DOI: 10.5817/FAI2016-1-2 No. 1/2016
34
Comparison of Valuation of Financial Instruments
according to the International and Czech Accounting
Standards in the Context of Performance Reporting
Jaroslav Sedláček
Masaryk University
Faculty of Economics and Administration, Department of Finance
Lipová 41a, 602 00 Brno, Czech Republic
E-mail: sedl@econ.muni.cz
Abstract: The paper is devoted to a comparison of the valuation of financial
instruments according to the international and Czech accounting standards in the
context of performance reporting of trade corporations. Differences in valuation and
reporting of financial instruments are examined in connection with the upcoming
amendments to the international accounting standards, which are currently the
subject of scientific and expert discussions. The research focused on the comparison
of classification methods of financial instruments according to the international and
Czech standards and the resultant methods of recognition, valuation and reporting
with the aim of identifying possible differences. The research arrived at the discovery
of what causes the differences and the assessment of their impact on the financial
statements of trade corporations. A different concept of accruals on long-term
receivables and variant calculations of present value affected the amount of the
reported balance sheet as well as performance. Calculations of specific values of
differences in financial instruments are made in two model examples in the categories
Held-to-maturity investments (HTMI) and Loans and receivables (L&R), both from the
viewpoint of owners, as well as from the perspective of debtors. The development of
these differences in time is described graphically. The differences in the reported
values manifested themselves in overvaluation or undervaluation during the life of
the financial instrument, but the values were identical at the time of their maturity. It
has been proved that differences between the reported financial situation and the
performance of trade corporations persist even after the amendment to the Czech
accounting legislation, and it is necessary to take them into account in financial
analysis.
Keywords: financial instruments, models of valuation, recognition, Czech accounting
legislation (CAL), International Financial Reporting Standards (IFRS), differences
JEL codes: M21, M41, G32
Introduction
Accounting is generally considered a reliable instrument of financial management,
which accurately shows assets and liabilities of trade corporations and their net
income. It is based on principles and rules which are universally recognised and
accepted all over the world. And it is the understanding of these principles and their
implementation at international and national levels which causes the differences in
valuation, ultimately leading to different reporting of performance of businesses
(Brealey, R. A., Myers, S. C. and Allen, F., 2006), which is usually measured by the
No. 1/2016
35
profitability of paid-in capital, EVA (Economic Value Added) indicators, MVA (Market
Value Added) indicators, or by SVA (Shareholder Value Added) indicators. The
environment in which accounting develops and functions plays a key role (Sedláček,
2007). It is therefore logical that accounting is influenced by the economic, legal,
social, political, and cultural environment in a given jurisdiction. Also the application
of accounting principles in national rules (particularly for valuation) is different in
each country. This occurs despite the ongoing efforts to harmonise accounting
globally in the form of the International Accounting Standards (IAS) and the
International Financial Reporting Standards (IFRS), including the interpretations of
SIC (the Standing Interpretations Committee) and IFRIC (the International Financial
Reporting Interpretations Committee).
The basic accounting principles involved in valuation methods in individual countries
are particularly the following:
 the conservatism principle, which requires the use of immutable accounting
methods,
 the prudence principle, which does not allow overvaluing assets and income
of a trade corporation nor undervaluing liabilities and costs,
 the historical cost principle, which preserves past conditions because a trade
corporation is obliged to record assets at their purchase price,
 the realisation principle, which requires reporting of the actually achieved
(realised) profit only,
 the imparity principle, which on the one hand forbids to report unrealised
profits, but on the other hand, it requires or allows reporting of unrealised
losses,
 the true and fair view, which requires that a financial statement faithfully
represents the financial situation of a trade corporation.
Furthermore, a problem arises from the fact that the individual principles contradict
each other and it is up to the will of businesses to decide which principle is more
important when valuing their assets and liabilities. The selected method of valuation
then directly affects the amount of reported assets and liabilities of a trade
corporation, it has an impact on the amount of costs (as asset consumption
expressed in monetary terms) and revenues (as accrued assets expressed in
monetary terms) as well as on the amount of reported net income of a trade
corporation.
