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Czech Accounting

Amendments to Regulation No. 500/2002 Coll. for Businesses

On 30 December, an amendment to Regulation No. 500/2002 Coll. for businesses (hereinafter the “Regulation”) was published in the Collection of Deeds under No. 469/2008, Issue 151.

We would like to present you with an overview of the key points of the amendment and come back to certain points in the next issue of our newsletter in greater detail.

The amendment addresses areas which have not been dealt with specifically in the Regulation in the past (A), such as:

• Residual value
• Component method of depreciation;
• Cross-border merger transformation method;
• Forest land with forest cover;

and areas of changes in the current wording of the Regulation (B).

With respect to A) Areas which have not been dealt with specifically in the past

Residual value

For the purposes of this Regulation, the anticipated residual value is the estimated justifiable positive amount which the entity could obtain at the moment of the anticipated disposal of the assets, e.g. through sale, after deducting the estimated costs of disposal. The depreciation is adjusted so as to arrive at the net book value equalling the residual value at the moment when the assets are disposed of.

We will get back to the residual value in the next issue of our newsletter in more detail.

This provision is valid for reporting periods starting 1 January 2009.

Component method of depreciation

Buildings, apartments and non-residential premises, individual movable assets and sets of movable assets can be depreciated using the component method of depreciation with regard to the materiality and the true and fair view of the subject matter of accounting and the financial position of the reporting entity.

A component is defined as a specific part of an asset or a group of assets or a specific review of the occurrence of defects, the carrying value of which is material in proportion to the carrying value of the entire asset or a group of assets, and whose useful life significantly differs from the useful life of the asset or group of assets. Individual components are depreciated separately, similarly as if they were individual items of assets.

The component method of depreciation will be dealt with in the next issue of our newsletter in more detail.

This provision is valid for reporting periods starting 1 January 2010.

Cross-border merger transformation method

The area of cross-border mergers, the implementation of which is facilitated by the new Transformation Act, has newly been amended. Account A.II.4 ‘Gains or losses from the revaluation upon transformations’, which will form a part of assets of the successor company, will be used for the settlement of differences arising during the cross-border merger of the company.

This difference will be utilised e.g. in respect of differences arising from different accounting treatments applied in individual countries.

If the successor company reports the aggregate amount of item A.II.4 ‘Gains or losses from the revaluation upon transformations' before the division in the opening balance sheet, this amount shall be reported separately within A.II.4, e.g. in a special column called “Aggregate amount of gains or losses upon transformation”.

The Company will use the exchange rate promulgated by the Czech National Bank at the effective date of the transformation in the translation of assets and liabilities acquired in the transformation process.

Forest land with forest cover

If the reporting entity owns more than 10 ha of forest land with forest cover or has the right or competence to its management, it will newly include the following information in the notes to the financial statements:

1. The aggregate area of forest land with forest cover; and
2. The carrying value of the forest cover is the area of forest land with forest cover (in square metres), multiplied by the average value of timber per square meter (CZK 57).

If the reporting entity also determines the value of the forest cover in another way and the result is significantly different, the reporting entity will also state this value including the information regarding the method of its determination and its purpose.

With respect to B) Changes in the current wording of the regulation

Related party transactions

These are the changes of this topic in the Regulation:

Original wording

The original wording is valid for financial statements prepared as of 29 June 2008 and after this date, but before 1 January 2009.

The original wording of the Regulation required the disclosure of related party transactions which:

• Were material; and
• Were not made under standard market conditions.

(these basic conditions were subsequently simplified for reporting entities maintaining simplified accounting, except for reporting entities which were included in the consolidated financial statements, in certain cases. It was also not necessary to report transactions between the reporting entity and the entity which fully owns it.)

The term “related party” is assessed in line with International Financial Reporting Standards as adopted by the EU.

This wording has changed significantly as a result of the amendment of Regulation No. 469/2008.

New wording

The term “related party” is still assessed in line with International Financial Reporting Standards as adopted by the EU.

