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Czech Accounting, IFRS and US GAAP news


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May 2010

Czech Accounting

Contacts

If you have any questions regarding any of the articles in this publication, please contact one of the following audit experts:

Romana Pojslová
+420 246 042 564
Stanislav Staněk
+420 246 042 588
Michal Brandejs
+420 246 042 522

Deloitte Advisory Has Been Designated an Expert Institute

Deloitte Advisory has successfully completed the application process to be designated an Expert Institute and is registered in the list of qualified institutions to provide economic appraisal services, including the following activities:

  • Financial management;
  • Valuation of a business and parts thereof, including intangible assets;
  • Accounting;
  • Actuarial;
  • Transfer pricing; and
  • Assessment and definition of research and development activities for the purposes of grant programmes and the use of tax relief.

Our specialisation includes unique areas such as actuarial services or assessment of research and development activities for the purpose of grant programmes and the use of tax relief. This makes us the only expert institute licensed for all of these activities.

Subsidies and Their Presentation in the Financial Statements

At present, highly-discussed topics in the business sector include subsidies and their use to cut costs and increase the competitiveness in various sectors of the Czech economy. Before we discuss in greater detail how subsidies are accounted for in the accounting records in accordance with Czech accounting regulations, we would like to draw your attention to opportunities (programmes) currently open in this area:

Area What can be supported Who can apply Deadline for the application Amount that can be received
Energy savings

Insulation of buildings, replacing of windows, replacing of lights, renovation of the distribution system, renovation of sources, replacing of transformers, use of waste heat and anything that may lead to energy savings.

An entity registered in the Czech Republic with a history of at least two years, regardless of its size.

The project must be located outside of Prague.

Until 30 June 2010

Cash subsidies of 40% from capital costs (must be capitalised, not repairs),

Max. CZK 200 million

Research and development (R&D) – assets

Equipment of laboratories, testing labs, purchase of measuring devices, HW, SW, construction work for premises where R&D will take place.

An entity registered in the Czech Republic and active in the manufacturing industry, regardless of its size.

The project has to be located outside of the Prague region.

Until 30 November 2011

Cash subsidies of 40% from investment costs,

Max. CZK 100 million

Research and development (R&D) – tax deduction

Development of new or improved systems, products and services.

Taxpayer registered in the Czech Republic

Before the filing of tax return

100 % of costs (own production) as a corporate income tax deduction.

Shared services centres

Creation of a shared services centre – 40 new jobs

Centres for development of SW – 10 new jobs

Centre for the repair of high-tech products – 25 new jobs

An entity registered in the Czech Republic, regardless of its size.

The project must be located outside of Prague.

Until 15 October 2010

Cash subsidies of 40% for tangible and intangible assets

Or 40 % from estimated two-year gross wages,

Max. CZK 100 million

Purchase of production technology

Purchase of new machinery and equipment for the production of newly developed or technically improved products

An entity registered in the Czech Republic and active in the manufacturing industry, regardless of its size, with history of at least 2 years.

The project must be located outside of Prague.

Until 30 Sept 2010

Cash subsidies of 40% from investment costs,

Max. CZK 75 million

Processing of agricultural and food products

Processing and introduction on the market (packaging, labelling, marketing) of agricultural and food material and products, and increase in their quality.

Producer, processor of agricultural or food products for human consumption (or feed) registered in the Czech Republic with up to 750 employees and turnover of EUR 200 million. The project must be located outside of Prague.

Anticipated in July – Sept 2010

Cash subsidies of 40% from investment costs,

Max. CZK 15 million

Accounting for Subsidies in Czech Accounting Records

Czech legislation, predominantly the following, stipulates how subsidies should be accounted for:

  • Czech Accounting Standard for Businessmen No. 017 – Debtors and Creditors, Section 3.7
  • Regulation No. 500/2002 Coll., Section 27 and Section 47 (4)

The most important step in the process of obtaining subsidies is to file an application. A subsidy, however, cannot be accounted for based on the application even if a promise to grant subsidies was issued pursuant to the application. The promise does not constitute a legal claim for obtaining subsidies. The claim for a subsidy is recognised at the moment an incontestable legal claim originates.

In practice, it is possible to apply for a subsidy during the period for which it is provided or after the end of the period. The financial settlement may occur in a different period than the expenses for which the subsidy was granted are incurred.

Subsidies are often granted on condition that compliance requirements are or will be met in the future. The potential non-compliance with these requirements may result in an obligation to return the subsidies. In general, the time when a subsidy will be financially settled plays no role in how subsidies shall be recognised. The moment in which the process of its approval will come to an advanced phase is decisive when the granting of the subsidy is incontestable.