The international standards have gradually become globally applied accounting
standards and they successfully respond to the current needs of economy
globalisation and, in particular, to the development of world financial markets, which
is under way without any limits (Pacter, 2015). Companies seek capital at the best
price wherever it is available. Investors and lenders seek investment opportunities
wherever they can get the best returns commensurate with the risks involved. To
assess the risks and returns of their various investment opportunities, investors and
lenders need financial information that is relevant, reliable and comparable across
borders. The amounts of cross-border investment are enormous. To illustrate (see
Fig. 1): the Organisation for Economic Co-operation and Development (OECD)
Financial Assets and Investing
36
estimates that the worldwide Foreign Direct Investment (FDI) outflows in 2014 were
USD 1.372 trillion. The historically highest level was in 2007 (USD 2.170 trillion). As
you can see in Tab. 1, cross-border ownership of stocks and bonds amounts to many
trillions of US dollars. For example, foreign ownership of US equities, corporate bonds
and treasuries amounted to nearly USD 14 trillion in 2013. And US investors held
over USD 9 trillion of foreign corporate stocks and bonds in 2013.
Figure 1 The development of the worldwide foreign direct investment (trillion USD)
Source: OECD statistics (2015)
The use of one set of high quality standards by companies throughout the world
improves the comparability and transparency of financial information and reduces
financial statement preparation costs. When the standards are applied rigorously and
consistently, capital market participants receive higher quality information and can
make better decisions. Thus, markets allocate funds more efficiently and firms can
achieve a lower cost of capital. A comprehensive review of nearly 100 academic
studies of the benefits of IFRS concluded that most of the studies provide evidence
that IFRS has improved efficiency of capital market operations and promoted crossborder
investment.
The purpose of this article is to compare the IFRS and CAL in the classification, initial
recognition, measurement and presentation of financial instruments. The aims are to
identify any differences and assess their impacts on the financial statements of
business corporations, and, for selected financial instruments, quantify differences
caused by different methods of valuation and accruals during the entire period of
their maturity; especially to determine impacts on the financial position of the
corporation that is the investor and a corporation that is the debtor.
0
500
1000
1500
2000
2500
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
FDI outward flows - total world FDI outward flows - EU
No. 1/2016
37
Table 1 Foreign holdings of U.S. LTS and U.S. holdings of foreign LTS
1
(Billions of dollars)
2006 2007 2008 2009 2010 2011 2012 2013
Foreign holdings
of U.S. LTS
7,162 9,136 9,463 8,492 9,736 11,561 12,451 13,532
U.S. holdings
of foreign LTS
4,799 6,429 6,324 4,615 5,282 6,830 6,835 7,886
U.S holdings
as a share of
foreign holdings
0.67 0.70 0.67 0.54 0.54 0.59 0.55 0.58
Net position of
LTS of U.S.
residents
-2,363 -2,71 -3,139 -3,877 -4,454 -4,731 -5,616 -5,646
Source: Federal Reserve Bank of New York (2014)
1 Problem Definition, Data and Methodology
The idea of creation and implementation of international accounting standards has
contributed to the unification and comparability of financial statements over time and
space. The standards are created by an independent professional organisation
established in London in 1973, which provides them to individual jurisdictions for
voluntary use. Although it has no formal authority to mandatory implementation of
the standards, most jurisdictions already require the IFRS to be used when preparing
domestic financial statements. According to Pacter from the IFRS Foundation, 130
countries have publicly pledged to adopt the IFRS as a single set of global accounting
standards, 114 countries require their use in all or most public companies and their
use in other countries is possible. The ongoing convergence of the US GAAP, which
are oriented to the needs of corporations financed through financial markets
(Bohušová, 2011), also contributes to the global nature of the IFRS. Accounting is
thus becoming more and more international and national accounting is more and
more pushed to the sphere of small and medium-sized trade corporations, in which it
plays the role of recording for the tax purposes or commercial law. The International
Accounting Standards Board (IASB) seeks to establish a coherent global system of
accounting standards, but the way of their implementation in individual countries is
still within the authority of national governments or economic groups. In the Czech
Republic, being a member country of the EU, only those trade corporations which are
traded on the public capital markets are obliged to submit financial statements
according to the IFRS from 1st January 2005 onwards. Other corporations follow the
Czech accounting legislation, which leads to inconsistent reporting of their financial
and revenue situations on an international scale. On the basis of the amendment to
the Accounting Act valid from 1st January 2011 onwards, the IFRS may also be used
for the purpose of preparing individual financial statements by the trade corporations
1
Long-term securities.
