The third and the last part of our newsletters on the amendment to the Accounting Act explains further changes companies will have to face from January 2016.
Purpose of financial statements
The amendment to the Accounting Act (“Amendment”) introduces a new definition of the purpose of financial statements, which has been missing from the existing Act. “Financial statements are prepared for the purpose of providing information for financial decisions by external users.” In our opinion, incorporating this definition in the Accounting Act will increase pressure on companies to choose appropriate accounting methods and procedures so that the accounting gives a true and fair view, based on which such financial decisions can be made.
Definition and application of fair value
According to a new definition, fair value can be determined based on generally recognised valuation models and techniques, provided that they ensure an acceptable estimate of market value. Under the new rules, micro companies will not be required to value individual asset and liability items at fair value due to technical and administrative difficulties. Asset valuation at fair value will be mandatory for micro companies operating in sectors such as the financial market (this applies mainly to securities).
Restrictions on dividend distribution
Companies will have to comply with restrictions on dividend distribution provided that they capitalise intangible assets arising from research and development. The Amendment requires that the balance of retained earnings be reported at least up to the balance of non-amortised intangible assets of the company’s own research and development.
Expenses related to inventory generated internally
By the end of 2015, companies may at their discretion include indirect expenses in the value of inventory generated internally. From 2016 companies will be mandatorily required to include in the value of their inventory generated internally indirect expenses having a causal relationship to the production of such inventory (attributable indirect expenses).
The Amendment introduces a quite fundamental change related to incorporation costs. It is a move closer to the interpretation of international accounting standards. Incorporation costs incurred by companies in 2016 will not be reported as intangible assets. Instead, they will become costs for the current period and will be reflected as a whole in the profit/loss for the period. The amortisation of incorporation costs reported as intangible assets before 2016 will be completed under the standard regime.
Extraordinary profit/loss abolished
From 2016, the profit and loss account will no longer present extraordinary profit/loss. Any expenses or revenues, which have been considered extraordinary until now, will be shown in the operating or the financial part of profit/loss.
Changes in inventory and capitalisation reclassified
With effect from 2016, changes in inventory and capitalisation will no longer be presented as revenue but as an expense. This change is a result of cancellation of extraordinary expenses, and revenue groups 61 and 62 will be transferred to account group 58 (former extraordinary expenses). In our opinion, the information disclosed will become more transparent compared to international standards and will have an impact on the calculation of a company’s standard turnover.
Definition of reserves
The current Accounting Act provides no definition of reserves. This absence has been rectified by the Amendment, which defines them as follows: “Reserves are intended to cover liabilities or expenses, the nature of which is clearly defined and that are either likely or certain to occur as at the balance sheet date but that are not certain in terms of the amount or the moment of occurrence. As at the balance sheet date, a reserve must constitute the best estimate of expenses that will most likely occur, or the amount of liabilities that is required for the settlement…” From 2016, reserves for repairs to fixed assets will not comply with the definition of reserves as future repairs to fixed assets is not a company’s liability but its choice. From a tax perspective, reserves for repairs to fixed assets will continue to be tax-deductible.