National Accounting Council Interpretations

Interpretations express the National Accounting Council’s expert opinion on the practical application of Czech accounting regulations. Their purpose is to contribute to the development of optimal and consistent approaches in the area of accounting and financial reporting. They focus primarily on matters that are not addressed by Czech accounting regulations, are addressed inadequately, or on areas where accounting practice is inconsistent.

Although the Interpretations are not legally binding, the Supreme Administrative Court has accepted them, on several occasions, as a valuable source complementing accounting legislation.

Interpretation I‑53 Accounting for investments using the equity method in separate financial statements

Interpretation I‑53 Accounting for investments using the equity method in separate financial statements (hereinafter the “Interpretation”) provides an interpretation of the term “share in equity”, which is used by Decree No. 500/2002 Coll. for entrepreneurs (hereinafter the “Decree”) to define the equity method. The Interpretation’s approach differs from the prevailing practice to date and, particularly for investments acquired through purchase, may lead to significantly different measurement.

Prevailing practice to date

To date, most reporting entities, when applying the equity method (i.e. accounting for investments in a controlled entity or an entity under significant influence as at the balance sheet date), have relied on an interpretation of Section 51(3) of the Decree under which changes in the value of such investments are recognised through balance sheet accounts within account group 41. The carrying amount of the investment in such entities was, as at the balance sheet date, determined by applying the ownership interest to the equity reported in their financial statements at that date. This can be illustrated by the following example:

Example

Company A acquired a 40% interest in Company B on 1 January 2025 for CZK 10 million. Company B is a highly successful start-up with significant growth potential. Company B’s equity at the acquisition date, as presented in its financial statements, was CZK 100 thousand. In 2025, Company B generated a profit of CZK 2 million, which was even CZK 0.5 million above plan, and its equity as presented in its financial statements therefore amounted to CZK 2,100 thousand as of 31 December 2025.

Under the prevailing practice to date, Company A would take the CZK 2,100 thousand as of 31 December 2025 and apply its 40% ownership interest. This would result in the investment being measured at CZK 840 thousand (2,100 × 0.4) and, at the same time, recognising a “loss” of CZK 9,160 thousand in equity – the revaluation reserve. The question is whether such a significant decrease in value reflects economic reality, i.e. whether—using the wording of the Accounting Act—it presents a true and fair view. The answer is fairly straightforward. The purchase price agreed between unrelated parties provides the best evidence of fair value. In the case of Company B, no events occurred during the year that would indicate a decrease in such value; on the contrary, its performance exceeded the original expectations. Objectively, therefore, no significant decrease in the value of the asset occurred. It therefore appears that the prevailing interpretative practice to date was inconsistent with the fundamental principle on which financial statements are based—namely, presenting a true and fair view of the reporting entity’s financial position.

Interpretation I‑53

The Interpretation of Section 51(3) of the Decree is consistent with the interpretation of Section 63(6) of the Decree for the equity method of consolidation (based on consideration), and, similarly, with the way the equity method is defined in separate financial statements by Decree No. 501/2002 Coll. for banks and other financial institutions. It is based on the fundamental premise that the acquisition cost of the investment should subsequently be adjusted for the investor’s share of changes in equity between the acquisition date and the measurement date under the equity method. In order to minimise differences between the application of the equity method in separate financial statements of entrepreneurs and financial institutions and in consolidated financial statements, the Interpretation introduces additional mandatory adjustments. The most significant of these is the amortisation of the difference between the acquisition cost of the investment and the investor’s share in the fair value of the acquired net assets (this difference is referred to as goodwill in separate financial statements and as the consolidation difference in consolidated financial statements). In this case, this “goodwill” is not presented separately but remains an integral part of the carrying amount of the investment. What the Interpretation does not change is the fact that the impact of equity method adjustments (whether arising from changes in equity or from the amortisation of “goodwill”) is recognised against equity – the revaluation reserve – and only dividends received are recognised in the statement of profit or loss. Let us illustrate this concept using the same example as above.

Example

Under the Interpretation’s approach, Company A would first have to determine the amount of “goodwill”, i.e. the difference between the acquisition cost of the investment in Company B and its share in the fair value of the acquired net assets at the acquisition date. Let us assume that the fair value of Company B’s net assets (assets less liabilities) equals the carrying amount of equity, i.e. CZK 100 thousand. The “goodwill” at the acquisition date would therefore amount to CZK 9,960 thousand (10,000 − 100 × 0.4). Management of Company A must then determine the period over which this “goodwill” will be amortised. Given the nature of the business and the expected return of the investment, management determined an amortisation period of 10 years. The annual amortisation charge would amount to CZK 996 thousand.

