In this article, we will briefly summarise the main features of Interpretation I-38 of the National Accounting Council entitled “Accounting Treatment of the Sale of Equity Investments in Subsidiaries in Consolidated Financial Statements”.
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-38 ‒ Accounting Treatment of the Sale of Equity Investments in Subsidiaries in Consolidated Financial Statements
Interpretation I-38 (hereinafter the “Interpretation”) was issued in February 2019 in response to the query as to what accounting and presentation treatment should be applied to the sale of 100% equity investments held in subsidiaries in consolidated financial statements. The Interpretation does not deal with the partial sale of investments.
The Interpretation is based on the premise that “from the perspective of consolidated financial statements, the substance of the sale of equity investments held in subsidiaries is similar to transactions constituted by the sale of business under the perspective of single financial statements”. The sale of business is dealt with by Czech Accounting Standard No. 011 – Transactions related to Businesses.
The general results arising from the Interpretation are as follows:
- The subsidiary has been consolidated from the date of acquisition to the date of the sale of the full (100%) equity investment.
- In the event that the full equity investment is sold in the course of the reporting period, as of the balance sheet date the assets and liabilities of the subsidiary are no longer included in the consolidated assets and liabilities.
- The subsidiary’s assets and liabilities at a value determined at the sale date are reported (derecognised) in the consolidated profit and loss, specifically in other operating expenses (or other operating income, if the net assets sold have a negative value).
- The reserves and provisions reported by the subsidiary are not released (as opposed to the treatment applied on the sale of business under Czech Accounting Standard 011). Conversely, the reserves and provisions are included in the net assets sold. Therefore, as of the sale date, together with other components of net assets, they are reported in other operating expenses.
- Other items to be derecognised are the book value of goodwill arising on consolidation, minority interests, and any deferred taxes.
- It is advisable to obtain the values of the assets and liabilities sold, of derecognised goodwill and of minority interest from interim financial statements.
- The income from the sale of equity investments is recognised in other operating income. Therefore, it shall be reclassified from the financial profit or loss (under which it was reported as part of single financial statements of the parent company).
Given that income and expenses related to the sale of equity investments are not transactions that occur regularly, in line with the requirements of Regulation 500/2002 Coll., the Interpretation includes a list of items that ought to be disclosed separately in the notes to the financial statements.
In addition, the Interpretation includes a comprehensive illustrative example.
The full wording of the Interpretation can be found on the National Accounting Council‘s website.
The article is part of dReport – May 2019, Accounting news.