The exception regarding not reporting the transactions between the reporting entity and the entity which fully owns it is still effective.

The exception for reporting entities which are included in the consolidated financial statements also remains valid. We believe that this applies to cases in which the reporting entity constitutes part of the local consolidated group or the consolidated group which is part of a consolidation carried out in line with EU law according to Part V of the Regulation.

In the case of material related party transactions, the reporting entities must state their nature and business purpose.

If the reporting entity exceeds at least two of the following three criteria at the end of the balance sheet date:

1. The amount of total assets exceeds CZK 350,000 thousand; total assets for the purposes of this Regulation represent the sum determined on the basis of the balance sheet in a valuation which is not adjusted by items, in line with Section 26 (3) of the Act;
2. The net annual turnover exceeds CZK 700,000 thousand; the net annual turnover for the purposes of this Regulation represents the amount of income net of sales discounts and divided by the number of months initiated within the reporting period, multiplied by 12; and
3. The average recalculated headcount, including the working relationship of the member and the association, exceeds 250 in the reporting period, and has been determined on the basis of a special legal regulation;

the entity shall also include the information about the financial impact of these transactions on it.

The reporting entity shall also include information about material transactions which were not concluded under standard market conditions.

Nevertheless, there is an exception for joint stock companies which do not exceed these criteria; these companies must include at least the following information:

• Information regarding the transactions which were carried out directly or indirectly between (1) the reporting entity and its majority shareholders and (2) the reporting entity and the members of administrative, management and supervisory bodies, which are essential for the understanding of the reporting entity's financial position, if these transactions are material and have not been concluded under standard market conditions.
• Information about individual transactions can be grouped according to their nature, except when individual information is essential for the understanding of the impact of the transactions on the reporting entity's financial position. The reporting entity is not obliged to include information according to a) and b) if the transactions were carried out between the reporting entity and its sole owner.

In conclusion, we would like to remind you that we consider it essential to comment on all material (from the viewpoint of the reporting entity) related party transactions as part of the notes to the financial statements, in line with Section 39 (6) of the Regulation which states that the reporting entity shall explain every material item or group of items in the notes.

For this reason, we recommend considering the use of the relevant part of the template notes to the financial statements template which is available on our website.

Change in czech accounting Standard no. 008 for Businesses – Transactions with securities and investments

This change applies to the possibility of transfers between individual groups of securities. In this particular point, CAS 008 refers to CAS for Financial Institutions no. 108 “Securities for financial institutions” which deals with this issue.

This standard states that, upon the transfer (reclassification) of securities between groups of securities, the entity can follow International Accounting Standards (IAS 39 and IFRS 7) as adopted by the EU in the wording of Commission Regulation (EC) nos. 1126/2008 and 1004/2008, including the obligation related to the disclosure of information in the notes to the financial statements. The adoption of International Accounting Standards (IAS 39 and IFRS 7) upon the transfer (reclassification) of securities between groups of securities does not affect the entity's obligations set out in the Accounting Act, its implementation regulations and special legal regulations.

The moment of the transfer (reclassification) of securities between groups is the moment when the entity makes a decision regarding this transfer (reclassification); the entity can decide that the moment of the transfer (reclassification) of securities between groups of securities is a retroactively selected day in the period from 1 July 2008 to 31 December 2008 by 31 December 2008.

We would like to remind you that business entities will not be allowed to use the group “loans and receivables” for the relevant reclassification because the use of this group would be in conflict with the remaining accounting legislation.

The amendments to IAS 39 and IFRS 7 will only allow for the reclassification of certain non-derivative financial assets recognised in line with IAS 39. Financial liabilities, derivatives and financial assets which were designated by the entity as instruments measured under the ‘fair value measurement’ option and recognised at fair value through profit or loss (FVTPL) upon initial recognition cannot be reclassified. The amendments therefore only allow for the reclassification of debt and capital financial assets (classified as assets held for trading or available for sale) if they fulfil certain criteria.

The amendments do not allow for the reclassification to the FVTPL category.

