No Compliance Summary

In line with the European Commission (EC) Regulation No. 1606/2002, listed companies in the Czech Republic are required to prepare consolidated accounts in accordance with the International Financial Reporting Standards (IFRSs) as adopted by the European Union. The 2008 EC report on the implementation of Regulation No. 1606/2002 states that the Czech Republic exceeded the requirements of the Regulation by mandating application of IFRSs in the annual accounts of listed companies and permitting IFRSs in the consolidated accounts of all other companies. Companies that are not required or choose not to apply the international standards, have to follow the Czech Generally Accepted Accounting Principles (GAAP) which are primarily contained in the Accounting Act, supplemented by the Ministry of Finance Provisions on Accounting and Czech Accounting Standards for entrepreneurs, banks, insurance, non-profit organizations, and other governmental entities. According to a number of publications on the subject, Czech GAAP differ from the international standards in many respects. The 2009 PricewaterhouseCoopers report on the implementation of IFRSs throughout the world states that the national accounting standard-setter has not announced any convergence plans.

General Overview

A World Bank review of the accounting and auditing environment in the Czech Republic led to the publication of a Report on the Observance of Standards and Codes (ROSC) in July 2003. International Financial Reporting Standards (IFRSs) (formerly known as International Accounting Standards, or IASs) and International Standards on Auditing were used as the benchmarks for assessing national standards. The World Bank observed that "there are wide ranging differences between Czech and International Accounting Standards, which have an impact on the financial statements of companies in the enterprise sector, banks, and insurance companies" (p. 8). Consequently, the World Bank made policy recommendations concerning the amendment of accounting and auditing laws and standards. The ROSC also recommended that international standards and related interpretations be made mandatory for all public interest entities.

More recently, a 2009 PricewaterhouseCoopers (PWC) report compared the Czech accounting framework with IFRSs and reiterated that Czech Generally Accepted Accounting Principles (GAAP) contained in the Czech accounting legislation still differ from the international standards. Another 2009 PWC publication on the adoption of IFRSs throughout the world states that the national standard-setter has not announced any convergence plans. However, being a member of the European Union (EU), the Czech Republic has to comply with the European Commission (EC) Regulation No. 1606/2002 which stipulates that beginning in 2005 all listed companies in the EU are required to use IFRSs in their consolidated accounts. Per the Deloitte IAS Plus website update of 2003, listed companies in the Czech Republic have been preparing consolidated financial statements in accordance with IFRSs since 2002. The 2008 EC report on the implementation of the Regulation No. 1606/2002 asserts that the Czech Republic exceeded the requirements of the Regulation by requiring application of IFRSs in the annual accounts of listed companies and permitting IFRSs in the consolidated accounts of all other companies. IFRSs, however, are not permitted for use in the annual accounts of unlisted companies. Therefore, apart from the mandatory application of IFRSs, other companies still follow the Czech GAAP.

According to the 2009 report by PWC on similarities and differences between the Czech and the international standards, the framework for accounting in the Czech Republic is primarily contained in the Accounting Act, which stipulates general principles and conditions for the preparation of accounts, however, “there is no conceptual framework prepared on a coherent basis, including definitions of basic terms” (p. 14). The Act is supplemented by detailed guidance provided in the Ministry of Finance (MoF) Provisions on Accounting and the Czech Accounting Standards also issued by the MoF. In addition to the MoF rules, entrepreneurs, banks, insurance companies, non-profit organizations, and other governmental entities are subject to the regulations.

In accordance with Act No. 6/1993 Coll., on the Czech National Bank (CNB), the CNB was created as the integrated regulator for the financial sector on April 1, 2006. At that time, the CNB assumed the responsibilities of the Czech Securities Commission, the Ministry of Finance's Office for Supervision of Insurance and Supplementary Pension Insurance, and the Office for Supervision of Credit Unions, and is responsible for the supervision of the banking sector, the capital market, the insurance and pension scheme industry, and credit unions. Per its website, "the CNB lays down rules safeguarding the stability of the banking sector, the capital market, the insurance industry, and the pension scheme industry. It systematically regulates, examines, assesses and, where appropriate, issues penalties for non-compliance with these rules." The 2003 World Bank report added that "the Czech National Bank issues prudential regulations that have an impact on the preparation of financial statements" (p. 7). The CNB can impose fines or de-license any bank for non-compliance with accounting or regulatory rules. For listed banks, the CNB may additionally impose fines up to three (in some cases six) percent of total assets of the bank.

