Adoption of IFRS and Its Impact on the
Financial and Management Accounting: A
Case from the Czech Republic
David Procházka
Department of Financial Accounting and Auditing
Faculty of Finance and Accounting
University of Economics, Prague
Email: prochazd@vse.cz
Motivation for the paper
to summarise theoretically the current
development in the external and internal
financial reporting
 to reveal the special features of general
development in the case of the Czech Republic

2
The aims of the paper



to outline the basic features of the Czech accounting
regulatory system
to explore usefulness of financial statements and other
information prepared in compliance with the IFRS in
comparison with the financial statements under CAS for
both external and internal users; and
to analyse the convergence of financial and managerial
accounting in general and in the Czech Republic in
particular
3
Literature overview – historical development



strong tendency for the divergence of FAS and MAS due
to specialisation and rapid capital accumulation already
from the 19the century (Kaplan, 1984)
the peak of the tendency after WWI – e.g. Clarks´
(1923) „Different costs for different purposes“
„Berlin Wall fall“; European integration and opening of
the China together with the turbulent progress of ICT
help:
 linking of national capital markets into single global
one
 companies to expand worldwide by more effective
international management of subsidiaries
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Data processing into information
Model I – Dual Accounting System
Users 1
Users 2
Users 3
Outputs 1
Outputs 2
Outputs 3
Calculation in FAS
Calculation in MAS
Data recording and storing
Data recording and storing
Definition of rules for data recording, ordering and registering

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FAS … financial accounting system; MAS … management accounting system;
Outputs 1 ... tax reports; Outputs 2 ... financial statements; Outputs 3 ...
budgeting, planning, performance measuring, control, etc.;
Users 1 ... tax authorities; Users 2 ... owners, creditors, trade partners, etc.;
Users 3 ... managers
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Literature overview – recent development

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separate coexistence of FAS and MAS till 1990´s; then:
 integration of management accounting techniques
(Granlund and Lukka, 1998 or Ittner and Larcker,
2001)
 harmonisation of the financial reporting (IOSCO,
2000; CEC, 2002 or IASB and FASB, 2002)
MAS is influenced by financial reporting requirements
(Kaplan, 1984; Nathan et al., 1996)
stimuli from MAS incorporated in FAS (Stewart, 1991)
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Literature overview – current status
“integration of financial and management
accounting systems” (Angelkort and
Weißenberger, 2009)
 “the convergence of financial accounting and the
management accounting” (Taipaleenmäki and
Ikäheimo, 2009)
 „question is not to which extent to converge or
integrate, but when the convergence or
integration will be finished“ (Hemmer and
Labro, 2008)

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Data processing into information
Model II – Integrated Accounting System
Users 1
Users 2
Users 3
Outputs 1
Outputs 2
Outputs 3
Calculation in FAS
Calculation in MAS
Data recording and storing
Definition of rules for data recording, ordering and registering
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Financial reporting in the Czech Republic
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Based on the Czech Act on Accounting (respecting the
Regulation (EC) 1606/2002), Czech companies can be divided
into 3 groups:
 Category I (big Czech companies that are publicly traded on
stock exchanges in the EU markets – IFRS reporting only)
 Category II (Small and medium-sized enterprises – both
CAS and additional reporting)
 Category III (Small and medium-sized enterprises – only
CAS reporting)
Additional reporting according to the statutory standards of
parent company (mostly IFRS, sometimes US GAAP)
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Financial reporting in the Czech Republic
O
n
l
y
I
F
R
S
O
n
l
y
Both IFRS and CAS
C
A
S
Category I
Category II
Category III
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Model III - Dual Accounting System (before
IFRS adoption)
Users 1
Users 2
Outputs 1
Users 3
Outputs 2
Outputs 3
Calculation in FAS
Calculation in MAS
Data recording and storing
Data recording and storing
Definition of rules for data recording, ordering and registering

