Entities with their reporting periods being calendar years slowly start planning the preparation of their annual financial statements. Preparation of the financial statements includes namely the planning of asset and liability counts, closing operations, such as calculations of deferred or due income tax or a reserve for the tax, recognition of estimated balances and accruals and deferrals, a review of entity classification as part of the reporting entity categorisation rules and other activities.

Is an inventory count of equity necessary?
The Accounting Act does not explicitly require equity to be counted. The reason for “omitting” equity in the list of items that are subject to inventory taking is the fact that the amount of equity results from the difference between assets and liabilities. If assets and liabilities that are subject to inventory taking pursuant to the Act are duly reviewed and any inventory differences are duly accounted for, the value of equity should be reported correctly as far as its amount is concerned.

Fortunately, entities and their management often review equity in terms of its structure rather than being satisfied just with the above indirect review of its amount. The review is based on the entity’s key documents, resolutions of the entity’s top bodies (the general meeting, the Board of Directors), the company’s decisions, records in the Register of Companies, company transformation projects, documents on fair value measurement, donation contracts, etc.

Registered share capital
When reviewing the registered share capital, its increase or decrease, if any, is examined. A record to the Register of Companies is crucial in accounting for the increase or decrease on the account of the share capital. Before the record in the Register of Companies, group account 41 – Changes in share capital is provisionally used.

In verifying the share capital item, attention should be paid to receivables for subscribed capital. Business corporations such as limited liability companies must pay in the subscribed capital within the deadline agreed in the Memorandum of Association, no later than within five years from the establishment of the company or from the assumption of the contribution obligation during the company’s existence. In business corporations such as joint-stock companies, the establishment of the company is effective if all founders pay the share premium that may arise and in aggregate, at least 30% of the nominal or net book value of subscribed shares within the period stipulated in the Articles of Association, no later than on the date on which a motion to make a record in the Register of Companies is made. A shareholder is obliged to pay up the issue rate of the shares subscribed by it within the period stipulated in the Articles of Association or in a decision of the general meeting on the increase of the share capital, no later than within one year from the date of the company’s formation or from the effective date of the increase in the share capital.

Closing activities should include a review to determine whether the entity creates a reserve or other funds under the Memorandum of Association or the Articles of Association, or based on a decision of the general meeting.

Distribution of profit of a limited liability company
Pursuant to Section 161 of the Business Corporations Act, the amount of profit to be distributed to partners should not exceed the amount of profit of the most-recent completed reporting period increased by retained earnings brought forward and reduced by the loss of prior periods and contributions to the reserve and other funds in line with the Business Corporations Act and the Memorandum of Association.

Pursuant to Section 181 of the Business Corporations Act, the general meeting discusses financial statements no later than six months from the last day of the prior reporting period.

Distribution of profit of a joint-stock company
Pursuant to Section 350 of the Business Corporations Act, a joint-stock company shall not distribute profit or any other internal funds to shareholders if at the date of completion of the most-recent reporting period the company’s equity resulting from the regular or extraordinary financial statements or the share capital after the distribution falls below the level of the subscribed share capital increased by the funds that may not be distributed to shareholders pursuant to the Act or the Articles of Association.

Pursuant to Section 403 of the Business Corporations Act, the general meeting will discuss the financial statements no later than within 6 months from the latest date of the previous reporting period.

Reporting profit or loss for the previous reporting period as of the balance sheet date
As of the balance sheet date, Account 431 Profit or loss reported at the end of the previous reporting period in item “A.V. Profit or loss for the current period” should be settled. In the current period, the general meeting should decide on the treatment of the profit or loss generated or incurred, as appropriate, in the prior period. If the general meeting fails to make a decision, the next steps are defined by Czech Accounting Standard No. 018 Capital accounts and long-term liabilities, Section 3.1.11. There should be no balance on this account when the books are closed. If no decision is made on the use of the profit or loss, the balance of this account is credited (in case of profit) or debited (in case of loss) to the relevant account of accounting group 42 – Funds from profit and transferred profit or loss disclosed in item “A.IV.1. Accumulated profit or accumulated loss brought forward (+/-)”.

This provision is practical for reporting entities; however, it may be in conflict with the general meeting’s responsibility in connection with the approval of the financial statements and profit distribution or the settlement of loss. This is the last recourse, the natural situation is for the general meeting or the sole owner or shareholder to make the decision during the reporting period. At the same time, an error may occur if a sufficient amount of funds from profit is not created (pursuant to the Articles of Association or Memorandum of Association) to settle the loss or in respect of holding treasury shares.

Bankruptcy
In the end, it should be reviewed that the circumstances specified in Section 182 of the Business Corporations Act did not materialise. According to the provision, a statutory executive is obliged to call a general meeting as soon as he/she learns that the company is at risk of bankruptcy or if the goal pursued by the company is at risk and shall propose to the general meeting to adopt another appropriate measure or liquidate the company in the last resort.

Pursuant to Section 403 of the Business Corporations Act, the Board of Directors will call a general meeting if it learns that the amount of the company’s total loss based on the financial statements is so high that if paid from the company’s available funds the accumulated loss would amount to half of the share capital, or such a situation may be expected with respect to all circumstances, and shall propose an appropriate measure or the company’s liquidation in the last resort.

If the reporting entity reports a deficit on its equity it should be considered whether it is not bankrupt pursuant to the Insolvency Act. If the entity is bankrupt, it should file an insolvency motion.

Conclusion
The above specified shows that although the Accounting Act does not explicitly require equity counting it makes sense, namely for the company’s management, to pay attention to the item. Financial statements provide sufficient support to make a detailed analysis.

The article is part od dReport – October 2018, Accounting news.