Interpretation of the NAC – topics currently addressed
The interpretations express the professional opinion of the National Accounting Council (NAC), its members being representatives of major professional organizations and professional academia. By issuing interpretations, the NAC aims to ensure uniform and appropriate application of Act No. 563/1991 Coll., on Accounting (hereinafter the “Accounting Act”) and other legal regulations. However, interpretations are not legally binding opinions, as only the courts are authorized to issue such opinions. Interpretations aim to contribute to the formulation of optimal accounting and financial reporting practices, including related issues. The following article summarizes the interpretations that have been newly issued or updated in the past year.
Update on I-16
Interpretation I-16 was updated in October 2022: Reporting of a separate easement acquired for consideration. This interpretation describes the issue of an easement – a right that restricts the owner of immovable property in favour of another person (the beneficiary) in such a way that the owner is obliged to suffer, perform or refrain from doing something. The Interpretation is intended to clarify how a separate easement acquired for consideration should be recorded and reported in the accounts and how to depreciate it. The original interpretation (from 2010) referred to the acquired easement as intangible property with regard to the creation of the right in the beneficiary. However, as the easement is usually attached to immovable property, an adjustment was made as part of the update. The new requirement is to report the easement as part of the tangible property (similar to the right to build), which emphasizes the fact that the beneficiary, according to the terms, has the immovable property at his disposal. Therefore, it is appropriate for entities recognising an easement as an intangible asset to change the accounting method in compliance with Interpretation I-16.
The new I-48
A new Interpretation I-48 was approved by the NAC in early 2023: Valuation of assets and liabilities in transactions involving a plant or part of a plant. This interpretation was prepared by our colleague from the tax department – Alice Šrámková. In transactions involving a plant or part of a plant, entities take different approaches to the measurement of the assets and liabilities to be acquired, either by measuring them at fair value or by taking the seller’s valuation. The effect is then the recognition of goodwill or a valuation difference on the acquired assets on the buyer’s balance sheet. The Interpretation addresses whether it is appropriate to measure acquired assets/liabilities at fair value with recognition of goodwill or whether to take the measurement from the seller with recognition of the valuation difference. It also addresses the determination of the amortisation period for goodwill or valuation differences and the situations, in which deferred tax arises.
The preferred solution should always be to recognise goodwill, i.e. the value of the individual plant components should be determined. Consequently, goodwill should be amortised over the period of use of the assets or over the period of generation of future economic benefits from the assets. As of the date of acquisition of the plant (or part of it), the entity shall recognise all liabilities associated with the plant being acquired and any assets that have been written off by the seller but are still in use. The difference between the carrying amount and fair value of the assets and liabilities acquired shall be recognised by the entity in subsequent accounting periods in the profit and loss account on a time and material basis, for example, through depreciation, interest income (costs) or the nature of the asset (liability).
When the cost of obtaining a fair valuation of the individual components of a business exceeds the benefit of such information, an entity shall recognise the valuation difference. A situation in which the valuation difference becomes negative may indicate that the assets of the business are overstated and the entity should consider using the goodwill method. At the same time, if the transaction results in negative goodwill, the entity should verify whether it is indeed a bargain purchase or whether the recorded valuation of the commercial establishment is correct.
Both goodwill and the valuation difference should be tested for impairment in compliance with Interpretation I-45 (Impairment of Tangible and Intangible Fixed Assets – Testing and Reporting) when an entity becomes aware that non-current assets are overvalued. For conversions and contributions in kind, the related deferred tax must also be recognised in compliance with Interpretation I-2 Transitional Differences in Conversions and Contributions.
Update on I-8
As part of their internal policy, different companies commit to spending a certain amount to cover the various needs of their employees (benefits). Employee entitlement to these benefits is often regulated by contract. The articles of association may also provide for the creation of a social fund to cover benefits or borrowing. Interpretation I-8: Social Fund and Accounting for Funds Generated from Profit deals with how to account for the inception of an employee’s entitlement to a benefit or loan in a company that creates a social fund. In April 2023, the original interpretation from 2006 was updated.
An employee’s entitlement to a benefit is a cost, whether or not a social fund is used in connection with it, because it is remuneration for work performed, similarly to wages. If a social fund is used to cover an employee’s entitlement in compliance with the articles of association, this fund shall be reduced to the benefit of retained earnings of previous years or other funds if the company’s articles of association so determine. This approach is a change from the original wording of I-8, which allowed employee benefit entitlements to be booked directly against the social fund. The original approach led to inconsistencies between the accounts of companies that created social funds and those that did not.
The provision of a loan to employees from the social fund is not a cost but a receivable from employees and the social fund is not reduced in that case. The part of the social fund corresponding to provided loans can be recorded using the analytical account “Social fund – loans granted” within the synthetic social fund account, for example. Similarly, the repayment of a loan by an employee has no effect on the total amount of the social fund, only a transfer between the analytical accounts of the social fund.
The article mentions three new interpretations issued by the NAC from September 2022. Two interpretations were updated to include new guidance to accounting entities and a change in how the issue is viewed. The latest Interpretation I-48 was newly prepared to clarify the recognition of differences in the accounting value and fair value of an acquired commercial establishment (group of assets).
And what can we look forward to in the future? Working draft interpretations are currently being addressed with the following topics: employee benefits, accounting for cryptocurrencies, emission allowances and reporting of securities. We hope to be able to bring you more new information in these areas as soon as possible.
Author: Jiří Anděl