In this article, we will briefly summarise the main features of Interpretation I-39 of the National Accounting Council entitled “Stock-count Differences on Inventories and Fixed Assets”.
About the National Accounting Council
The National Accounting Council (the “NAC”) is an independent professional institution promoting professional competencies and ethics in the development of accounting professions and in respect of accounting and financing policies. Its members include the representatives of significant professional organisations (the Czech Chamber of Auditors, the Czech Chamber of Tax Advisors, the Accountants’ Union) and academia (University of Economics).
The National Accounting Council’s primary mission is to cooperate with the Ministry of Finance, and other governmental, legislative and other institutions in drafting legislation and the related norms on accounting. Also, the Council’s task is to create, update, publish and distribute the Czech Accounting Standards and interpretations of the National Accounting Council.
Interpretations of the National Accounting Council
The interpretations express the expert opinions of the National Accounting Council on hands-on application of Czech accounting rules. The interpretations are not legally binding. Their aim is to contribute to the formation of optimal and unified accounting and financial reporting procedures. They namely focus on issues that are either not addressed by Czech accounting regulations or that are not tackled sufficiently. Also, the focus is on areas for which no unified treatment is applied in day-to-day accounting practice.
Interpretation I-39 ‒ Stock-count Differences on Inventories and Fixed Assets
Interpretation I-39 (hereinafter the “Interpretation”) was issued in April 2019 with the aim of defining a uniform accounting treatment of selected contentious cases of stock-count differences on inventories and fixed assets.
This area of accounting is governed by two accounting regulations – Regulation No. 500/2002 Coll. for businesses (hereinafter the “Regulation”) and Czech Accounting Standard for Businesses No. 007 “Stock-count differences and losses as part of the standards for inherent inventory disposals” (hereinafter “CAS”), dealing with the accounting for stock-count differences on fixed assets as well. A closer look at those accounting standards will reveal that both regulations stipulate the same requirements as regards accounting for a shortfall or deficit – these have to be recognised under operating or financial expenses based on the underlying activity. However, the regulations differ in terms of accounting for surpluses. While the Regulation requires recognising surpluses under operating income, a correction of expenses (i.e. crediting surpluses to expenses) is required by CAS.
The Interpretation only addresses selected issues relating to stock-count differences.
The fundamental conclusions of the Interpretation are as follows:
Initially, it is necessary to assess whether the stock-count differences are caused by a prior year error or whether they arose in the current period:
- If the stock-count difference is assessed as a prior year error, it will be important to identify whether the error arose solely in the prior period or in multiple prior periods. In such a case, Interpretation I-29 has to be applied, stipulating that an error must be reported in the comparable period to which it relates, or as part of equity presented in the most recent financial statements. According to the Regulation, correction of this error, if material, will be recognised in the item “A.IV.2. Other profit or loss from prior years”. Immaterial errors are charged to expenses or income of the current reporting period.
- If the stock-count difference is due to an error arising in the current reporting period, a standard correction corresponding to the specific accounting case will be made.
Accounting for inventory surpluses
The Interpretation prefers for inventory surpluses to be accounted for as a correction of expenses, i.e. crediting surpluses to expenses instead of to income. This is a correction of the value of inventory released from the warehouse rather than additional income from the entity’s activity.
Accounting for fixed assets deficits and surpluses
The Interpretation specifies that accounting for stock-count differences on fixed assets depends on whether the fixed assets are or are not depreciated/amortised and to which reporting period they relate.
1. Deficits relating to the current period
a) Depreciated/amortised assets – the carrying amount of these assets is recognised (and the assets are disposed of):
DR Other operating expenses
CR Accumulated depreciation/amortisation
b) Assets that are not depreciated/amortised – the assets being disposed of are recognised (and disposed of):
DR Other operating expenses
CR Tangible fixed assets that are not depreciated
2. Deficits relating to the prior period
The entity should consider an alternative accounting treatment giving a true and fair view, including an adjustment (if any) to comparative data in the financial statements.
3. Surpluses relating to the current or prior periods
The Interpretation stipulates that asset surpluses should not be recognised under operating income (as required by the Regulation); however, where asset surpluses relate to the current period, they should be treated as an adjustment to the original accounting treatment. Asset surpluses relating to prior periods should be usually accounted for and recognised as a prior year error.
a) Depreciated/amortised assets
DR Tangible/intangible fixed assets
CR Accumulated depreciation/amortisation
In this case, the surplus of depreciated/amortised assets are reported in the zero carrying amount. This accounting treatment is recommended by the Interpretation in the event that the respective assets have already been fully depreciated/amortised. However, if the surplus arose from an inappropriate recognition or valuation of assets in the current reporting period, the Interpretation stipulates that “the entity must determine an accounting treatment giving a true and fair view of the economic use of the asset, its carrying amount and reflecting the surplus in the period to which it relates.”
b) Assets that are not depreciated
DR Tangible fixed assets
CR Registered capital and capital funds
This accounting treatment may be used when the asset surplus relates to the current period. However, if the surplus relates to one of the prior periods, this may be a prior year error. In this event, it will also be necessary to adjust comparative data in the financial statements.
The Act on Accounting requires that assets newly reported in the accounting records (such as a stock-count surplus) be measured at replacement cost. In line with the Interpretation, if, however, the surplus arises from an incorrect accounting treatment or measurement in prior periods, its measurement will have to correspond to the measurement which would be applied upon the origination of the surplus as if the assets were accounted for correctly.
The full wording of the Interpretation can be found on the National Accounting Council‘s website.
The article is part of dReport – June 2019, Accounting news.