The information about the updates in IAS 39 and IFRS  7 which were predominantly triggered by the current economic crisis was included in the IFRS part of the November issue of our Accounting Newsletter.

IFRS

Closing out 2008

This newsletter provides a high-level overview of new and revised Standards and Interpretations that are effective for December 2008 and later accounting periods. Of the long list of pronouncements in issue at the date of this newsletter, only three Interpretations are required to be adopted for December 2008 year-ends. Entities are, however, generally permitted to adopt new and revised Standards and Interpretations in advance of their effective dates (refer to individual Standards and Interpretations for additional details).

Where applicable, we have made reference to past Accounting News dealing with the specific Standard or Interpretation in greater detail. These past newsletters are also available at www.deloitte.cz/newsletters/accounting-news/archive. As always, entities should refer to the Standards and Interpretations themselves to identify all of the changes that may affect their particular circumstances.

Where a Standard or Interpretation is adopted in advance of its effective date, disclosure of that fact is generally required.

Even where there is no intention to implement a Standard or Interpretation in advance of its effective date, entities need to be aware of new Standards and Interpretations as they are issued, in order to comply with the requirement included in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to disclose in their financial statements the potential impact of Standards and Interpretations in issue but not yet effective.

We therefore recommend reviewing further newly issued amendments to standards and interpretations that will be approved by the date of the issuance of a company's financial statements. We will be providing updates on these developments at www.iasplus.com and in our Accounting News.

Finally, a word of caution regarding early adoption of Standards and Interpretations in the case of the entities that prepare financial statements according to IFRS as adopted by the European Union (EU).

As of 1 January 2009, the following documents have not yet been endorsed by the EU:

Amendments to standards

• IFRS 1: First-time Adoption of IFRS — Restructured standard (2008)
• IFRS 1 (revised in 2008) and IAS 27 (revised in 2008): Cost of an Investment in a subsidiary, jointly-controlled entity or associate
• IFRS 3 (revised in 2008): Business Combination
• IAS 27 (revised in 2008): Consolidated and Separate Financial Statements
• IAS 32 (revised in 2008) and IAS 1 (revised in 2008): Puttable Financial Instruments and Obligations Arising on Liquidation
• IAS 39 (revised in 2008): Eligible Hedged Items
• Improvements to IFRSs 2007 (issued in May 2008)

Interpretations:

• IFRIC 12 Service Concession Arrangements
• IFRIC 15 Agreements for the Construction of Real Estate
• IFRIC 16 Hedges of a Net Investment in a Foreign Operation
• IFRIC 17 Distributions of Non-cash Assets to Owners

For further information refer to the EU Endorsement Status Report at www.efrag.org.

New and Revised Standards and Interpretations

The following is a complete list of the new and revised Standards and Interpretations in issue at 31 December 2008, and effective for 31 December 2008 year-ends and later periods. All of the newsletters referred to may be found at www.deloitte.cz/newsletters/accounting-news/archive.

New IFRS documents at www.deloitte.cz

New documents related to the financial statements for 2008 are available at www.deloitte.com/cz/en/audit:

•  Presentation and disclosure checklist for 2008. The checklist summarises the reporting and disclosure requirements specified in International Financial Reporting Standards. The questionnaire is intended to assist the user in determining whether the reporting and disclosure requirements defined in IFRS are met. This document is available in Czech and English.
  • Czech version
  • English version
• Compliance Questionnaire for 2008. The checklist summarises the recognition and measurement requirements in International Financial Reporting Standards. This questionnaire may be used to assist in considering compliance with those pronouncements and is available only in English.

Revised Effective Date of the Restructured Version of IFRS 1 First-time Adoption of IFRSs

At its December meeting the IASB decided to change the effective date of the recently issued restructured version of IFRS 1 First-time Adoption of IFRSs to correct a potential technical problem arising from the effective dates of the 2008 revised versions of IFRS 3 Business Combinations and IAS 27 Consolidated and Separate Financial Statements. The effective date of restructured IFRS 1 is changed from 1 January 2009 to 1 July 2009 with immediate effect.