As of 31 December 2025, the investment in Company B would be measured as follows:

Acquisition cost (CZK 10,000 thousand) – amortisation of goodwill (CZK 996 thousand) + share of profit for 2025 (2,000 × 0.4) = CZK 9,804 thousand.

The difference between the acquisition cost of the investment of CZK 10,000 thousand and the carrying amount as at the balance sheet date of CZK 9,804 thousand represents a “loss” of CZK 196 thousand, which is recognised against equity – the revaluation reserve.

As illustrated, in this particular case the Interpretation’s approach also leads to a decrease in the carrying amount of the investment. This decrease is driven by the straight-line amortisation of “goodwill” and may be fully offset in subsequent periods if Company B’s profit increases.

Comparison of the two methods

062 – Investments in associates 

414 – Revaluation differences from the remeasurement of assets and liabilities

Disclosures in the notes to the financial statements

In the notes to the financial statements, it is necessary to disclose both a description of the method applied and other relevant quantitative information, including a breakdown of the carrying amount of the equity-accounted investment into (i) the share in equity and (ii) goodwill, as well as the goodwill amortisation period.

Other adjustments required by the Interpretation

However, the Interpretation does not stop at determining and amortising goodwill. Similarly to the equity method of consolidation (based on consideration), the following aspects also need to be taken into account:

• Differences between the carrying amounts of individual assets and liabilities and their fair value at the acquisition date. This will be particularly relevant for investments in entities that own real estate. This difference must also be amortised over the useful life of the relevant asset (taking into account any deferred tax).
• Foreign currency investments. If the investment is denominated in a foreign currency, the example in the Interpretation shows that the acquisition cost and goodwill themselves are not retranslated at the balance sheet date, and only the change in equity since the acquisition date is translated at the closing rate.
• Investments in entities applying a different accounting framework. If the investment is in an entity that does not apply Czech accounting regulations in preparing its financial statements, the first step is to align accounting policies. Equity and changes in equity cannot be taken directly from the financial statements; instead, they must first be adjusted to the amounts that would have been reported if the financial statements had been prepared in accordance with Czech accounting legislation.
• Impairment of the investment. The Interpretation’s approach, and the fact that the residual amount of goodwill remains included in the carrying amount of the investment, go hand in hand with the possibility that the investment may be impaired, because its carrying amount exceeds the net assets reported in the investee’s financial statements. When the subsidiary or associate does not perform as planned or expected, an impairment test should be performed and, where appropriate, an impairment allowance should be recognised for the equity-accounted investment.
• Impact of transformations. If, within a group, a transformation occurs that involves remeasurement to fair value, such remeasurement should not affect the application of the equity method. In other words, the change in equity arising from the transformation should reflect only the carrying amounts of the transferred net assets.

If any of the above situations applies to your company, it is advisable to study the text of Interpretation I‑53 and the accompanying examples in detail. Another option is to attend the “Updates in Czech Accounting” annual training course organised by Deloitte where this Interpretation will be discussed in detail.

Adoption of the new interpretation

National Accounting Council Interpretations are not legally binding; however, they typically lead to reporting that better reflects the principle of a true and fair view, as is evident in this case from the example above. Furthermore, the Interpretation itself notes that the equity method is defined in European Directive (EU) No. 341/2013, with which Czech accounting legislation should be fully consistent. This Directive primarily defines the equity method for consolidation and allows its use also in separate financial statements (subject to certain specific requirements). It is therefore clear that the equity method should be applied consistently and, in substance, in the same way as in consolidated financial statements, where relevant. Application of the approach set out in this Interpretation is therefore consistent with European law.

We believe that the change in interpretation should be understood in a manner similar to a change in accounting policy and reflected in the company’s financial statements accordingly. When a change in accounting policy occurs, comparative information must be adjusted as if the new policy had always been applied, and the change must be described in the notes to the financial statements together with a quantification of its impact on the company’s financial position.

Conclusion

The Interpretation does indeed bring a fundamental change to the application of the equity method in separate financial statements; however, this change will primarily affect only those investments that were acquired through purchase and where the purchase price differed significantly from the carrying amount of the share in equity. Attention is also required where a transformation involving remeasurement to fair value has taken place, because such remeasurement should be excluded from the application of the equity method. For those reporting entities that apply the equity method only to investments in entities they themselves established, and where no transformation with remeasurement has occurred, there is, in effect, no revolution.

It is also worth emphasising that the draft of the new Accounting Act, in the version currently being discussed by the Chamber of Deputies, approaches the application of the equity method in separate financial statements in the same way as Interpretation I‑53. If a company’s management decides to proceed in accordance with this Interpretation, the transition to the new legislation will be significantly easier for them.

Source: www.nur.cz