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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.

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David proch zka department of financial accounting and auditing faculty of finance and accounting

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

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


The aims of the paper

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


Literature overview historical development

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


Model i dual accounting system

Model I – Dual Accounting System

  • 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; Users2 ... owners, creditors, trade partners, etc.; Users 3 ... managers


Literature overview recent development

Literature overview – recent development

  • 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)


Literature overview current status

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)


Model ii integrated accounting system

Model II – Integrated Accounting System


Financial r eporting in the czech republic

Financial reporting in the Czech Republic

  • 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)


Financial r eporting in the czech republic1

Financial reporting in the Czech Republic


Model iii dual accounting system before ifrs adoption

Model III - Dual Accounting System (before IFRS adoption)

  • financial reporting according to CAS hardly subordinated to tax requirements and other information needs of state authorities


Organisational structure of the czech economy

Organisational structure of the Czech economy

[1] Incl. businesses which did not report their numbers of employees


The relation between c as and ifrs

The relation between CAS and IFRS

  • 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, time- and 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


Model i v integrated accounting system after ifrs adoption

Model IV – Integrated Accounting System (after IFRS adoption)

  • 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


The differences between cas and ifrs

The differences between CAS and IFRS


The differences between cas and ifrs1

The differences between CAS and IFRS


Conclusions

Conclusions

  • 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


That s all

That's all ...

... looking forward to your remarks and questions


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