Financial Assets and Investing
38
which are a part of a consolidated unit preparing a consolidated financial statement in
accordance with the IFRS.
It is clear that the differences in reporting according to the international and national
accounting standards will be particularly affected by the economic and legal
environment of individual countries. They will depend on how each country modifies
the relationship between these two systems and how it will accept changes arising
from the IFRS updates. The IASB permanently modifies and extends the IFRS
depending on the evolving needs of the users of financial statements.
The Czech national accounting system is primarily based on rules which are codified
in legislation. As a EU member country, it is a subject to the legislation of the
European Union and therefore it has to carry out its obligations. The main pillar of the
Czech accounting legislation in its broader concept is the Accounting Act, which is a
basic, generally valid legislative norm with state-wide force, containing adjustment of
accounting methods and reporting for all business units in the country ranging from
the smallest to the largest (also multinational) ones, whose scope of business and
purpose of foundation are fundamentally different. The form and content of the act
are determined not only by the rules and the content of the European legislation, but
also by the Czech legislative rules and the requirement for full compliance (both
factual and terminological) with the other regulations of the Czech legal order.
Considering the fact that the act is also designed for very small business units, e.g.
the self-employed who cannot be expected to have broad theoretical knowledge in
accounting and related fields, it is necessary to make the text as much
comprehensible and clear as possible. The national accounting system is also
influenced by the tax requirements, because the accounting net income is at the
same time the basis for the assessment of corporate income tax. As a result, in
practice the management makes a lot of estimates when preparing accounting
statements with regard to the potential tax implications of the particular accounting
procedure. This may lead to adoption of an accounting stance based on tax counts
and not considerations about how it is to be expressed in fair and true view of a
transaction in its essence. Although the Czech accounting legislation (hereinafter
CAL) has gradually taken over a wide range of procedures from the IFRS and it is
continuously updated in the form of amendments, there are still differences resulting
from the different priorities and principles. Identification of the differences between
the two accounting systems and examination of their causes is the subject of many
research studies, see e.g. papers by audit companies Ernst and Young (EaY, 2013)
and PricewaterhouseCoopers (PwC, 2013). The IASB projects, whose aim is to meet
the needs of users resulting from the dynamically developing financial markets, are
currently discussed. The solution lies in simplification and clarification of reporting of
financial instruments (IFRS 9). The key issue is the valuation of financial assets and
liabilities or equity instruments.
Valuation in accounting should generally be derived from the benefit which an asset
or liability will bring to the owners. It is basically the right choice between two
extreme approaches based on the one hand on historical costs, and on the other
hand on fair prices. Both approaches have their pros and cons and that is why the
choice of an appropriate valuation variant is always problematic and ambiguous. To
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39
identify the differences in the valuation of financial instruments between the IFRS and
CAL it is necessary to first analyse the valuation models and conditions of their use.
1.1 Models for Valuation of Financial Assets and Liabilities under the
IFRS
Procedures for valuation of financial instruments are governed by several
international standards, which define their recognition, valuation, reporting, and
disclosure. The following standards are concerned in particular:
 IAS 39 Financial instruments: recognition and measurement
 IAS 32 Financial instruments: presentation
 IFRS 7 Financial instruments: disclosures
 IFRS 13 Fair value measurement
 IFRS 9 Financial instruments
The specific method for the valuation of financial instruments is determined by the
categorisation of financial assets and liabilities according to the business model used
by the trade corporation for the management of financial instruments. The IAS 39
standard distinguishes four categories of financial assets:
 Financial assets or financial liabilities at fair value through profit or loss (FVTPL)
– are assets or liabilities which are intended for trade or were classified as an
instrument at fair value through profit or loss by the accounting unit at initial
recognition.
 Held-to-maturity investments (HTMI) – are non-derivative financial assets with
fixed or determinable payments and a fixed maturity which a trade corporation
intends to and is able to hold to maturity.
 Loans and receivables (L&R) – are non-derivative financial assets with fixed or
determinable payments which are not quoted in an active market.