Per the World Bank report, the accounting regulation in the Czech Republic is governed by the MoF. The MoF is responsible for developing and amending legislation on financial reporting in the country, and ensures that this legislation is on line with the EU requirements. The National Accounting Board, issues interpretations for the standards, although these interpretations are not legally binding. The Chamber of Auditors of the Czech Republic (CACR), as described in the 2006 self-assessment, "provides comments on suggested changes in law and standards" (p. 88). With regard to the Code of Ethics, the 2006 CACR self-assessment noted that the CACR code of ethics was based on the 2001 version of the International Federation of Accountants (IFAC) Code. However, the revised IFAC code was expected to be translated in 2006 and subsequently replace the existing CACR’s code. In this respect, the 2009 action plan prepared by the CACR states that the Chamber will “continue to support ongoing adoption and implementation of the IFAC Code of Ethics” (p. 9).The CACR and the Union of Accountants of the Czech Republic are listed as members on the IFAC website.

The Principles

NCIFRS 1: First-time Adoption of International Financial Reporting Standards (revised 2009)

According to the 2009 PWC report, the issue of first-time adoption of IFRSs is not addressed under the Czech GAAP.

NCIFRS 2: Share-based Payment (revised 2009)

According to the 2009 PWC report, under the Czech GAAP there is no guidance on accounting for share-based payments.

NCIFRS 3: Business Combinations (revised 2009)

According to the 2009 PWC report, there are numerous differences in accounting for business combinations between the Czech GAAP and IFRS 3.

IIIFRS 4: Insurance Contracts (effective 2006)

Sources of assessment do not directly address this principle.

NCIFRS 5: Non-current Assets Held for Sale and Discontinued Operations (revised 2009)

According to the 2009 PWC report, there is no equivalent Czech standard.

NCIFRS 6: Exploration for and Evaluation of Mineral Resources (effective 2006)

According to the 2006 Ernst & Young report, "the exploration and evaluation expenditures are, in general, treated as fixed assets in both the IFRS and CAL [Czech Accounting Legislation], however, only as a part of other assets in CAL whilst as a separate non-current asset in IFRS" (p. 137).

NCIFRS 7: Financial Instruments: Disclosures (effective 2007)

According to the 2009 PWC report, there are major differences between the Czech GAAP and IFRSs in this area.

NCIFRS 8: Operating Segments (effective 2009)

According to the 2009 PWC report, Czech GAAP does not regulate segment reporting.

NCIAS 1: Presentation of Financial Statements (revised 2009)

According to the 2006 Ernst & Young report, "IFRS defines richer set of mandatory financial statements whilst CAL requirements for structure and layout of financial statements are more rigid than IFRS where only minimal set of items is required with no prescribed layout. Some of the items prohibited to be disclosed or classified as such in IFRS (e.g. extraordinary items, results of operating activities) are required by CAL while other items required to be disclosed or classified as such in IFRS (e.g. assets classified as held for sale) are omitted in CAL" (p. 13). The report also observed differences in disclosure requirements and noted that the international standard is more demanding in comparison to the Czech requirements.

NCIAS 2: Inventories (effective 2005)

According to the 2009 PWC report, the treatment of inventory under the Czech GAAP is "comparable to IFRS, however borrowing costs related to purchased inventories are never capitalized" (p. 10).

NCIAS 7: Cash Flow Statements (effective 1994)

According to the 2009 PWC report, while under IFRSs preparation of cash flow statements is required, in the Czech Republic this is done on a voluntary basis. In addition, there are some differences in the definition of cash and cash equivalents and in the format of the statement.

NCIAS 8: Accounting Policies, Changes in Accounting Estimates and Errors (effective 2005)

According to the 2009 PWC report, there are some differences between the Czech GAAP and the international requirements.

NCIAS 10: Events after the Reporting Period (effective 2005)

According to the 2009 PWC report, rules are in general similar to IFRSs; however “no specific and detailed guidance [is] available” (p. 13).

NCIAS 11: Construction Contracts (effective 1995)

According to the 2009 PWC report, "the percentage of completion method is not part of the Czech GAAP. Accounting treatment depends on the form of contractual arrangement, usually having the form of completed contracts, since the inclusion of unrealized profits is not allowed." (p. 8).

NCIAS 12: Income Taxes (effective 2001)

According to the 2009 PWC report, both IFRS and CAL use the balance sheet liability method for accounting for deferred taxes. However, both frameworks differ in specific application features and also in level of detailed guidance provided.

NCIAS 16: Property, Plant and Equipment (revised 2009)

According to the 2009 PWC report, many differences exist between IFRSs and the Czech requirements in this area.

