailed instructions on what non-financial information should be disclosed and in what structure and form. Deloitte offers a variety of services in this area, such as the preparation and implementation of sustainability strategies, preparation of reports with non-financial data, energy sustainability strategies, diversity management etc. More information can be found here.
Invitation to a Seminar 6 News in Czech Accounting 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 significant changes to the Accounting Act and Regulation No. 500/2002 Coll. affecting entrepreneurs which have been brought about by the amendments to the both regulations effective as of 1 January 2016. We will also address the upcoming amendment to the Accounting Act and related regulations which are to come into effect as of 1 January 2017. 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 December in Prague, Ostrava and Pilsen and will be delivered by our professionals. Programme Practical obstacles in preparing financial statements Amendment to the Accounting Act and the related legislation taking effect from 1 January 2016 Amendments to the Accounting Act effective A tax perspective on financial statements (income tax, VAT) Timing Prague: 8 December 2016 Ostrava: 4 December 2016 Pilsen: 1 December 2016 More information on: www.deloitte.com/cz/akce
15 Endorsed for Use in the EU 7 FASB s Accounting Standards On 29 October 2016, 15 Revenue from Contracts with Customers was endorsed by the European Commission for use in the European Union. The standard was published by the IASB in May 2014 with the effective date on 1 January 2017 which was subsequently postponed to 1 January 2018. Earlier application is permitted. 15 specifies how and when an reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The core principles of 15 were presented in our News published in July 2014 and the impacts of 15 on various types of enterprises were discussed in October 2014. Today s article provides a summary of basic information on the new standard and an overview of the main differences from the existing revenue recognition standard. Scope The standard supersedes IAS 18 Revenue, IAS 11 Construction Contracts and a number of revenue-related interpretations. Application of the standard is mandatory for all reporters and it applies to nearly all contracts with customers, the main exceptions are leases, financial instruments and insurance contracts. Objective The objective of the Standard is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. To meet this objective, the core principle of this Standard is that an entity shall recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Overview of 15 An entity recognises revenue in accordance with that core principle by applying the following steps: Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
8 FASB s Accounting Standards There is new guidance on whether revenue should be recognised at a point in time or over time, which replaces the previous distinction between goods and services. Where revenue is variable, a new recognition threshold has been introduced by the standard. This threshold requires that variable amounts are only included in revenue if, and to the extent that, it is highly probable that a significant revenue reversal will not occur in the future as a result of reestimation. However, a different approach is applied for sales and usage-based royalties from licences of intellectual property; for such royalties, revenue is recognised only when the underlying sale or usage occurs. Detailed implementation guidance is included on topics such as: sales with a right of return, warranties, customer options for additional goods or services, principal versus agent considerations, licensing, and bill-and hold arrangements, etc. The standard also introduces new guidance on costs of fulfilling and obtaining a contract, specifying the circumstances in which such costs should be capitalised. Costs that do not meet the criteria must be expensed when incurred. 15 also includes a cohesive set of disclosure requirements that would result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity s contracts with customers. Comparison of 15 with predecessor s 15 is a complex standard, introducing far more prescriptive requirements than were previously included in s, and it may result in substantial changes to revenue recognition policies for some entities. It requires the application of significant judgement in some areas, but in other areas it is relatively prescriptive, allowing little room for judgement. Whereas IAS 18 provides separate revenue recognition criteria for goods and services, this distinction is removed under 15. The new standard focuses instead on the identification of performance obligations and distinguishes between performance obligations that are satisfied at a point in time and those that are satisfied over time, which is determined by the manner in which control of goods or services passes to the customer. The new model means that
9 revenue may be recognised over time for some deliverables previously accounted for as goods (e.g. some contract manufacturing); it also means that revenue may be recognised at a point in time for some deliverables previously accounted for as services (e.g. some construction contracts). Specific topics on which more prescriptive requirements have been introduced include: the identification of a contract with a customer; the identification of distinct performance obligations and the allocation of the transaction price between those obligations; accounting for variable consideration and significant financing components; and recognition of revenue arising from licences. The scope of 15 has been expanded to cover costs relating to contracts, distinguishing between costs of obtaining a contract and costs of fulfilling a contract, and providing detailed guidance on when it is appropriate to capitalise such costs. Whereas IAS 11 provides specific requirements for accounting for construction contracts, such contracts are accounted for in accordance with the general principles of 15. The recognition of interest revenue and dividend revenue is not within the scope of 15. These matters are now dealt with under 9 Financial Instruments (or, for entities that have not yet adopted 9, IAS 39 Financial Instruments: Recognition and Measurement). The disclosures required by 15 are likely to be much more extensive than those previously provided in accordance with IAS 11 and IAS 18, and additional disclosures are also required in interim financial reports prepared in accordance with IAS 34 Interim Financial Reporting. In some cases, entities may need to consider changes to existing systems and processes in order to capture the information to be disclosed. Effective date 15 must be applied in an entity s first annual financial statements for periods beginning on or after 1 January 2018, with early adoption permitted. The 2018 effective date has been chosen, in part, to allow time for entities to make changes to systems and processes that may be needed in order to comply with the new standard. Source: www.iasplus.com/en/collections/revenue
EU Endorsement Process 10 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 15 November 2016. As of 22 November 2016, the following IASB pronouncements are awaiting European Commission endorsement for use in the EU: Standards 9 Financial Instruments (issued in July 2014); 14 Regulatory Deferral Accounts (issued in January 2014) - the European Commission has decided not to launch the endorsement process of this interim standard and to wait for the final standard; 16 Leases (issued in January 2016). Amendments Amendments to 2 Classification and Measurement of Share-based Payment Transactions (issued in June 2016); Amendments to 4 Applying 9 Financial Instruments with 4 Insurance Contracts (issued in September 2016); Amendments to 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (issued in September 2014); Amendments to 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.