The principle of matching expenses and income relating to the particular subsidy is applied. The operating results should not be misstated by recognising an expense in a period different than the one in which the subsidy for this expense was reported. If there is an obligation to return the subsidy, eg owing to a breach of conditions set by the provider of the subsidy, it is necessary to recognise the payable arising from such obligation as of the date when the obligation to return the subsidy arose. The use of the subsidy to acquire intangible and tangible fixed assets is debited to the relevant account of account group 34 – Accounting for taxes and subsidies with a corresponding credit entry to the relevant account of account group 0 – Fixed assets. If the subsidy was reported as a decrease in the acquisition cost of fixed assets, the change in the amount of the subsidy (including the obligation to return the entire subsidy) will be recognised as an adjustment to the acquisition cost of the relevant asset in the period in which the amount of the subsidy changed.

Recognising Subsidies in Specific Accounts:

Incontestable claim for the subsidy:
Dr 378 / Cr 346

Receipt of a subsidy to a bank account:
Dr 221 / Cr 378

Use of the subsidy for the acquisition of tangible and intangible fixed assets:
Dr 346 / Cr 04X

Use of the subsidy to cover operating expenses:
Dr 346 / Cr 648

Use of the subsidy to settle the interest not included in the acquisition cost of tangible and intangible assets:
Dr 346 / Cr 662


Kontakty

V případě jakýchkoliv dotazů nebo potřeby konzultací a pomoci se získáním dotací se neváhejte obrátit na odborníky společnosti Deloitte z oddělení pobídek:

Luděk Hanáček
+420 246 042 108
Jaroslav Macháč (Morava)
+420 595 133 150

Example of Recognition:

A company purchases a manufacturing machine and concurrently applies for a subsidy of 10% of the acquisition cost:

  • The company has determined the capitalisation threshold for tangible fixed assets as all assets with an acquisition cost exceeding CZK 40 thousand.
  • Machinery and manufacturing equipment are depreciated for accounting purposes over 48 months, with the depreciation starting in the month following the month in which the assets are brought into use.
  Acquisition of a Machine using a Subsidy Amount Debit Credit
1.

Acquisition of a machine

5 000 000

042

321

2.

Promise of a subsidy from the state budget to acquire a machine at a cost of CZK 500 thousand

500 000

X

X

3.

Incontestable claim for a subsidy

500 000

378

346

4.

Decrease in the acquisition cost by the subsidy

500 000

346

042

5.

Receipt of a subsidy

500 000

221

378

6.

Bringing the machine into use

4 500 000

022

042

7.

Depreciation – first month
4 500 000/48 = 93 750

93 750

551

082

Appointment of an Auditor by the Company’s Supreme Body

With respect to forthcoming General Meetings, we would like to discuss the obligation supreme bodies have to appoint an auditor of the statutory financial statements, as required by Act No. 93/2009 Coll. on Auditors and Change to Certain Acts.

In practice, a company’s supreme body can appoint an auditor for one or more years, or until further notice or further decision. If an auditor was appointed for only one year in the previous year, the supreme body must make a new decision for 2010 to comply with legal conditions.

Exceptions include multiple year contracts concluded with an auditor before 14 April 2009, ie the day when the act came into effect, the subject of which is the obligatory audit of financial statements with the effective date of 31 December 2010, at the latest.

IFRS

Contacts

If you have any questions regarding any of the articles in this publication, please contact one of the following audit experts:

Martin Tesař
+420 246 042 525
Soňa Plachá
+420 246 042 357

IFRS EU Endorsement Process

The European Financial Reporting Advisory Group (EFRAG) updated its report showing the status of endorsement of each IFRS, including standards, interpretations, and amendments, last time on 25 March 2010. The following six IASB pronouncements are awaiting European Commission endorsement for use in Europe:

Standards

  • IFRS 9 Financial Instruments

Interpretations

  • IFRIC 19 Extinguishing Liabilities with Equity Instruments
  • Amendments to IFRIC 14 Prepayments of a Minimum Funding Requirement

Amendments

  • Amendments to IFRS 1 Additional Exemptions for First-time Adopters
  • Revised IAS 24 Related party disclosures
  • Amendment to IFRS 1 Limited Exemption from comparative IFRS 7 Disclosures for First-time Adopters

You can always find the endorsement status report at http://www.iasplus.com/efrag/efrag.htm# endorse.

New IFRS Publication by Deloitte

IFRS for SMEs in Your Pocket

In April 2010, Deloitte has published the Global Edition of IFRS for SMEs in Your Pocket. This 45-page guide to the IFRS for SMEs is similar to Deloitte’s very popular IFRSs in Your Pocket guide to full IFRSs.

IFRS for SMEs in Your Pocket takes each section of the IFRS for SMEs, summarises its requirements, and highlights differences with full IFRS requirements. There is also a chronology of the development of the IFRS for SMEs and a discussion of how the IFRS for SMEs differs from full IFRSs. Like dozens of other Deloitte IFRS-related publications, there is a permanent link to this IFRS for SMEs in Your Pocket on our www.iasplus.com at IFRS Publications Page.

