National Accounting Council – a possible source of accounting information and a step towards the application of IFRS
- Petra Kopsová
- Ivana Bartáková
- Kateřina Prachařová
Czech accounting is traditionally based on legal regulations. It is regulated mainly by the Accounting Act, implementing decrees, including standards that follow the decrees. Recently, however, there has been a growing number of companies, for which the definitions in the above-mentioned regulations are no longer sufficient or they need to make adjustments for international purposes (mainly for the sake of uniform reporting within the group, of which they are part). This is often not easy. Interpretations of some possible situations in the Czech Republic are addressed by the National Accounting Council, which through its interpretations tries to offer solutions to issues that the Czech accounting regulations address incorrectly, inconsistently or not at all.
National Accounting Council as an institution
The National Accounting Council (hereinafter the “NAC”) is, according to its statutes, an independent professional institution for promoting professional competence and professional ethics in the development of the accounting profession and in the field of accounting and financial methodology. The objects of its activities are in particular mutual cooperation with the Ministry of Finance, the Government of the Czech Republic on the development of legislation and related standards; development, updating, publishing and distribution of national accounting standards and methodologies; methodological cooperation with European Union bodies, foreign institutions and persons in areas related to national accounting standards and cooperation in the development and support of the accounting professions. The NAC was established in 1999 at a time when, for example, a completely new Accounting Act, new tax laws or the Act on Auditors were being drafted. Historically, the first two interpretations of the NAC were approved in 2005 and concerned deferred tax.
The members of the National Accounting Council are all parties to the founding agreement, by which the NAC was established:
a) Chamber of Auditors of the Czech Republic
b) Chamber of Tax Consultants of the Czech Republic
c) Association of Accountants of the Czech Republic
d) University of Economics, represented by the Faculty of Finance and Accounting
Each of these members has one vote in the NAC. Each member has a total of three representatives on the NAC. An interpretation is approved by absolute majority of all votes.
The process of creating interpretations
Suggestions for topics that should be treated by an interpretation may be made by members of the NAC at an NAC meeting. If a member of the public wishes to submit a proposal, they must do so through a member of the NAC. The NAC votes on whether the draft interpretation will be processed at its meeting and the draft needs to be approved by absolute majority of votes. Subsequently, one of the members of the NAC is tasked with preparing a working draft interpretation. After a discussion of the working draft interpretation, the draft interpretation is published for an external comment procedure, where any member of the public can comment. The preparer submits a summary of the comments received and the manner, in which they have been incorporated, or the reasons for rejection by the NAC, together with the final draft interpretation for approval at the NAC meeting. If the interpretation is approved by a majority of all members, the interpretation is published together with a report on the settlement of the comments.
What we can find on www.nur.cz in particular:
- Preface to the interpretations
- Approved NAC interpretations
- Comment procedure on draft interpretations
- Working drafts of interpretations
- Creation of interpretations of the NAC
Interpretation of the NAC
The www.nur.cz website contains interpretations and draft interpretations listed according to the dates, on which the interpretations and draft interpretations were published.
Within each interpretation, which is numbered with a flag (e.g. “Draft Interpretation” – DI; "Interpretation" – I), there is a description of the problem that the interpretation solves and at the same time what the aim of the interpretation is.
Each interpretation offers a solution to the problem and its justification, including reference to the relevant regulations.
The purpose of interpretations is to express a professional opinion on accounting issues that are not addressed by Czech accounting regulations or their solution is not sufficient. Another task is to deal with issues that have arisen on the basis of new legislation and need to be put into practice, or where there are no uniform views/conclusions from the professional community in practice.
However, it is important to note that interpretations are not legally binding, but they are expressions of ‘good practice’ and are applied through the rules at the given accounting entity. Only courts are empowered to issue legally binding opinions/conclusions.
