Amendment to Regulation No. 501/2002 Coll., for Banks and Other Financial Institutions, from 1 January 2018

Main reasons for the amendment

The main reasons for the amendment to Regulation No. 501/2002 Coll., for reporting entities that are banks or other financial institutions (hereinafter the “Regulation Amendment”), were as follows:

Effectiveness of the new International Financial Reporting Standard adopted for use in the EU – IFRS 9 Financial Instruments, which replaces IAS 39 Financial Instruments: Recognition and Measurement from 1 January 2018;
Incorporation of changes brought by Act No. 257/2016 Coll., on Consumer Lending, as amended; and
Changes of a legislative and technical nature.

Primary changes in the Regulation

The primary changes brought by the Regulation Amendment include:

(1) Presentation, measurement and disclosure of financial instruments

A new Section 4a was added, introducing the obligation for reporting entities “to present, measure and disclose information on financial instruments in the notes to the financial statements in line with the international accounting standards adjusted by directly applicable regulations of the European Union on the application of international accounting standards”. A financial instrument means a financial instrument as per international accounting standards. This therefore means that from 1 January 2018 reporting entities have to present, measure and disclose information on financial instruments in line with the following International Financial Reporting Standard (IFRS):

IFRS 9 Financial Instruments
The standard sets out requirements for recognition, measurement, impairment and derecognition of financial assets and financial liabilities and general hedge accounting.

IAS 32 Financial Instruments: Presentation
The standard sets out the principles of classification and presentation of financial instruments as debt or equity instruments and for offsetting financial assets and liabilities.

IFRS 7 Financial Instruments: Disclosures
The standard defines requirements for disclosures that will enable users of financial statements to evaluate the significance of financial instruments for the reporting entity and to discover the nature and extent of risks arising from financial instruments and the way in which the reporting entity manages these risks.

In Financial Bulletin No. 10/2017 of 22 December 2017, the Ministry of Finance issued a communication concerning this extensive change of accounting methods in the area of financial instruments. The communication of the Ministry of Finance states: “The reference to IFRS for the purposes of presentation, measurement and disclosure of financial instruments in the notes to the financial statements will ensure that the affected reporting entities will have access to principles and policies for reporting more complicated transactions.”

The Communication of the Ministry of Finance also provides a more comprehensible explanation of the transitional guidance included in Article II, paragraph 2 of the Regulation, which provides certain reporting entities with a three-year transitional period to ensure a problem-free transition to the new accounting methods and requirements concerning financial standards. The reporting entities which will have to follow IFRS in the area of financial instruments only from 1 January 2021 are:

a) Securities traders, organisational branches of a foreign securities trader pursuant to the Act on Capital Market Trading;
b) Investment companies and investment funds or branches of a foreign entity that is authorised to manage investment funds or foreign investment funds pursuant to the Act on the Activities of Investment Companies and Investment Funds; and
c) Pension companies, participants funds or transformed funds pursuant to the Act on Supplementary Pension Savings.

In line with the communication of the Ministry of Finance the above reporting entities will use Czech Accounting Standards for Financial Institutions as amended as of 1 January 2018.

Reporting entities that cannot use the transitional period in the area of financial instruments (i.e. banks, savings and loan cooperatives, financial holding groups, electronic money institutions and payments institutions) will not use Czech Accounting Standards for Financial Institutions effective as of 1 January 2018 in the area of financial instruments, but instead the directly applicable regulations of the European Union on the application of international accounting standards in line with Section 4a of the Regulation.
A number of changes to the Regulation also follow from the fact that IFRS 9 categorises financial assets differently from the previous standard IAS 39. Financial assets are now classified as measured at amortised cost, at fair value through equity and at fair value through profit or loss.

(2) Cash flow statement

Section 3 of the Regulation adds the obligation to prepare the cash flow statement, which already follows from Section 18 (2) of the Accounting Act. Pursuant to the Act, this obligation applies only to medium-sized and large reporting entities, but it does not concern public interest entities (banks, savings and loan cooperatives, insurance companies, pension companies and health insurance companies).

Entities are newly required to prepare the cash flow statement with an adequate application of Regulation No. 500/2002 Coll., for Businesses.

(3) Cancellation of extraordinary income and expenses

The profit and loss account items ‘Extraordinary income’ and ‘Extraordinary expenses’ have been cancelled.

The Regulation Amendment also fine-tunes certain other provisions in a legislative and technical respect, which will not lead to any significant changes in practice.

The Regulation Amendment came into force on 1 January 2018 and it will apply for reporting periods beginning on or after 1 January 2018.
The full text of Regulation No. 501/2002 Coll. can be found here.

Amendment to Czech Accounting Standards

Following the Regulation Amendment, on 22 December 2017 the Financial Bulletin published changes to Czech Accounting Standards for reporting entities maintaining accounting records under Regulation No. 501/2002 Coll., effective from 1 January 2018.
The main change is that form 1 January 2018 CAS Nos. 108 Securities and 110 Derivatives will not be used by banks, savings and loan cooperatives, securities traders, financial holding groups, electronic money institutions and payments institutions.
The full text of the changes in Czech Accounting Standards for Banks and Other Financial Institutions can be found here.

How we can help you?

The amendment to Regulation No. 501/2002 Coll., for Banks and Other Financial Institutions, and the newly introduced obligation to follow IFRS in the area of financial instruments will entail an extensive and difficult change for many reporting entities.

In this respect Deloitte can offer you:

• English-language publications at www.iasplus.com;
• Consultations with Deloitte experts concerning the specific impacts of IFRS 9 on your reporting entity;
  dReport articles addressing this topic;
• Assistance during the implementation of the requirements set by this new standard; and
• Seminars on IFRS 9 Financial instruments.

If you would like to find out more about our advisory services, please contact David Jurčík (djurcik@deloitteCE.com).