US GAAP

Effect of Statement 141(R) on Income Tax Accounting

Summary

We would like to use this article as a reminder that upon an entity's adoption of Statement 141(R)¹, any subsequent changes to the entity's acquired uncertain tax positions and valuation allowances associated with acquired deferred tax assets will no longer be applied to goodwill, regardless of the acquisition date of the associated business combination. Rather, such changes will typically be recognized as an adjustment to income tax expense. This article also highlights other changes to income tax accounting resulting from the issuance of Statement 141(R).

Background

Statement 141(R) is applied prospectively to business combinations in which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. However, the transition guidance of Statement 141(R) does not only affect business combinations consummated after the Statement's effective date; it changes subsequent accounting for certain income tax items regardless of the related business combination date.

Before Statement 141(R), any changes in an acquired entity's uncertain tax positions and reversals of valuation allowances associated with acquired deferred tax assets generally would be applied to goodwill, regardless of whether such changes occurred during the allocation period or after it. In contrast, Statement 141(R) requires any adjustments to an acquired entity’s uncertain tax positions, or valuation allowances associated with acquired deferred tax assets that occur after the measurement period, to be recorded pursuant to Interpretation 48² and Statement 109³. Accordingly, any changes after the measurement period will generally be reflected in income tax expense. The transition provisions of Statement 141(R) clarify that this new requirement applies to all tax uncertainties and valuation allowances recognized as a result of a business combination, including those that arose in business combinations consummated before Statement 141(R)'s effective date.

Acquired uncertain tax positions

Under Issue 93-7⁴, any changes in an acquired entity'’s uncertain tax position balances were generally recognized as adjustments to goodwill. Statement  141(R) nullified Issue 93-7 and states that income tax uncertainties acquired in a business combination should be accounted for in accordance with Interpretation  48. Statement 141(R) also amended Interpretation 48 to add paragraph 12B, which states:

The effect of a change to an acquired tax position, or those that arise as a result of the acquisition, shall be recognized as follows:

1. Changes within the measurement period that result from new information about facts and circumstances that existed as of the acquisition date shall be recognized through a corresponding adjustment to goodwill. However, once goodwill is reduced to zero, the remaining portion of that adjustment shall be recognized as a gain on a bargain purchase in accordance with paragraphs 36–38 of Statement 141(R).
2. All other changes in acquired income tax positions shall be accounted for in accordance with this Interpretation.

Therefore, if an acquired entity's unrecognized tax benefit for a tax position is adjusted during the measurement period because of new information about facts and circumstances that existed as of the acquisition date, goodwill should be adjusted. However, even during the measurement period, if the adjustment to the acquired entity's unrecognized tax benefit is the result of an identifiable event that occurred after the business combination's acquisition date, then the adjustment is generally recorded to income tax expense. Note that Interpretation 48 states that judgments may be changed only after the evaluation of new information — not on the basis of a new evaluation or new interpretation of information that was available in previous financial reporting periods. After the measurement period, all changes in the acquired entity's unrecognized tax benefit will be recorded pursuant to the guidance in Interpretation 48.

Paragraph 12B of Interpretation 48 is effective for all business combinations (regardless of when the business combination was consummated) on or after the effective date of Statement 141(R).

Example 1

On January 15, 2005, Company X acquired 100 percent of Company Y. As part of the purchase accounting, X recognized a liability associated with an unrecognized tax benefit. On December 31, 2006, X increased the liability as a result of new information to reflect a change in its best estimate of the ultimate settlement with the taxing authority. In accordance with Issue 93-7, X recorded this adjustment as an increase to goodwill. After it adopts Statement 141(R), X will be required to record any additional adjustments to the liability as a component of income tax expense.

Example 2

Company X purchases 100 percent of Company Y on February 15, 2007, and the transaction is accounted for under Statement 141. Company X has recorded an unrecognized tax benefit of $100 related to Y's tax issues. Company X has a calendar year-end and will adopt Statement 141(R) on January 1, 2009. On March 15, 2009, X concludes, on the basis of new information, that Y's $100 unrecognized tax benefit is no longer needed. Following the transitional provisions of Statement 141(R), X will reverse the liability for the unrecognized tax benefit and credit income tax expense.