Invitation to Autumn Seminars 11 16 New Standard on Leases We would like to invite you to Deloitte s autumn seminar on International Financial Reporting Standards, this time dedicated to new 16 Leases. 16 replaces IAS 17 Leases and the related interpretations and will be effective for the reporting periods starting on 1 January 2019. The standard has yet to be adopted for use in the EU, the approval is expected in 2017. In the seminar, we will inform you about the key issues of this long-awaited standard, which predominantly introduces major changes in terms of lessees as operating leases will newly be recognised in the balance sheet. Application of the standard s requirements will be illustrated in a number of practical examples. We will also provide answers to your inquiries in the seminar. The seminar is predominantly intended for accountants, economists and financial managers of projects relating to and for all who want to know more about. The seminar will be held in Prague in the Czech language and will be delivered by our professionals. Date Prague: 13 December 2016 More information is available at: www.deloitte.com/cz/akce
Invitation to Autumn Seminars 12 News 2016 We would like to invite you to Deloitte s webcast on International Financial Reporting Standards (). You will learn which new amendments will have to be taken into account in preparing financial statements for 2016 and subsequent reporting periods. You will also receive information on new and amended standards that are effective as of a later date than the reporting period starting on 1 January 2016. Most of them may be adopted earlier, ie in the financial statements for 2016. In the notes to the financial statements prepared under, entities are obliged to specify what would be the impact of the application of issued standards and interpretations before their effective dates on the financial statements. In the webcast, you will have an opportunity to ask questions. The webcast is predominantly intended for accountants, economists and financial managers working on projects relating to and for all who want to know more about. The webcast will be held in the Czech language and will be delivered by our professionals. Date Webcast took place on 14 September 2016. Its record is available here. This on-line seminar will not cover the new 9 Financial Instruments, 15 Revenue from Contracts with Customers, and 16 Leases, which will be the topics of specialised seminars organised in autumn.
New updates of the 13 In October 2016, the FASB published two approved standard changes - ASU 2016-17 Interests Held Through Related Parties That Are Under Common Control and ASU 2016-16 Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-17 Interests Held Through Related Parties That Are Under Common Control The update 2016-17 amends the consolidation guidance for situations where the reporting entity holds indirect interest in an entity through related parties that are under common control. The update changes the requirements for the step when the reporting entity needs to determine whether it is a primary beneficiary of that VIE or not. The change is mostly in removing the last sentence in ASC 810-10-25-42 stating that Indirect interests held through related parties that are under common control with the decision maker should be considered the equivalent of direct interests in their entirety. Under the current guidance from 2015 in such cases, the reporting entity is required to treat indirect interest on the same basis as direct interest and when evaluating if the entity is the primary beneficiary of the variable interest entity (VIE). In case the entities are not under common control, an indirect interest would be considered on a proportionate basis while evaluating if it is the primary beneficiary. It the entity concludes that the characteristics of a primary beneficiary are not met, it needs to evaluate whether it and one or more of its related parties under common control, as a group, have the characteristics of a primary beneficiary. If the single decision maker and its related parties that are under common control, as a group, have the characteristics of a primary beneficiary, then the entity within the group that is most closely associated with the VIE is the primary beneficiary. The ASU is effective for fiscal years beginning after December 15, 2016, for specific details related to the adoption see the full text of ASU. For more info see the full ASU on FASB.org.
14 ASU 2016-16 Intra-Entity Transfers of Assets Other Than Inventory The second Accounting Standard Update issued in October is ASU 2016-16 amending the tax consequences of intra-entity transfers of assets other than inventory. This amendment is the result of the simplification initiative and aligns the guidance with the requirements of, specifically IAS 12 Income taxes. It deals only with the transfers of assets other than inventory. Inventory is left out of the Update. Under the current guidance when the assets are transferred between related parties, tax consequences (recognition of the current tax expense or deferred tax expense or benefit) have deferred until when sold to an outside party. Based on the Update the companies that transfer assets from or to related party will recognise the tax impact when the transfer occurs and will no longer defer the recognition until the final sale to a third party. The changes are effective for publicly traded companies for fiscal years beginning after December 15, 2017, for other companies a year later. For more info see the full ASU at FASB.org.
Contact If you have any questions regarding any of the articles in this publication, please contact one of the following audit experts: Czech Accounting Jarmila Rázková jrazkova@deloittece.com and Martin Tesař Soňa Plachá Gabriela Jindřišková mtesar@deloittece.com splacha@deloittece.com gjindriskova@deloittece.com FASB s Accounting Standards Deloitte Advisory s.r.o. Nile House, Karolinská 654/2, 186 00 Praha 8 - Karlín, Czech Republic Tel.: +420 246 042 500 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