Accounting law coming up to speed

THE LAST amendment to the Slovak Accounting Act, effective since January 1, 2005, brought positive changes to the country's accounting laws and contributed to their increased credibility and transparency.

FINANCE ministry has been introducing IFRS since 2003.
photo: TASR

THE LAST amendment to the Slovak Accounting Act, effective since January 1, 2005, brought positive changes to the country's accounting laws and contributed to their increased credibility and transparency.

The amendment represents the latest iteration of a process initiated by the Ministry of Finance back in 2003: to convert Slovak accounting law to International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS).

According to some experts, IAS/IFRS represent the best standards in the accounting world. Therefore, any change in Slovak legislation in accordance with IAS/IFRS can be perceived as a progressive development.

The new accounting procedures that took effect January 1 also clarified certain definitions or introduced new ones. Below is a summary of the significant changes to the Accounting Act law.

IAS/IFRS compliance extends to more companies

It used to be that only Slovak corporations registered on a stock exchange were obliged to prepare financial statements in accordance with IAS/IFRS. All other companies had the option of using IAS/IFRS for internal reporting purposes; however, they primarily had to prepare their financial statements in accordance with Slovak accounting legislation, which is different from IAS/IFRS in certain aspects.

Since January 1, 2005, however, the range of companies required to adopt IAS/IFRS for financial reporting has been extended. All consolidated financial statements for periods starting on or after January 1, 2005, have to be prepared under IAS/IFRS. In addition, large corporations, banks, insurance companies, supplementary pension insurance companies, brokers, public companies registered on EU stock exchanges and other companies quoted in the amended Accounting Act will be obliged to prepare their financial statements according to IAS/IFRS for their reporting periods beginning on or after January 1, 2006.

Even though the number of companies affected by the amendment is still small (approximately 300 to 350) compared to the number of all entrepreneurs registered in Slovakia, these companies represent the largest Slovak corporations. Requiring higher quality financial statements and annual reports from these entities will contribute to a more transparent economic environment in Slovakia.

Amendment simplifies process of changing a financial year

Effective from January 1, 2005, an entity willing to change its accounting period only has to inform a tax authority at least 15 days before the change. In spite of this simplification, the financial statements of an entity changing its financial year have to give a true and fair view of its financial situation, and the new accounting period has to last for at least 12 months before it can be changed again.

Valuation of assets and liabilities changes

Valuation rules of ownership interests in share capital have been changed as well. Previously, ownership interests in share capital were valued at their acquisition cost and no measurement at their fair value was possible. Use of the equity method for the valuation of all ownership interests was optional.

According to the new Accounting Act, ownership interests (relating to shares only) up to 20 percent of voting rights must be valued at their fair value; the use of the equity method is prohibited. The equity method can be optionally used to value ownership interests equal to or exceeding 20 percent of the voting rights.

Amortization period of intangible assets extended

Previously, intangible assets had to be amortized within five years from the date of their acquisition. The amended Accounting Act allows intangible assets other than goodwill, capitalized incorporation expenses and capitalized development costs to be amortized over their useful life, for example, over a period longer than five years.

Goodwill, capitalized incorporation expenses and capitalized development costs still have to be amortized over a period of up to five years.

Corrections of errors and changes in accounting methods

Effective January 1, 2005, corrections of material errors from prior years have to be recorded to retained earnings and not to income of the current year. However, the correction of immaterial errors is recorded to the profit of the current year.

Before the amendment became effective, correction of errors, no matter how significant, had an impact on the current year's profit.

The effects of changes in accounting methods shall now be booked to retained earnings and not to extraordinary income, as it was previously.

Capitalization of borrowing costs possible

The old accounting procedures for entrepreneurs prohibited the inclusion of borrowing costs in the cost of fixed assets. The amendment allows an alternative treatment: accounting entities can optionally capitalize borrowing costs. This provision of the new accounting procedures for entrepreneurs is effective for financial statements prepared as of December 31, 2004.

New criterion for finance lease introduced

Since January 1, 2003, finance leases were accounted for under Slovak regulations similarly as under IFRS/IAS: a lessee recorded the leased asset on his/her balance sheet. A finance lease was defined as a lease agreement with a purchase option at the end of the lease term, where the agreed purchase price must not exceed the tax value of the asset at the end of the lease using the straight-line depreciation method.

The amendment of the accounting procedures introduced a new criterion for a finance lease, which must be met together with the previous ones; the lease term must be for at least 60 percent of the tax useful life and must not be less than three years. Thus, the provisions of the accounting procedures for finance leases have been synchronized with the current tax law.

Induced investments clarified

Accounting for induced investments was not explicitly defined in the old accounting procedures. Certain induced investments were not allowed to be capitalized; on the other hand, certain categories of induced investments had to be included in the acquisition cost of property, plant and equipment.

Currently, an induced investment is defined as the acquisition of an asset or service which the accounting entity will not use, but which it incurred according to special legislation or based on an agreement in connection with the acquisition of non-current assets. Examples of induced investments are construction of a road, parking lot or intersection, landscaping, renovation of a school etc.

Effective January 1, 2005, induced investments should be included in the acquisition cost of property, plant and equipment.

Miroslav Knobloch is
audit manager at
KPMG Slovensko Advisory

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