… in readings of the National Accounting Council…

The National Accounting Council (NAC) is an independent institution constituting of professionals who serve to uplift professional competence and ethics upon advancement of accounting professions. It was founded in 1999 by the Chamber of Auditors of the Czech Republic, Chamber of Tax Advisers of the Czech Republic, Association of Chartered Certified Accountants, and the University of Economics in Prague represented by the Faculty of Finance and Accounting; all of these institutions are the founding and at the same time the current members.

The readings of the NAC express expert opinion and contribute to the advancement and better quality of accounting regulations of the Czech Republic. This way they strive for a unified and correct interpretation of the Act on Accounting and other legal provisions. These readings have gained respect and today they are widely used in practice.

As an example we can present reading I- 17 property lease incentives (further only “I – 17”). There have been more and more cases emerging where in exchange for signing a lease agreement for a fixed period of time the landlord gives the tenant a discount on the rent for a certain period of time (or makes it free for the given period), for example for the first 6 months.

A number of accountants believed that if the lease isn’t being paid, it doesn’t have to be accounted for. Other specialists in the field were of the opinion that even in this case one should adhere to the principle governing accruals-based accounting of expenses and revenues.

The National Accounting Council have agreed that such transactions are very common nowadays, that rent is usually a significant part of service expenses for accounting entities, and that a unified solution for these transactions would benefit the quality of financial statements. This process resulted in the already mentioned reading I – 17. In accordance with this reading, rent should be accounted for when the tenant is using the service and not when it is paid for. However, this stands only if the discount on rent has been given in exchange for signing the lease agreement for a fixed period of time. If there is a discount for any other reason, such as the lift being out of order etc., the solution suggested in the reading cannot be mindlessly applied.

As another example we can mention reading I – 29 Corrections of errors, changes in accounting estimates, and changes in accounting methods (“I – 29”). Since January 1^st, 2013 provision § 15a of regulation no. 500/2002 Sb. has been in force and significantly changed the process of accounting and correcting mistakes in previous years and changing accounting methods. In connection to this new process of accounting, many questions from practice have risen about what is actually considered an error, what is an estimate, and what is a change of method. These are all very different situations and therefore, each has a different impact on accounting and affects financial statements differently.

An error in previous years can be neglect, erroneous accounting in previous periods, or erroneously recognized items in financial statements. These are often a result of not using certain data or information or using data and information available incorrectly at the time of preparation of financial statements. They can also be the result of incorrect use of accounting rules, mathematical error, or fraud. If there is an error in a financial statement, the statement can no longer be considered correct and reliable.

An accounting estimate means the data in a financial statement that cannot be exactly determined – because such is the nature of entrepreneurship which brings with itself a certain amount of uncertainty – and their amounts can only be estimated. The estimates are made based on the current information which is available at the time of the preparation of the financial statement. The main purpose of the estimates is to contribute to the completeness and reliability of the financial statement. Most often these are estimations of valuation allowances, reserves, or accrued expenses.

However, the line between an error and a change of an estimate is very thin and there is not always a simple solution. For example, an incorrect amount of a valuation allowance can be the result of a fraud or negligence during mathematical calculations and consideration of currently available information.

While corrections of errors are recognized retrospectively, a change of an estimate is shown in the current and possibly the following financial years. The financial statement which contained the financial year in which an error has been corrected looks as if there never was any error at all. On the other hand, a change of an estimate only shows in the result of the economic activities of the current financial year (and possibly in the following ones) while comparative data are not adjusted at all.

Example no. 1

In 2016, company Alfa, JSC, removed tangible fixed assets of residual value of CZK 50 000 by selling them for CZK 1 million. The takings from this sale of assets have not been accounted for in 2016 and this fact has only been found out in 2017.

The accounting entity did not account for an accounting event when compiling its financial statements and thus, it has made a substantial error which must be corrected retrospectively. The takings from the sale of tangible fixed assets will be recognized in the financial statements for 2017 in the profit and loss account as takings from sale of fixed tangible assets conducted in 2016. This correction will show in equity in the line Other economic results.

Example no. 2

In its financial statement for 2015, company Beta, LLC, has recognized an accrued expense for the use of energies of CZK 200 000. In 2016 the accounting entity has received an invoice for CZK 220 000.

If the accounting entity considered all available information at the time of estimation, this will be considered change of an accounting estimate. The change will show in the financial year in which it has been done, that is in 2016.

Example no. 3

After an adequate analysis of tax regulations, company Gama, LLC, classified an expense as tax deductible. However, the following year a new judicature appeared and questioned the chosen solution and the financial administration assessed additional tax.

The additionally assessed tax will be considered a change of an estimate because it appeared as result of new information. The accounting entity has considered all information accessible to assess the tax. Therefore, it will be recognized as expense in the financial year when the additional tax was assessed.

You are welcome to attend the seminar called “Inspiration for your accounting policies from the National Accounting Council” which takes place October 26^th, 2017 in the offices of the Fučík & partners company where we will talk in more detail about other readings of the NAC.