Rules for preparing consolidated financial statements

7.9.2017

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Many texts have been written about the amendment to Act No. 563/1991 Sb. on Accounting (amendment No. 221/215, hereinafter the Accounting Act), in effect as of 1 January 2016. The general public is thus well-acquainted with the changes now that more than a year and a half has passed. In this text, I would like to stress a very important detail which should be of interest to the representatives of certain accounting units now, in the second half of 2017, specifically the minimum criteria for preparing consolidated financial statements.

The changes apply to accounting periods that commenced after 1 January 2016. The first financial statements impacted by the new law are thus those prepared as of 31 December 2016. They are usually prepared in the first half-year after the balance sheet day. Naturally, this only applies to audited accounting units or those that use the services of a tax advisor and thus have more time to file the tax return. There will presumably be very few or possibly no consolidating companies that are required to file the tax return by 31 March.

Once the financial statements are finalised and audited, the management should consider whether the company is a consolidating unit. This is governed in Sections 22a and 22aa of the Accounting Act. Nothing has changed in this area, and this text does not discuss the topic.

For consolidating entities, the values should be assessed on a consolidated basis (the consolidating unit along with the consolidated unit).

The Accounting Act divides the consolidated pools into three categories:

  1. A small group of accounting units that complies with at least one of the following limits as of the balance sheet day:
    • balance sheet sum: CZK 100,000,000,
    • annual net turnover: CZK 200,000,000,
    • average number of employees throughout the accounting period: 50.
  2. A medium group of accounting units that is not a small group and complies with at least one of the following criteria as of the balance sheet day:
    • balance sheet sum: CZK 500,000,000,
    • annual net turnover: CZK 1,000,000,000,
    • average number of employees throughout the accounting period: 250.
  3. Large group of accounting units - fails to comply with at least two limits for the medium group as of the balance sheet day.

The medium and large groups of accounting units are required to prepare consolidated financial statements under Section 22a, and small groups of accounting units have this obligation if one of the companies is a public interest entity. Obviously, the limits for consolidated financial statements fell radically. The law prescribes them when the consolidation units exceeds at least two of the three criteria stated in point 1 (i.e. assets over CZK 100 million, annual turnover over CZK 200 million, average number of employees over 50). For comparison, the limits for 2015 were assets over CZK 350 million, annual turnover over CZK 700 million, average number of employees over 250, and the rule of two criteria applied as well.

In 2017, accounting units should consider carefully if they need to compile consolidated statements as of 31 December 2016. They may not have had this obligation in previous year, but the situation in 2016 might be different. The minimum criteria are much lower so that many companies will face a new situation. To conclude, a fine of up to 6% of total assets can be imposed for the failure to prepare consolidated financial statements.

Author: Jaromír Chaloupka, Audit Manager, e-mail: chaloupka@apogeo.cz, phone: +420 267 997 717

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