IFRS Tips

Today, IFRS Tips cover one question from our client relating to the borrowing costs.

Deposit paid for the acquisition of an asset

Company A places an order with a supplier for the acquisition of an asset. The asset “necessarily takes a substantial period of time to get ready for its intended use or sale” (the condition for a qualifying asset under IAS 23.5). At the time of placing the order, Company A pays a substantial deposit. The remainder of the cost of the asset is paid on delivery.

In accordance with IAS 23.8 company A capitalises borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset.

Question
If Company A incurs borrowing costs in respect of the deposit paid, are those borrowing costs eligible for capitalisation?

Answer
In determining whether any borrowing costs incurred are eligible for capitalisation, an assessment is required of all the facts and circumstances and the nature of the deposit paid by Company A. Some common examples are described below.

a) Deposit represents payment on account under a construction contract
An asset that is manufactured for Company A under a construction contract, in accordance with Company A’s specification, is a qualifying asset. The deposit represents a payment on account for construction services.

For example, Company A contracts a supplier to construct a property on Company A’s land to Company A’s specification based on architect’s plans provided by Company A. Any payments made by Company A to the supplier are for the construction services provided by the supplier and, therefore, are directly related to the manufacture or construction of the property. Consequently, borrowing costs incurred by Company A during the construction period are eligible for capitalisation and should be capitalised as part of the cost of the asset.

b) Deposit secures place in a waiting list to acquire standard goods
IAS 23.7 states that “assets that are ready for their intended use or sale when acquired are not qualifying assets”. In such cases, a deposit may primarily serve to secure Company A’s place in a waiting list.

A common example is the manufacture of top-end cars where the customer may select from standard customisation options (e.g. paint colour, air conditioning, parking sensors, etc.). There is generally a waiting list for such cars. In order to secure its place in the waiting list and guarantee delivery of the new car, Company A may pay a substantial deposit when the order is placed. However, if the deposit does not affect the total amount payable to the supplier for the car, any borrowing costs Company A incurs on the deposit do not qualify for capitalisation as they do not arise in relation to the manufacture of the car.

US GAAP

Contacts

If you have any questions regarding any of the articles in this publication, please contact one of the following audit experts:

Martin Tesař
+420 246 042 525
Soňa Plachá
+420 246 042 357
Pavel Kodýtek
+420 246 042 167

Bill-and-Hold Arrangements from the Perspective of U.S. GAAP

Under U.S. GAAP, FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, indicates that revenue is recognised when it is realised or realisable and earned. However, beyond those broad guidelines, a single, comprehensive revenue recognition standard does not exist in U.S. GAAP. Rather, guidance on revenue recognition is found in a collection of transaction- or industry-specific or other specialised guidance. Furthermore, the SEC provides detailed guidance on revenue recognition for U.S. public entities in Staff Accounting Bulletin Topic 13, “Revenue Recognition.”

In the article, we discuss one specific area - revenue recognition related to bill-and-hold arrangements.

Under U.S. GAAP, for revenue to be recognised, delivery generally must have occurred. The fact that delivery has occurred constitutes sufficient evidence that the risks and rewards of ownership have passed to the buyer (ie, the earnings process is complete). One of the sources of guidance on this topic is the Staff Accounting Bulletin (SAB), which is issued by the SEC and is binding for public companies. SAB Topic 13 states that the following criteria must be met for revenue to be recognised before delivery of the product (ie, bill-and-hold arrangements):

  • The risks of ownership must have passed to the buyer.
  • The customer must have made a fixed commitment to purchase the goods, preferably in written documentation.
  • The buyer, not the seller, must request that the transaction be on a bill and hold basis. The buyer must have a substantial business purpose for ordering the goods on a bill and hold basis.
  • There must be a fixed schedule for delivery of the goods. The date for delivery must be reasonable and must be consistent with the buyer’s business purpose (eg, storage periods are customary in the industry).
  • The seller must not have retained any specific performance obligations such that the earning process is not complete.
  • The ordered goods must have been segregated from the seller’s inventory and not be subject to being used to fill other orders.
  • The equipment [product] must be complete and ready for shipment.

Non-SEC entities also generally use these criteria, because no other authoritative guidance in U.S. GAAP addresses the accounting for bill-and-hold arrangements. The criteria are rigidly applied and restrict revenue recognition when delivery has not occurred to limited circumstances.