Acquired deferred tax asset valuation allowances

Under paragraph 30 of Statement 109, an acquired entity's deferred tax assets, or tax loss carryforwards that were not initially realizable as of the acquisition date (partial or full valuation allowance against the acquired entity's deferred tax assets), but are considered realizable after the acquisition date, were generally applied to goodwill. Statement 141(R) amended Statement 109 to add paragraph 30A, which states:

The effect of a change in a valuation allowance for an acquired entity's deferred tax asset shall be recognized as follows:

1. Changes within the measurement period [footnote 8a] that result from new information about facts and circumstances that existed at the acquisition date shall be recognized through a corresponding adjustment to goodwill. However, once goodwill is reduced to zero, an acquirer shall recognize any additional decrease in the valuation allowance as a bargain purchase in accordance with paragraph 36–38 of Statement 141(R).
2. All other changes shall be reported as a reduction or increase to income tax expense (or a direct adjustment to contributed capital as required by paragraph 26).

Footnote 8a states that the measurement period in the context of a business combination is described in paragraphs 51–56 of Statement 141(R).

Therefore, subsequent changes in an acquired entity's deferred tax asset valuation allowance that were established as of the business combination's acquisition date would generally be recorded to income tax expense unless such adjustments occurred in the measurement period and related to information about facts and circumstances that existed as of the acquisition date. If the adjustment occurred during the measurement period and relates to new information about facts and circumstances that existed as of the acquisition date, the adjustment would be recorded to goodwill.

When an entity adopts Statement 141(R), paragraph 30A is effective for business combinations regardless of when they were consummated.

Example

On July 15, 2006, Company X acquired 100 percent of Company Y. As part of the purchase accounting, X established a full valuation allowance on Y's deferred tax asset for tax losses carryforwards of $100. On September 30, 2007, X determined that $40 of Y's tax losses will be realizable and reversed its valuation allowance with a corresponding entry to goodwill in accordance with paragraph 30 of Statement 109. Company X has a calendar year-end and will adopt Statement  141(R) on January 1, 2009. On June 15, 2009, X concludes that, under Statement 109, Y's remaining $60 tax losses deferred tax asset is realizable and the valuation allowance is no longer necessary. Following the transitional provisions of Statement 141(R), X will reverse its remaining $60 valuation allowance and record a corresponding credit to income tax expense.

Other income tax accounting changes

Statement 141(R) amends Statement 109 concerning (1) recognition of a deferred tax asset for the excess of tax deductible goodwill over goodwill for financial reporting and (2) reversals of acquirer's valuation allowance on its deferred tax assets resulting from a business combination. Under Statement 141(R), the recognition of a deferred tax asset for tax deductible goodwill in excess of financial reporting goodwill is no longer prohibited. That is, all deferred tax assets for tax deductible goodwill from business combinations after the adoption of Statement 141(R) will be recorded as of the acquisition date. For excess tax deductible goodwill from business combinations accounted for under Statement 141, paragraphs 262 and 263 of Statement 109 (pre-Statement 141(R) amendments) still apply. That is, goodwill will continue to be adjusted as the tax deductible goodwill is realized on the tax return.

The guidance in paragraph 266 of Statement 109 (pre-Statement 141(R) amendments) on acquirers' valuation allowances stated that in some circumstances, reversals of an acquirer's valuation allowance that resulted from the business combination would be included in the business combination accounting. Statement 141(R) amends paragraph 266 and clarifies that reversals of acquirers’ valuation allowances are not part of the business combination accounting.

• ¹ FASB Statement No. 141(R), Business Combinations.»
• ² FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. »
• ³ FASB Statement No. 109, Accounting for Income Taxes. »
• ⁴ EITF Issue No. 93-7, “Uncertainties Related to Income Taxes in a Purchase Business Combination.”»

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