Accounting 

I-46: A new interpretation of the National Accounting Council

The following article briefly summarises the key points of the new National Accounting Council’s interpretation I-46: the accounting treatment of free business and settlement shares in limited liability companies (“LLC”) and a settlement share in associations.

The National Accounting Council’s interpretation

The interpretations express the National Accounting Council’s expert opinion on the practical application of the Czech accounting regulations and are not legally binding; however, they are aimed at contributing to the formulation of optimal and uniform practices in the area of accounting and reporting. The interpretations mainly address issues that are not covered by the Czech accounting regulations or that are covered only insufficiently as well as areas that are handled inconsistently in the accounting practice.

Interpretation I-46: The accounting treatment of free business and settlement shares in LLCs and a settlement share in associations

The I-46 interpretation (“Interpretation”) was issued in June 2021 to unify the accounting treatment of free business and settlement shares in LLCs and associations. It addresses only the monetary settlement of a partner, not the non-monetary compensation.

The regulation of free business and settlement shares is covered mainly by Section 36 and Sections 212 – 215 of the Act on Business Corporations. More detailed regulation of this matter has been missing in the accounting legislation so far.

A settlement share arises upon the termination of a partner’s participation in a business corporation during its existence in a manner other than by a transfer of the partner’s share or by an auction knock-down.

A free business share is the share of a partner whose participation in an LLC was terminated (in a manner other than by a transfer). The LLC is obliged to sell such a free business share at a reasonable price.

The Interpretation provides instructions on the accounting treatment in the following situations:

  • settlement through the satisfaction from proceeds from the sale of the free business share;
  • settlement without the sale of the free business share;
  • transfer of the free business share after the settlement share payment;
  • termination of a partner’s share in an LLC;
  • special procedure in the case of a partner’s replacement by a new partner; and
  • termination of a member’s share in an association.

When terminating the participation in an LLC, it is worth keeping in mind the related tax impacts. More about this topic can be found in the article of our Tax function.

The full wording of the I-46 Interpretation is available on the National Accounting Council’s website.

Source: www.nur.cz

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