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Over the past few months, the situation in the energy market has led to interventions by the state aimed at mitigating the impact on businesses (among others). Several measures have come into force to help businesses and households combat high energy prices. Business entities also have to deal with their implementation in accounting – the situation is not made any easier by the fact that the individual state-imposed measures came into force before the year-end and therefore have to be considered when preparing the financial statements as of 31 December 2022 and in the accounting for 2023.
Compensation for high energy and gas prices (“temporary crisis framework”)
Within the Temporary Crisis Framework for state aid measures to support the economy after Russia’s aggression against Ukraine, approved by the European Commission, the Ministry of Industry and Trade (MIT) announced on 19 October 2022 Call 1 of the Programme of Support for Increased Costs of Natural Gas and Electricity as a Result of Exceptionally Sharp Price Increases (hereinafter referred to as “Call 1”). Call 1 is intended for businesses that are not subject to the capping of energy prices under Government Regulation No. 298/2022, as amended. The support is provided in the form of a subsidy for eligible costs, which are the costs of purchasing electricity and natural gas incurred in connection with the increase in their prices.
The application acceptance process under Call 1 started on 15 November and ended on 8 February 2023, which makes it necessary for some applicants to consider recognising the related transactions in the company’s accounting or financial statements.
Basic guidance can be found in the accounting regulations (e.g. Regulation No. 500/2002 Coll., Section 47 (6)), as well as in the National Accounting Council’s Interpretation I-14 “The timing of recognition of entitlement to the receipt or repayment of a subsidy”, which discusses the “unquestionable entitlement to a subsidy”. This particular aid scheme was also addressed by the Chamber of Auditors of the Czech Republic (the Chamber), which issued an opinion in the Questions from Practice on Accounting Methodology section on the recognition of entitlement to a subsidy in a situation where the application was submitted in 2022, but the decision to grant the subsidy was not issued until the following period.
Compensation under Call 1 relates to costs incurred during the eligible period from 1 February 2022 to 31 October 2022. The accrual principle, i.e. the principle that expenses and income are recorded in the period in which they occur, favours the recognition of income from this subsidy in the same reporting period, i.e. in 2022. However, the accrual principle can only be applied if the grant is unquestionable as of the balance sheet date (prudence principle).
Article 8 (12) of Call 1 directly states that there is no legal entitlement to the subsidy, which offers the conclusion that the moment of unquestionable entitlement to the subsidy is when the decision to grant it is taken. However, the Chamber commented on the need to evaluate other aspects of Call 1, such as the fact that Call 1 does not foresee the closing of the application acceptance due to the allocation limit, that there is no selection of applicants and the MIT provides full support to all, or that support is not conditional on the fulfilment of additional conditions after the submission of an application. For this reason, the Chamber is of the opinion that an undoubted entitlement in individual exceptional cases may arise earlier than an undisputed entitlement given at the time of the grant decision.
If the entity concludes that there are no other circumstances relating to the application that could cast doubt on the claim, such as the return of the application for reworking, the grant may be shown as a receivable (an asset) and other operating income in the 2022 financial statements. It is certainly also appropriate to support this approach with facts that occur in a subsequent reporting period (in particular, the granting of the MIT claim and the cash consideration received after the balance sheet date).
If an entity chooses to follow the above opinion of the Chamber, the reasons and arguments must be disclosed in the notes to the financial statements, together with subsequent events that support the decision. Consideration should also be given to the possible tax consequences, e.g. if, on the other hand, the entity decides to exercise the prudence concept and wait until the decision on the grant is made.
Please note that this procedure cannot be automatically applied in a manner similar to other subsidy programmes; the Chamber’s opinion applies only to Call 1.
To mitigate the negative impact of high energy prices, the Czech government issued several regulations:
Simply put, these regulations introduced a cap on electricity and gas prices for households, small and medium-sized enterprises and providers of public utilities, and also for large enterprises while setting out the conditions for compensating producers and traders of electricity and gas for the losses they incur.
The application of price caps, therefore, affects both energy suppliers and energy consumers. A brief description of the related accounting transactions is given below. The accounting presentation of these transactions is not comprehensively addressed anywhere, but is acceptable from our point of view:
Price cap from the customer’s perspective
Price cap from the supplier’s perspective (electricity and gas producers and traders):
The accounting entry can then come in two forms:
– 311/602 at the price defined by the regulation
– 311/601A at the original price and correction – reduction to the price according to the regulation -311/-601A
Levies on excess income in the energy sector
For the sake of completeness, here is another measure that may be of interest from an accounting perspective. It applies only to electricity producers and intermediaries participating in the wholesale market on behalf of producers. The legal framework is provided by Council Regulation (EU) 2022/1854 of 6 October 2022, which was transposed into Czech legislation by means of an amendment to the Energy Act No. 365/2022 Coll. and Government Regulation No. 407/2022 Coll. of 7 December 2022 on the method of determining the amount of excess income from the sale of electricity produced.
The subject of the levy is the producer’s excess income, which is determined as the difference between the actual income and the market income cap. For more information, see our article ‘What are the rules for levies on excess income in the energy sector?‘.
Electricity producers that prepare their financial statements under IFRS will follow IFRIC 21 Levies when recognising levies on excess revenue. We recommend that entities preparing their financial statements in accordance with Czech accounting legislation recognise the levies on excess income under Accounting Group 53 – Sundry taxes and charges or Accounting Group 54 – Other operating expenses.
The aim of the article was to highlight selected problems and possible accounting implications of the current state measures to address high energy prices. It is necessary to consistently distinguish between the concepts of prepayment, rebate and subsidy. Despite the short time companies have had to reflect the implications in their accounting, it is important to note that these forms of government support can represent significant items in financial statements and deserve our attention.
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