The Supreme Administrative Court of the Czech Republic issued judgment No. 7 Afs 365/2018-62, which deals with the moment from which an entity is to capitalize the costs of acquisition into the value of the tangible and intangible assets. In terms of allocation of certain costs to the acquisition value of assets, the court held that it was not essential when the tax entity had formally approved the investment to be made but when it had objectively begun to invest even though it was not quite certain at that time that the investment would be completed successfully.
The Supreme Administrative Court thus upheld the interpretation of the National Accounting Council No. I-5 (Determination of the date at which the costs related to the acquisition of tangible fixed assets start to be capitalized), which states that the crucial moment is when the accounting unit actually rather than formally decides to acquire a new investment to address the relevant issue. In the present situation, no qualitative change was found in the company’s procedure, i.e. expenses of the same nature were incurred to make the investment both before and after the formal decision of the board of directors in the relevant matter.
According to the court, the company’s formal decision would only be relevant to the cost classification for accounting purposes if the commencement date of capitalisation of the costs included in the decision preceded the actual commencement of the investment or if the decision resulted in a qualitative change in the taxpayer’s procedure to the extent that it would only start to incur the costs relating to the acquisition of assets from that date.
The above-mentioned judgment also very marginally and indirectly touches the interpretation of Section 25(5)(a) of Act No. 563/1991 Coll., on Accounting, as amended, namely the connection between the costs incurred and the acquisition of assets. The Court admits that accounting regulations do not define such a connection in any way. Therefore, it recommends examining the link between the given cost and the acquired asset, irrespective of whether or not (or when) the tax entity has formally decided on the acquisition of assets. In this case, it is again referred to the procedure and to a non-exhaustive list of costs that may represent regular operating costs as stated in the interpretation of the National Accounting Council No. I-5.
We see the attractiveness of the judgement in that the Supreme Administrative Court confirmed some of the conclusions of the interpretation of the National Accounting Council No. I-5 and that it accepted the argument arising from that document by which it considered it to be a relevant source in a certain sense.
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