IFRS EU endorsement process [May 2023]
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The following article briefly summarises the main points of the new interpretations of the National Accounting Council I-44 ‒ Reporting of an Investment in a Non-profit Corporate Entity in Investor’s Assets and I-45 ‒ Impairment of Tangible and Intangible Fixed Assets – Testing and Reporting.
Interpretations express a professional opinion of the National Accounting Council on the practical application of the Czech accounting rules. The interpretations are not legally binding. They aim to contribute to the formulation of optimum and uniform procedures in accounting and financial reporting. They primarily address the issues that are not sufficiently covered by the Czech accounting regulations or are not covered at all and issues that are not addressed consistently in the accounting practice.
Interpretation I-44 (hereinafter the “Interpretation”) was issued in March 2021 with an objective of adding guidance on reporting of investments in non-profit organisations in the investor’s accounting that has not been so far covered in the accounting regulations.
Investments in non-profit corporate entities are usually reported as an item in operating expenses. According to the Interpretation, investments may be reported in fixed assets of the investor as financial investments when the following two conditions are met at the same time:
a) a formed non-profit corporate entity is controlled by the investor; and
b) the investor anticipates future economic benefits from the investment that it is able to reliably measure.
The investment is subsequently reported in a similar manner as investments in business corporations (depending on the level of control) and is subject to impairment testing. The Interpretation specifies how to measure
The Interpretation additionally addresses under what conditions a non-profit corporate entity in which the assets were invested should be included in the consolidation group. It is not important whether the investment was recognised as a financial investment in fixed assets or as an operating expense. Furthermore, the Interpretation draws attention to the fact that reporting an investment of a non-profit corporate entity may result in an obligation of the investor to prepare the consolidated financial statements even though it has not prepared it before.
A similar manner is used according to the Interpretation for reporting of hiving off of assets from the ownership of the investor into a trust fund which does not have business activity as its main mission according to the instrument of incorporation.
The Interpretation includes numerous examples which illustrate a procedure for individual types of non-profit corporate entities and various types of investments.
The entire text of Interpretation I-44 is available on the website of the National Accounting Council.
Interpretation I-45 (hereinafter the “Interpretation”) was issued in March 2021 and it aims to determine
a procedure in testing of fixed assets (except for financial assets) for impairment and clarify the subsequent recognition of an identified impairment.
This Interpretation is based on IAS 36 Impairment of Assets. In its introduction, it defines so far unused terms in the Czech accounting – a cash-generating unit and corporate assets.
The Interpretation states that an entity will test a tangible or intangible asset if there is an indication that an asset may be impaired, and provides examples of external and internal indications. An assessment whether there were indications of impairment of tangible and intangible assets (including those in progress) should be performed at least annually.
If, based on indications, there is an assumption that the fixed asset is impaired, the entity determines
a recoverable amount for the assets or groups of assets (cash-generating unit) concerned.
According to the Interpretation, the “recoverable amount is the higher of:
a) the fair value of an asset less costs of its sale; and
b) value in use that consists of discounted net operating cash flows that the assets or group of assets generates.”
If the recoverable amount is lower than the amortised cost, the entity will decrease the carrying amount of
the fixed asset by the specific difference through a provision and potentially adjust the depreciation plan and the residual value of the specific asset.
If it is not possible to test individual assets as they themselves do not generate any cash flows or generate cash flows that are not sufficiently independent of cash flows from other assets, the entity will group assets into
cash-generating units which is the “smallest group of assets generating cash flows that are largely independent of other cash-generating units”.
The Interpretation outlines a procedure for allocation of goodwill, positive goodwill on consolidation and corporate assets into the value of a cash-generating unit.
In addition, the Interpretation determines a detailed procedure how the identified impairment loss is allocated to individual assets that belong to a cash-generating unit when the cash-generating unit is impaired. If an entity evaluates that a loss from impairment is temporary, this loss is recognised as a provision for a specific asset. If the impairment loss is permanent, the loss is reflected in the accounting through a write-off.
The Interpretation additionally describes the procedure for the derecognition of an impairment loss, if the recoverable amount of an asset or a cash-generating unit exceeds the carrying amount of an asset or
a cash-generating unit.
The Interpretation contains a detailed rationale and a number of illustrative case studies.
The complete text of Interpretation I-45 is available on the website of the National Accounting Council.
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