Differences in accounting according to IFRS and the Czech accounting standards.
In the first part of the series on the differences in accounting according to IFRS and the Czech accounting standards, we addressed the general comparison of their respective procedures under Czech legislation and IFRS. We also provided examples of the application of IFRS in the Czech Republic. In this article, we shall focus on a particular area – non-current tangible assets.
Definition and basic classification
Pursuant to Czech legislation, non-current tangible assets (in Czech, dlouhodobý hmotný majetek) are defined as assets used over a period longer than a year. In the case of tangible personal property and sets of these items, there is also the condition of valuation as defined by the accounting entity. The applicable Czech regulation explicitly lists basic components of non-current tangible assets, such as blocks of land, buildings, tangible personal property and sets of these items, orchards and vineyards, adult animals, other non-current tangible assets, incomplete non-current tangible assets, advances paid on non-current tangible assets and valuation difference on acquired assets.
In terms of IFRS accounting, non-current assets are defined “negatively”, i.e. as any assets that do not fall under the definition of current assets. Similarly, the condition of use over a period longer than 12 months applies, as does the condition of future economic benefits arising from that asset. IFRS distinguishes between “Plots, buildings and equipment” (IAS 16 – blocks of land and buildings used by the enterprise and all personal property used by the enterprise over more than one accounting period) and “Property investment” (IAS 40 – blocks of land and buildings not used by the enterprise but held or offered for rent for the purpose of capital appreciation).
Valuation
According to Czech accounting principles, purchased assets are valued at the acquisition price, which is based on the price at which the asset was purchased, plus additional acquisition costs (e.g. transportation, assembly or customs duties). These additional costs do not include foreign exchange rate differences, penalties, repairs and maintenance. As for assets acquired through an entity’s own activities, the valuation is based at their own costs; they include all direct and indirect costs related to the creation of said non-current assets. Assets acquired for free are valued at the replacement value, i.e. the price at which the assets would have been purchased at the time of posting. As at the balance sheet date, accounting entities valuate non-current assets at their historical price minus accumulated depreciation and allowances. All temporary reductions in the value of assets (impairment) are posted as allowances in the costs for the period; value increase is not entered.
The primary valuation of blocks of land, buildings and equipment pursuant to IAS 16 is at the acquisition costs, which include the purchase price, additional attributable costs and estimate of the costs of liquidation, removal and rehabilitation. (The costs of disposal of an asset are included at their current amount.) The subsequent valuation pursuant to IAS 16 is carried out based on the acquisition cost model (where the acquisition costs are reduced by accumulated depreciation or accrued losses from the reduction of value) or the revaluation method (where the asset is posted in real value and reduced by accumulated depreciation or accrued losses from the reduction of value). The selection of the model is at the accounting entity’s discretion. The revaluation model can be used for assets whose real valuation is reliable, taking into account all items of the applicable asset category, not just selected ones. An asset need not be revaluated on an annual basis; it is however necessary to check whether the actual book value has not deviated from its real value. The revaluation per se is recognised in another full result increasing the equity. Should a situation arise where the value of an asset is reduced without impact on a prior profit revaluation, it constitutes conventional reduction in the value of the asset (impairment) entered into costs in the current period.
The primary valuation of property investments pursuant to IAS 40 is at acquisition costs, which include the purchase price and other directly attributable costs. The subsequent valuation according to IAS 40 is carried out using the acquisition cost model (where the acquisition costs are reduced by accumulated depreciation or accrued losses from the reduction of value) or the real value model (where the asset is posted in real value). The real value model reflects the market conditions, and real value must be defined at each balance sheet date. Any change (profit or loss) is recognised in P/L for the period. Revaluation always concerns the result, without depreciation. Even where an enterprise decides to use the acquisition cost model, it is obliged to determine the real value of real estate and disclose it in appendices. An enterprise shall use the acquisition cost model only if the determination of the real value of real estate is unreliable. As soon as conditions arise that allow for a reliable estimate of real value, the company shall proceed with the real value model.
The issue of non-current tangible assets is more complex and broader than this summary, so do not hesitate to contact us regarding any similar transactions under IFRS or Czech accounting standards.
