New interpretations from the National Accounting Council I-44 and I-45

May 30, 2021 Czech Republic

In March of this year, the National Accounting Council published two new interpretations.

I-44 - Reporting of a contribution to a non-profit-making legal entity in the depositor's assets and
I-45 - Impairment of fixed tangible and intangible assets - testing and reporting. In the following article, we will briefly summarize the main points of these new interpretations.

Interpretations of the National Accounting Council
These interpretations express the expert opinion of the National Accounting Council, the members of which are the Chamber of Auditors of the Czech Republic, the Chamber of Tax Advisers of the Czech Republic, the Association of Accountants of the Czech Republic, and the University of Economics, represented by its Faculty of Finance and Accounting. The main task of interpretations is to help accounting entities find the right solution for the accounting and reporting of specific transactions, an accounting solution for which does not exist in the Czech accounting regulations or is carried out inconsistently or incorrectly in practice.

Interpretation I-44 - Reporting of a contribution to a non-profit-making legal entity in the depositor's assets
Interpretation I-44 (the "Interpretation") arose due to the absence of accounting regulations for the recording of deposits in non-profit organizations in the financial statements of the depositor.

In practice, entities use one of the following options:

a) reporting of the deposit as a cost item in the current accounting period;

b) reporting of the deposit as a financial investment in their fixed assets.

According to the Interpretation, a depositor may use the second option, i.e. to recognize a deposit as a financial investment in their fixed assets, if at the same time it meets the following two conditions:

a) the established legal entity of a non-profit nature is under the control of the depositor and

b) the depositor expects from this deposit future economic benefits which can be reliably valued.

The deposit is then reported like deposits with business corporations and is also subject to an impairment test. The Interpretation specifies how non-monetary deposits are to be valued.

The Interpretation also deals with the conditions under which a non-profit legal entity into which assets have been invested should be included in the group consolidation. At the same time, it points out that the reporting of a deposit may give rise to an obligation for the depositor to prepare consolidated financial statements, even where it did not have to prepare them before.

The Interpretation is supplemented by several practical examples that illustrate the procedure for individual non-profit legal entities and individual types of deposits.

The full text of Interpretation I-44 can be found at website Národní účetní rady.

Interpretation I-45 - Impairment of fixed tangible and intangible assets - testing and reporting. Interpretation I-45 (the “Interpretation”) is based on IAS 36 Impairment and aims to determine how to test fixed assets for impairment and to clarify the subsequent reporting of an identified impairment. At the very beginning, it defines the terms "cash-generating unit" and "company-wide assets".

The Interpretation states that an entity should test a fixed asset for impairment at least annually, in situations where there is a presumption that the asset may be impaired. It also gives an overview of external and internal indications of asset impairment.

If based on these indications, there is a presumption that a fixed asset is impaired, the entity shall determine for the asset or group of assets (cash-generating unit) a recoverable amount that is the higher of:

a) the fair value of the asset less its costs of sale; and

b) its value in use, which represents the discounted net operating cash flows that an asset or group of assets generates.

If the recoverable amount is less than the residual value of the asset, the entity shall reduce the accounting (book) value of the fixed asset by the difference through a provision and, if necessary, shall adjust the depreciation plan and, where appropriate, the residual value of the asset.

If separate assets cannot be tested because they do not generate any cash flows or they produce cash flows that are not sufficiently independent from the cash flows of other assets, the entity shall group the assets into so-called cash-generating units, which are the “smallest group of assets that generates cash flows sufficiently independently of other cash-generating units”.

The Interpretation further sets out the detailed procedure for allocating the impairment loss determined in the event of the impairment of a cash-generating unit to the individual assets belonging to the cash-generating unit.

If the reasons for impairment of the asset cease to exist, the entity shall restate the recoverable amount of the asset or cash-generating unit. If this amount exceeds the book value of the asset or cash-generating unit, the entity shall derecognize the provision at most to the value the asset would have had if no impairment loss had been reported in the past. The entity shall then consider modifying the depreciation plan for the asset so that subsequent depreciation reflects the fact that the asset's book value has increased.

The Interpretation also contains a detailed rationale and several illustrative examples.

The full text of Interpretation I-45 can be found at website stránkách Národní účetní rady.

Petra Holečková
Petra Holečková Junior Accountant
ASB Czech Republic
pholeckova@asbgroup.eu