The approved interpretations of the NRC address a variety of topics. The most recent ones include interpretations on Received/Provided Advance Payments in Foreign Currency, Impairment of Non-Current Tangible and Intangible Assets, Foreign Currency Receivables with a Provision, Customer Loyalty Programmes, Inventory Differences on Inventories and Fixed Assets and others.
SAC decision in a dispute in favour of the interpretation
As indicated above, in practice there may be “disagreement” between the rules set out in the law (sometimes insufficient or outdated) and the interpretations that result from accounting practice. Recently, most of the discussion has been about the different perspectives in the context of advance payments in foreign currency and the related “burden” of bearing/not bearing the exchange rate risk.
The Interpretation on Foreign Currency Advances concluded that if the company does not bear exchange rate risk from subsequent exchange rate movements in connection with the advance payment (it does not expect to collect the advance back), it will not convert the advance payment using the CNB rate as of the date of the financial statements, but will leave it valuated at the historical rate at the time of payment. However, in its practice, the Tax Administration went against the conclusion of the interpretation and assessed the unreported exchange rate differences additionally in these cases (if the exchange rate gains subject to taxation according to the Tax Administration were not reported in the accounting). In February 2022, the Supreme Administrative Court (“SAC”) reached a decision and agreed with the conclusion of the Interpretation in the sense that exchange rate differences (in the disputed case, these were exchange rate differences on advance payments provided for non-current assets) should not be calculated, in other words, the entity does not bear exchange rate risk and there is no ground for revaluation as of balance sheet date.
Interpretations on Employee Benefits, Accounting for Cryptocurrencies, Goodwill and Valuation Difference on Acquired Assets, Emission Permits and Reporting of Liquid Valuables are currently being prepared.
Some of the more recent interpretations are already based on IASs and IFRS, or seek to support compliance with one of the main accounting principles, namely the maintaining of a true and fair view of the object of accounting. For example, I-45 – Impairment of Tangible and Intangible Non-Current Assets. The International Accounting Standards contain, among other things, definitions of individual terms that are missing in our accounting regulations and which are a necessary prerequisite for a correct assessment of the issue at hand.
Interpretation of the NAC – a step towards the application of IFRS
The NAC considers compatibility with IFRS to be appropriate especially in areas that are not clearly treated by Czech accounting regulations. The main reason, however, is usually the lack of legal regulation in the accounting regulations. Another reason for their use is the situation when many accounting units “by default” work with Czech accounting regulations within the framework of securing Czech accounting (reporting) and IFRS is used to maintain uniform rules when consolidating the group, to which they belong. Last but not least, there are companies that are required by law to apply IFRS regulations – these are companies listed on the European regulated market.
What does this look like for such accounting entities in practice? Currently, companies run two parallel accounting systems (one for the Czech treatment and the other for IFRS), which is very costly, time-consuming, and even with the best setup of a given system, it is necessary to make a large number of manual adjustments. In practice, we also encounter bookkeeping in one or the other system, which is subsequently transformed (“translated”) for the needs of the accounting unit either at the level of statements or at the level of account balances.
The process of transition from IFRS to Czech accounting rules was previously addressed in the Working Draft Interpretation PNI-51. However, this proposal was not completed.
Grant Thornton in relation to the NAC
In the context of the NAC, we would like to mention that our Group is represented in the NAC. Mrs Alice Šrámková and Petra Vaněčková, who work for Grant Thornton Tax & Accounting s.r.o., participate in the development of some interpretations and Alice Šrámková is also a member of the NAC, on behalf of the Union of Accountants of the Czech Republic.
What to say in conclusion? The Czech accounting environment continues to evolve and change. Changes need to be responded to. The National Accounting Council helps to find a possible solution to a specific problem, thereby ensuring that a true and fair view of the accounting is achieved.
Do you have a question about an approved (issued) interpretation, or do you not know if and how you can apply it to your financial reporting? Our company has experts not only on financial reporting, but also on tax reporting. Therefore, do not hesitate to contact us, we will be happy to help you solve the situation.
Author: Petra Kopsová, Ivana Bartáková, Kateřina Prachařová