financial reporting according to CAS hardly subordinated to tax
requirements and other information needs of state authorities 11
Organisational structure of the Czech economy
Number of employees
0[1]
1-5
Total corporations
269 185
78 052
35 677
22 203
1 685
406 802
136 093
64 687
31 316
18 008
885
250 989
559
670
216
111
6
1 562
132 425
12 581
4 090
3 995
768
153 859
108
114
55
89
26
392
Share of national corporations
50,8%
83,7%
88,4%
81,6%
52,9%
62,1%
Share of foreign corporations
49,2%
16,3%
11,6%
18,4%
47,1%
37,9%
6-19
20-249
250+
Total
there of under national control:
Non-financial corporations
Financial corporations
there of under foreign control:
Non-financial corporations
Financial corporations
[1]
Incl. businesses which did not report their numbers of employees
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The relation between CAS and IFRS
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CAS reporting obligatory unless entity is publicly traded (only +/60 Czech companies on stock exchanges)
at least 40 % of companies under foreign control, they must report
to parent companies – usually IFRS
huge number of differences between CAS and IFRS (study by EY
contains 188 pages!), therefore conversion very complex, timeand cost- consuming process
in order to low cost burden, the IFRS becoming leading principles
for internal management => integration of financial and
management accounting to some extent
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Model IV – Integrated Accounting System (after IFRS
adoption)
Users 1
Users 2a
Users 2b
Users 3
Outputs 1
Outputs 4
Outputs 2
Outputs 3
Calculation in FAS (CAS)
Calculation in MAS (IFRS)
Data recording and storing
Definition of rules for data recording, ordering and registering


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FAS … financial accounting system; MAS … management accounting system;
Outputs 1 ... tax reports; Outputs 2 ... financial statements (CAS); Outputs 3 ... financial
statements (IFRS); Outputs 4 ... budgeting, planning, performance measuring, control,
etc.;
Users 1 ... tax authorities; Users 2a ... external users excluding owners; Users 2b ...
owners; Users 3 ... managers
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The differences between CAS and IFRS
Topic
CAS
IFRS
transaction approach; strong
influence of legal framework (esp. taxation)
capital maintenance approach
Fair value
revaluation
model
not permitted except for the
financial instruments
financial derivatives, the most securities and
some biological assets revaluated
compulsory;
PPE, intangibles and investments
in properties as allowed
treatment
Offsetting
offsetting within income
statement not permitted (except
for some marginal cases)
allowed, if appropriate
Extraordinary
items
transactions of unusual nature accidently
occurring, changes in accounting politics and
material prior period errors restatement
not applied
Prior period
errors
correction through the related item of revenue
or expense; if material error, extraordinary
item
retrospective restatement
through retained earnings
Changes in
accounting
policies
extraordinary items
retrospective restatement
through retained earnings
Impairment
temporary vs. permanent
distinction; insufficient guidance on
calculation
carry amount vs. recoverable amount; solid
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guidance
Income concept
The differences between CAS and IFRS
Topic
CAS
IFRS
Revenues
no guidance, based only on
formal legal requirements
risk and reward approach; reliable
measurement of revenue at fair value of the
consideration; reliable measurement of
related costs
Financial leasing
lessee recognised instalments of leasing
obligation as the expense (incl. the principal);
asset not recognised on the balance sheet,
therefore not depreciated
asset recognised by lessee based on inflows
of future economic benefits; asset
depreciated; only interest (not principal)
recognised as expense
Depreciation
asset considered as a one
technological unit
component approach
Provisions for
reparation of
long-term assets
solving problem with faster obsolesce of
asset’s components; influenced by taxation
not allowed – component
approach to depreciation
Interest
calculation
linear method in all cases
effective interest method
Discontinued
operations
not solved, only the possibility to incur
provision for restructuring
special reporting requirements; each
discontinued operation
disclosed separately
Segment
reporting
no reporting
very detailed requirements
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Conclusions
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the Czech accounting is schizophrenic
quality financial reporting standards are used for internal
purposes
external users have to satisfy with low-quality financial
statements (although quality information are available)
to avoid time, labour and cost burden; entities apply IFRS in the
way they can serve as a useful internal reporting system for the
management
current status quo is useful in terms of meeting informational
demand of owners and managers in some extent, but not for the
general public
resolution could be twofold:
 to amend and improve the current CAS or
 to broaden the scope of entities subject to IFRS reporting
the will for the change is missing
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That's all ...
... looking forward to your remarks and
questions
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