 Available-for-sale financial assets (AFS) – are non-derivative financial assets
which categorised as available for sale by the accounting unit and do not fall
under any of the above mentioned categories.
Two categories of financial liabilities are distinguished:
 Financial liabilities at fair value through profit or loss (FVTPL) – are defined in a
similar way as financial assets in this category.
 Other financial liabilities – these include other liabilities not included in the
previous category.
Two models for valuing individual categories of financial assets and liabilities can be
used:
 Fair value, which is defined as the amount for which an asset could be
exchanged or a liability settled in transactions between knowledgeable and
willing parties under normal conditions.
 Amortised cost, i.e. the amount at which financial assets or liabilities are
valued at initial recognition, less principal repayments and (using the effective
interest method) plus or minus any unamortised original premium or discount
Financial Assets and Investing
40
(the difference between the initial value and the value at maturity), and further
less (directly or through an adjustment) the amount by which the value of the
assets or liabilities has decreased as a result of their impairment or
uncollectibility.
The choice of a valuation model also depends on the period in which the valuation of
financial instruments is performed. All financial assets and liabilities are valued at fair
value at initial recognition. The fair value of a financial instrument is standardly
represented by the transaction price, i.e. the amount of the consideration given or
received. In some situations, however, the price of a transaction does not show its
fair value. It is then necessary to determine the fair value using market data about
the same or similar instrument, or using valuation techniques which refer to market
data.
Subsequent valuation of financial instruments depends on their initial classification.
All financial assets are subsequently valued at fair value, except for loans and
receivables, held-to-maturity investments and, in rare cases, non-marketable equity
instruments whose fair value is not reliably measurable, or derivatives related to such
instruments, which will be repaid by these non-marketable equity instruments.
Loans and receivables and held-to-maturity investments are subsequently valued at
amortised cost. The amortised cost of financial assets and liabilities is determined
using the effective interest rate.
Available-for-sale financial assets are valued at fair value. Changes in fair value are
recognised in the other comprehensive income (fair value through other
comprehensive income – FVTOCI). The interest arising from available-for-sale debt
instruments is recognised in the financial revenue using the effective interest rate
method. The dividends arising from an available-for-sale capital instrument are
recognised in profit or loss at the time when they are granted to the holder.
Derivatives (along with embedded derivatives reported separately) are valued at fair
value. All changes in fair value are recognised in profit or loss, with the exception of
the case in which derivatives are classified as hedging derivatives for hedging of cash
flows. Financial liabilities are subsequently valued at amortised cost using the
effective interest rate method, unless they are classified as being valued at fair value
through profit or loss. Those financial assets and liabilities which are designated as
hedged may require additional adjustments based on the requirements for hedge
accounting.
All financial assets are the subject of impairment testing with the exception of those
valued at fair value through profit or loss. If there is objective evidence that a
financial asset has been impaired, an adjustment is calculated or a one-time write-off
is made, which are recognised in profit or loss.
Table 2 shows the valuation of financial assets in individual categories, including the
impact on the corporate net income.
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Table 2 Valuation models of financial assets in individual portfolios, including their
impacts
Portfolio Acquisition
Subsequent
revaluation
Impact on the net
income
FVTPL Fair value Fair value Profit and loss
HTMI Fair value Amortised cost Profit and loss
L&R Fair value Amortised cost Profit and loss
AFS Fair value Fair value
Other comprehensive
income
Source: IFRS 2014
1.2 Valuation Models of Financial Assets and Liabilities according to
the CAL
In the Czech Republic, procedures for valuation of financial assets and liabilities are
codified by legislation, namely the Accounting Act (Act no. 563, 1991), the
Implementing Decree (Decree no. 501, 2002) and also the national accounting
standards, which, however, are not legally binding for trade corporations. Within
financial instruments, the CAL distinguishes the following valuation models:
 Acquisition cost – this is the price for which a financial instrument was acquired,
including related transaction costs.
 Fair value – which is determined by the value set by a regulated market, a
qualified estimate, an expert report, valuation according to specific rules.
 Historical costs – which represent the acquisition cost modified by the interest
income or expenses, and at the same time they take into account all foreseeable
risks and potential losses, as well as impairment according to the principle of
prudence.
 Equivalence – which expresses the degree of participation of a trade corporation
in the book value of the company, which is a controlled person or a person under
significant influence.
