The following article briefly summarises the main points of the new interpretation of the National Accounting Board I-48 “Valuation of assets and liabilities in transactions involving a business or part of a business”.
Interpretations of the National Accounting Board
The interpretations provide NAB’s professional opinion on the practical application of Czech accounting principles. They aim to facilitate the formulation of optimum and unified procedures for accounting and financial reporting. The interpretations focus on matters that are not addressed by Czech accounting legislation or are addressed insufficiently, and on issues being resolved differently in the accounting practice.
Even though the interpretations are not legally binding, the Supreme Administrative Court has accepted them several times as a valuable source complementing accounting legislation.
Interpretation I-48 Valuation of assets and liabilities in transactions involving a business or part of a business
Interpretation I-48 (the “Interpretation”) was issued in January 2023 and addresses, in particular, the question of which is the more appropriate method for valuation of acquired assets and liabilities in transactions involving a business or part of a business – whether it is the “goodwill method” (where the acquired assets and liabilities are measured at fair value and goodwill is recognised) or the “valuation difference method” (where the valuation of the assets and liabilities is taken from the depositor (seller) and a valuation difference on acquired assets is recognised).
According to the Interpretation, the preferred solution should always be the goodwill method, in which the components of the assets less the debts assumed are individually revalued. The resulting difference between the valuation of the business as a whole and its individually valued assets and liabilities is goodwill. It should be amortised over the period over which the acquired assets generate future economic benefits. According to the Interpretation, this amortisation period may, in justified cases, exceed 120 months, i.e. the period allowed by Decree No. 500/2002 Coll. as the maximum amortisation period for goodwill (Section 56(2)).
The Interpretation further specifies what assets and liabilities an entity should report at the date of acquisition of a business. Reserves are mentioned among the liabilities if they “relate to risks that the acquirer assumes, such as reserves for reclamation, warranty repairs or already approved restructurings that the acquirer will continue”. The Interpretation also recommends how to deal with the difference between the carrying amount and fair value of the assets and liabilities acquired.
The valuation difference method should be used only when the cost of obtaining a fair valuation of the individual components of the business exceeds the benefit of such information. The amortisation period of the valuation difference should reflect the amortisation period of the related fixed assets. In the case of a negative valuation difference, the Interpretation recommends considering the use of the goodwill method.
The Interpretation notes that both goodwill and the valuation difference should be tested for impairment in accordance with Interpretation I-45 Impairment of Tangible and Intangible Fixed Assets – Testing and Reporting.
The Interpretation also addresses the question of when deferred tax arises on transactions with a business and how it should be accounted for. Because the tax bases of assets and liabilities do not change in transformations and contributions, the related deferred tax should be recognised in accordance with Interpretation I-2, Temporary Differences upon Transformations and Contributions. Conversely, in the case of acquisition of a business, both the carrying amount and the tax base are its cost and therefore no deferred tax arises.