CZ GAAP

Amendments to executive regulations to the Accounting Act as of 1 January 2009

On 30 December 2008, amendments to executive regulations to the Accounting Act were promulgated in the Collection of Laws with effect from 1 January 2009. We summarize below main changes to Decree No. 500/2002 Coll., for entrepreneurs using double-entry accounting and to Decree No. 501/2002 Coll., for banks and other financial institutions.

Decree No. 500/2002 Coll., for entrepreneurs using double-entry accounting

Main areas of changes:

1. component approach to fixed assets
2. residual value of fixed assets
3. procedures applicable to cross-border mergers
4. disclosure of information in the notes to the financial statements

Amendment No. 469/2008 Coll. introduces the possibility of depreciation of assets using the component approach. Under this method, constructions, flats and non-residential premises, individual movable assets and sets of movable assets can be depreciated. Each part of an asset or of a set of assets whose useful life is significantly different from useful life of the asset or of a set of assets as a whole and whose carrying amount is material relative to the carrying amount of the asset or of a set of assets as a whole, can be depreciated independently as a component. When a particular component is replaced, asset carrying amount is reduced by the carrying amount of the disposed component and increased by the carrying amount of the new component, including spare parts used for the replacement and costs associated with the replacement.

The component approach is governed by Section 56a  and you can use it for the first time  in the accounting period commencing on or after 1 January 2010! When an entity switches to component approach for assets already in use, total asset cost and total accumulated depreciation needs to be divided into components and component depreciation needs to be started from the net carrying amount.

2.   Residual value of fixed assets

The amendment to the regulations introduces the new concept defined under Section 56, para  3, i.e.  the residual value. The anticipated residual value is the estimated amount that the reporting entity is likely to receive at the moment of anticipated asset disposal, e.g. upon sale, less costs associated with the disposal. In practice, this means that the reporting entity may update the depreciation plan based on the latest assumptions in order to ensure more true view of the assets and is not forced to anticipate zero value upon disposal.

Reporting entities will use residual value to update their depreciation plan already in the accounting period commencing on or after 1 January 2009.

3.    Procedure applicable to cross-border merger

To date executive regulations have not addressed the accounting treatment for cross-border merger, where a foreign company is one of the parties involved. The amendment addresses this situation under Section 54a.

If the foreign company being wound up does not report any fair value adjustments, the fair value adjustments that have arisen from valuation of the company need to be reported by the continuing company in the opening balance sheet prepared as at the merger effective date. Assets and liabilities that have been acquired as a result of the transaction and that were denominated in a foreign currency will be translated by the reporting entity to the Czech currency at the CNB foreign exchange rate at the merger effective date.  

If a foreign corporation that meets the condition of a reporting entity pursuant to Section 1, para 2, letter b) of the Accounting Act (ie. is doing business in the Czech Republic) is the continuing company, this accounting entity does not open its books of account at the date of commencing its activities, but continues to keep books of account after adjustments made pursuant to Section 17 para 3 the second sentence of the Act (in the case that beside foreign corporations also more reporting entities operating in the Czech Republic participated in the merger).

On the other hand, if a foreign corporation that does not do business in the Czech Republic or does not perform any other activity according to special law regulation at the day of recording the merger into the Commercial Register, is the continuing company, this foreign entity must close books of account under the Czech legal regulations at the day of winding up of its business activities or other activities under special legal regulations after adjustments made from the merger effective date pursuant to Section 17 para 3 the second sentence of the Act. This provision applies, for example, when the activities are removed from the Czech Republic and business activity in the Czech Republic is terminated as a result of the merger.

The provisions relating to the cross-border mergers are effective as of  1 January 2009, however, due to the absence of Czech legal regulations applicable to this area, they may serve as an appropriate guidance for 2008 transactions as well.

4.   Disclosure of information in the notes to the financial statements

Under this amendment, the scope of companies that are required to disclose information in the notes to the financial statements pursuant to Section 39, para 9c and 10 has been reduced. Pursuant to para 9c reporting entities are required to disclose in the notes off balance sheet transactions that are material for the assessment of the company’s financial position. For the financial statements prepared before  31 December 2008, the obligation to disclose also information on the financial effect of these transactions on the company applies, if the company concerned keeps full scope books of account. For the financial statements prepared after 1 January 2009, (that refers to majority of financial statements with the balance sheet date as at 31 December 2008) information on the financial effect of material off balance sheet transactions needs to be disclosed only by a company that meets at the balance sheet date at least two of the following criteria (these are the same quantitative criteria as those applicable to the conditions giving rise to the obligation to prepare consolidated financial statements):

• total assets exceed CZK 350 million,
• annual aggregate net turnover exceeds CZK 700 million,
• the average full-time equivalent number of employees during the reporting period exceeds 250.       

The above criteria are applicable also to the determination of the obligation of a legal entity to disclose in the notes to the financial statements related party transactions, if material and if they have not been carried out at normal market conditions (Section 39, para 10). Joint-stock companies, that do not meet the above criteria are required to disclose information on transactions carried out between the company and its majority shareholders and between the company and members of statutory and management bodies that are material and have not been carried out at normal market conditions.

Decreee No. 501/2002 Coll., for banks and other financial institutions

Amendment No. 470/2008 Coll., only contains two factual provisions.

The first one is applicable to the financial statements prepared after 1 January 2009, ie. in substance to all financial statements for the period ended on 31 December 2008, adds the requirement to disclose for held-to-maturity securities their fair value at the balance sheet date. Consequently, financial institutions will be required to determine and add these data in the course of closing their books which is now in progress.

The second provision is applicable to accounting periods commencing on 1 January 2009 or thereafter abolishes the obligation of capitalization of establishment costs and requires financial institutions to write-off establishment costs capitalised prior to the effective date of this amendment no later than 31 December 2009.  Hence, through this measure, Czech GAAP regulation for financial institutions has been brought in line with the IFRS, the capital adequacy requirements and the approach of the Commercial Code.

There is also an amendment to the Czech Accounting Standard for banks and other financial institutions No 108 which allows to apply the IAS 39 reclassification amendments for Czech accounting purposes with retrospective application from 1 July 2008.  It is understood that this amendment is optionally available already for 2008 financial statements and may be used also by other businesses.