An example of a bill-and-hold arrangement under US GAAP

Company A, a privately held company is a manufacturer of calendars. Company A enters into bill-and-hold transactions throughout its first quarter (the period from February 1 through April 30). Company A provides a program with discount incentives for its customers to order calendars during the period from February 1 to April 30 for the purpose of normalising production. The customer is allowed to select the shipment date as long as it is before July 1. Company A produces the calendars upon receipt of the order and then stores the finished product until the customer’s requested shipment date. The finished products are unique to each order because most of these calendars are personalised. In the past, there have been no collection problems on such sales because this discount program is only provided to existing customers with good credit ratings. The returns and uncollectible accounts relating to orders placed under this program are comparable to other sales made throughout the year. Once production of the order is completed, Company A’s only remaining performance requirement is to ship the calendars. Because finished products are unique to each order, the customer must take delivery on the shipment date established when the order is placed. The invoice sent to the customer after production clearly states that the order has been produced and stored and also states the scheduled shipment date. Company A has indicated that if the orders are damaged or destroyed while in storage, it would be required to reproduce and deliver the orders to collect payment.

In these circumstances, Company A should not recognise revenue until the calendars are shipped, assuming “FOB shipping” terms. The risks of ownership do not pass until the goods are shipped to the customer. In addition, Company A has the obligation to reproduce the orders in the event they are damaged or destroyed before shipment. Accordingly, because title and risk of loss do not pass to the customer until shipment, the earnings process is not complete until the goods are shipped.

IFRS Perspective

The following paragraphs shortly compare the US GAAP rules with their IFRS counterparts.

Under IFRSs, IAS 18, Revenue, is the primary source of guidance on revenue recognition, including the sale of goods, rendering of services, and use by others of an entity’s assets (interest, royalties, and dividends). Three other sources of authoritative guidance on revenue recognition in IFRSs are IAS 11, Construction Contracts; SIC-31, Revenue – Barter Transactions Involving Advertising Services; and IFRIC Interpretation 13, Customer Loyalty Programmes.

For some type of revenue streams, there are differences between the U.S. GAAP and IFRS treatments. Under IFRSs, delivery does not necessarily need to have occurred for revenue to be recognised. IAS 18 accepts that the risks and rewards of ownership may be transferred to the buyer even though the goods have not yet been delivered. Paragraph 1 of Appendix A of IAS 18 indicates that in a customer-requested bill-and-hold arrangement, revenue would be recognised when title transfers to the customer, provided that:

  • it is probable that delivery will be made;
  • the item is on hand, identified and ready for delivery to the buyer at the time the sale is recognised;
  • the buyer specifically acknowledges the deferred delivery instructions; and
  • the usual payment terms apply.

In addition, IAS 18 indicates that revenue recognition may be appropriate in layaway sales if certain criteria are met. That is, as illustrated in the example in paragraph 3 of Appendix A of IAS 18, revenue may be recognised on layaway sales “when a significant deposit is received provided the goods are on hand, identified, and ready for delivery” if experience indicates that most layaway sales are consummated.

While the objective for recognising revenue in bill-and-hold arrangements under U.S. GAAP and IFRSs may be consistent (ie, the risks and rewards of ownership have been transferred to the buyer), the criteria in IFRSs may be deemed less restrictive or limiting than those in U.S. GAAP (SAB Topic 13). Therefore, in certain limited circumstances, entities accounting for bill-and-hold arrangements under IFRSs may meet the criteria for revenue recognition while entities with the same circumstances under U.S. GAAP would not meet the criteria for revenue recognition. However, while IFRSs may seem less restrictive, an entity should carefully consider the facts and circumstances when evaluating the appropriate accounting of a particular bill-and-hold arrangement under IFRSs to ensure that the accounting is in line with the overall principles of revenue recognition.


These materials and the information contained herein are provided by Deloitte Czech Republic and are intended to provide general information on a particular subject or subjects and are not an exhaustive treatment of such subject(s).

Accordingly, the information in these materials is not intended to constitute accounting, tax, legal, investment, consulting, or other professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser.

These materials and the information contained therein are provided as is, Deloitte Czech Republic makes no express or implied representations or warranties regarding these materials or the information contained therein. Without limiting the foregoing, Deloitte Czech Republic does not warrant that the materials or information contained therein will be error–free or will meet any particular criteria of performance or quality. Deloitte Czech Republic expressly disclaims all implied warranties, including, without limitation, warranties of merchantability, title, fitness for a particular purpose, noninfringement, compatibility, security, and accuracy.

Your use of these materials and information contained therein is at your own risk, and you assume full responsibility and risk of loss resulting from the use thereof. Deloitte Czech Republic will not be liable for any special, indirect, incidental, consequential, or punitive damages or any other damages whatsoever, whether in an action of contract, statute, tort (including, without limitation, negligence), or otherwise, relating to the use of these materials or the information contained therein.

If any of the foregoing is not fully enforceable for any reason, the remainder shall nonetheless continue to apply.

 

 

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