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-40 ‒ Reporting of Intangible Results of Research and Development

Interpretation I-40 (hereinafter the “Interpretation”) was issued in January 2020 with the aim of providing the definition of research and development which has so far been missing in existing accounting legislation, specifying the conditions for capitalising the results of internal development and basic principles of their amortisation.

Since 1 January 2018, “development” has been excluded from the list of intangible fixed assets (Section 6 (1)) in Implementing Regulation No. 500/2002 Coll. (hereinafter the “Regulation”), regarding the Act on Accounting for Businesses, and since then the costs of research and development have been reported as part of the reporting entity’s expenses. The main reason for this change is the fact that only assets that bring the reporting entity an economic benefit should be reported as part of assets. It is uncertain whether such results will be achieved from research, so the costs of research are to be reported as part of expenses of the current period even if they meet the other criteria.

Since Czech accounting and tax regulations currently do not include a definition of research and development, the Interpretation defines them as follows:

“Research refers to original and planned examination carried out in order to obtain new scientific or technical findings and knowledge.”

“Development refers to the use of the results of research or other findings to plan or design new or substantially improved materials, equipment, products, procedures, systems or services before starting their commercial production or use.”

Pursuant to the Regulation (Section 6 (3)), intangible results of development and software include such results and software that are either internally produced to be traded or acquired from other persons. The Interpretation specifies that internally produced to be traded means that the development itself will lead not just to the origination of an asset that will be the subject of trading, but also that the development will lead to the “design of such materials, equipment, products, procedures, systems or services that will be used directly for trading activities (e.g. they will be sold after their production based on the developed design”). We believe that the wider definition of “to be traded” also includes results of research and development that the reporting entity uses for trading, e.g. e-shops internally developed to sell and distribute the goods and services of the reporting entity.

In addition, the interpretation lists five conditions that costs of development have to meet to be capitalised in intangible fixed assets:

a) “The reporting entity is able to demonstrate the technical feasibility of completing the intangible asset;

b) The reporting entity has to be able to demonstrate the intention and ability to complete and use the intangible asset related to the development;

c) Future economic benefits are expected that will not be lower than the costs incurred;

d) The reporting entity has to be able to demonstrate the availability of resources for completing the intangible asset;

e) The intangible asset can be reliably valued based on accounting regulations.”

The above conditions are based on the conditions for the capitalisation of development that are listed in paragraph 57 of IAS 38 Intangible Assets. The National Accounting Council reached the conclusion that the conditions set in IAS 38 are not in conflict with the requirements of Czech accounting regulations. The adoption of this approach means that Czech reporting entities would no longer encounter differences between the results of development reported under IFRS and Czech accounting legislation.

In addition, the interpretation states that “intangible results of development are amortised over their estimated useful lives and like any other assets they are subject to the impairment test performed as of the balance sheet date.”

The justification of the interpretation also mentions that in practice, the costs of development are often reported as deferred expenses or complex deferred expenses. Although the National Accounting Council does not consider this approach to be incorrect, in the future it would prefer the costs of development to be reported either as intangible fixed assets (if they meet the conditions for capitalisation) or as part of expenses of the current period (if they do not meet the conditions for capitalisation or if the reporting entity decides so). For projects in progress where the costs of development were recognised as deferred expenses or complex deferred expenses, the National Accounting Council recommends detailed disclosures in the notes to the financial statements.

The full wording of the Interpretation can be found on the National Accounting Council‘s website.

Source: www.nur.cz