As of 1st January 2018 the amendment to a Decree No. 501/2002 Coll. implementing certain provisions of Act No. 563/1991 on Accounting, as amended, came into force. The Act is binding for all accounting entities which are banks or financial institutions. The way of reporting, measurement and recognition of financial instruments are the essential changes of the decree based on IFRS 9, Financial Instruments.
Some accounting entities are allowed to use interim period for an introduction of new accounting principles, requirements and ensuring smooth transition. Following accounting entities are obliged to report and measure financial instruments according to IFRS as of 1st January 2021:
- brokerage firms, any division or other organizational entity of brokerage firm according to Act No. 256/2004 Coll., on Capital Market Business;
- investment companies and investment funds or branch offices of foreign entities authorized to an administration of investment funds or foreign investment funds according to Act No. 240/2013 Sb., on Management Companies and Investment Funds;
- pension companies, participation funds of transformed funds according to Act No. 427/2011 Coll., on Supplementary Pension Savings.
Decree No. 501/2002 Coll., for Banks and other Financial Institutions was updated with § 4a stating that „Accounting entity proceeds for the purpose of financial instruments reporting, measurement and recognition in notes according to International Financial Reporting Standards governed by legislation of European union. A financial instrument according to the first article means the financial instrument according to IFRS.“
Financial assets are classified into 3 basic categories according to IFRS 9, based on the entity’s business model and the asset’s contractual cash flow characteristics:
- Amortised cost - financial asset is measured at amortised cost if the objective is to hold assets in order to collect contractual cash flows which are constituted by payments of principal and interest on the principal amount outstanding.
- Fair value through other comprehensive income - financial assets are classified and measured at fair value through other comprehensive income if they are held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.
- Fair value through profit or loss - any financial assets that are not held in one of the two business models mentioned are measured at fair value through profit or loss, these assets are held with intent to be used for selling.
In the case of financial liabilities IFRS 9 applies mostly IAS 39 requirements which are classified as follows:
- financial liabilities measured at amortised cost (e.g. commercial liabilities, credits received and loans, financial leasing liabilities),
- financial liabilities measured at fair value through profit or loss (derivates, financial guarantees, loan commitments and changes in the fair value of other liabilities resulting from changes in market risks, ie changes in interest rates, exchange rates, price indices),
- financial liabilities measured at fair value through other comprehensive income (changes in the fair value of other liabilities resulting from changes in credit risk).
Should you need any assistance in connection with IFRS problematics, don´t hesitate to contact our accounting experts.
ASB Czech Republic