NCIAS 17: Leases (effective 2005)

According to the 2009 PWC report, in Czech GAAP "legal form prevails over the commercial substance. Consequently, there is no difference in accounting for finance and operating leases" (p. 9).

NCIAS 18: Revenue (effective 1995)

According to the 2009 PWC report, under Czech GAAP "no comparable guidance is given on revenue recognition, contractual arrangements drive revenue recognition." (p. 8).

NCIAS 19: Employee Benefits (revised 2009)

According to the 2009 PWC report, "defined benefit plans are not used in practice and are not regulated by any standard." (p. 8).

NCIAS 20: Accounting for Government Grants and Disclosure of Government Assistance (revised 2009)

According to the 2009 PWC report, requirements for recognition and presentation are similar in both frameworks; however the Czech GAAP provides no guidance for biological assets.

NCIAS 21: The Effects of Changes in Foreign Exchange Rates (effective 2005)

According to the 2009 PWC report, there is a fundamental difference between IFRSs and the Czech GAAP in terms of functional and presentation currency.

NCIAS 23: Borrowing Costs (revised 2009)

According to the 2009 PWC report, there are differences between accounting treatment of borrowing costs between the Czech GAAP and IAS 23.

NCIAS 24: Related Party Disclosures (effective 2005)

According to the 2009 PWC report, "disclosure requirements are quite similar to IFRS. The definition of related parties is taken directly from IFRS by reference. Entities have to disclose at least those transactions that have a material impact on the financial statements and have not been concluded under standard commercial terms" (p. 72).

NCIAS 26: Accounting and Reporting by Retirement Benefit Plans (effective 1998)

According to the 2009 PWC report, there is no equivalent standard/requirements under the Czech GAAP.

NCIAS 27: Consolidated and Separate Financial Statements (revised 2009)

According to the 2009 PWC report, there are some differences between the two frameworks in the definition of subsidiaries exemptions from consolidation and other aspects of the standard.

NCIAS 28: Investments in Associates (revised 2009)

According to the 2009 PWC report, associates are defined similarly under IFRS and the Czech GAAP; also general requirements of equity accounting are similar. However, the Czech GAAP does not deal with fair valuation of acquired assets and liabilities or with the resulting goodwill from the acquisition of associate.

NCIAS 29: Financial Reporting in Hyperinflationary Economies (revised 2009)

According to the 2006 Ernst & Young report, "no special treatment for hyperinflation economies has been introduced in CAL" (p.132).

NCIAS 31: Interests in Joint Ventures (revised 2009)

According to the 2009 PWC report, "there is a number of differences between the two frameworks in the treatment of interests in joint ventures.

NCIAS 32: Financial Instruments: Disclosure and Presentation (revised 2009)

According to the 2009 PWC report, the Czech accounting requirements do not correspond to the international requirements.

NCIAS 33: Earnings per Share (effective 2005)

According to the 2009 PWC report, no equivalent standard exists under the Czech GAAP.

NCIAS 34: Interim Financial Reporting (effective 1999)

According to the 2009 PWC report, "Czech GAAP requires interim reporting in certain specific and rather extraordinary situations… The concept of interim financial statements under the Act on Accounting is considerably narrower, since it only includes financial statements, the preparation of which is prescribed by law or other regulations" (p. 75).

NCIAS 36: Impairment of Assets (revised 2009)

According to the 2009 PWC report, in Czech GAAP "there is only a general requirement to reflect possible impairment. No detailed guidance for the measurement is provided." (p. 50).

NCIAS 37: Provisions, Contingent Liabilities and Contingent Assets (effective 1999)

According to the 2009 PWC report, there are numerous differences in the definition, recognition and measurement provisions, contingent liabilities and contingent assets.

NCIAS 38: Intangible Assets (effective 2004)

According to the 2009 PWC report, under the Czech GAAP, the definition and the treatment of intangible assets differ from those of IAS 38.

NCIAS 39: Financial Instruments: Recognition and Measurement (revised 2009)

According to the 2009 PWC report, there are major differences between the Czech GAAP and IFRSs in this area.

NCIAS 40: Investment Property (revised 2009)

According to the 2009 PWC report, under Czech GAAP there is no guidance for accounting for investment property, which is treated as property, plant, and equipment.

NCIAS 41: Agriculture (revised 2009)

According to the 2009 PWC report, unlike IFRS, the Czech GAAP provides no specific guidance on biological assets. Per the report, biological assets are accounted for as inventories or fixed assets, and the application of fair value measurement is not permitted.