 Nominal value.
Similarly to the IFRS, valuation models are bound to a particular portfolio, which is
directly related to the way of difference recognition at the time of when the financial
statements are prepared. Under the CAL for non-financial corporations2
, any financial
instrument may at its initial recognition be valued by acquisition cost or nominal
value, depending on the category in which it is classified. Subsequently, when a
financial statement is prepared, financial assets and liabilities classified in the FVTPL
portfolio are revalued at fair value and the differences in valuation are reflected in
profit or loss in the same way as Table 2 shows.
2
Legislation applicable to financial corporations (the Implementing Decree no. 502/2002 to the
Accounting Act and national accounting standards) is closer to the IFRS rather than to the
legislation applicable to non-financial corporations.
Financial Assets and Investing
42
Financial assets held with the intention and ability to hold to maturity (HTMI) include
the assets with fixed and determinable payments and maturity. At initial recognition,
they are valued by the acquisition cost and then revalued by the amortised cost, as in
the IFRS. Costs and revenues are reported as a profit or loss. The method of effective
interest yield is only required for financial institutions, entrepreneurs recognise by
contractual interest.
Loans and receivables are financial assets generated by providing money, goods and
services directly to a debtor, e.g. bonds, loans to customers and credit. They are
valued at nominal value, and in financial institutions they are subsequently revalued
using the method of effective interest rate and reported in the same way as Table 2
shows. Receivables and trade payables in non-financial trade corporations are
classified as clearing relations and only contractual interest is usually reported.
Accruals on long-term trade and other receivables or liabilities are not considered a
financial instrument by the Czech accounting legislation.
Available-for-sale financial assets are all debt and non-financial assets which do not
fall under the three categories mentioned above. They include equity securities, with
the exception of those classified as held for trading. At initial recognition, they are
valued by acquisition cost and then they are revalued at fair value in the same way
as Table 2 shows. Changes in fair value are recognised directly in equity funds in the
form of valuation differences. Available-for-sale equity instruments3
(e.g. shares or
shares in companies with limited liability) are initially valued by acquisition cost and
subsequently revalued using the method of equivalence at the time when financial
statements are prepared. The model of equivalence is an alternative to the
acquisition (historical) cost, which a trade corporation can choose. If the trade
corporation decides to do so, then it must apply this valuation model to all assets
classified in this category. Changes in valuation by the method of equivalence are
recognised on balance sheet just as the changes in fair value of available-for-sale
assets.
1.3 Comparison of Valuation Models according to the IFRS and the
CAL
The scope of the international standards is very wide. The standards cover all types
of financial instruments, including receivables, payables, investments in bonds and
shares, loans and derivatives. They are also applied to certain contracts for the
purchase or sale of non-financial assets (such as commodities), which can be settled
on a net basis in cash or by another financial instrument. The gradual amendments to
the Czech accounting legislation have contributed to a considerable convergence with
the IFRS, particularly regarding recognition and valuation of derivatives and the area
of hedge accounting. Despite the advanced harmonisation in the area of financial
instruments, the national accounting system retains a certain degree of autonomy,
which is reflected in its valuation models as well as in the ways of reporting.
3
These represent the net share of the issuer’s assets less all liabilities or they in another way
free the issuer of the obligation to hand over money or other financial asset to another
company.
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Differences have emerged from the comparison of international and national systems,
and these are subsequently transferred to the financial situation of trade corporations
and their performance. Particularly the following differences come to the forefront:
 in the classification of financial instruments,
 in valuation models at initial recognition of financial instruments,
 in the use of valuation models in subsequent revaluation of financial instruments.
If business entities are taken into account, the main difference in classification occurs
in long-term receivables from business relations and other long-term receivables,
which are considered to be clearing relations in the Czech accounting, not financial
instruments. This also results in a different method of valuation, recognition and
reporting in the statement of profit and loss compared with the IFRS.
At initial recognition of financial instruments, the IFRS require that all financial
instruments are valued by the fair value valuation model or their nominal value,
whereas the CAL does not allow for fair value. Instead, the CAL uses the acquisition
cost model, in which the value of a financial instrument is determined by the cost of
the transaction, i.e. the amount of the consideration given or received. In certain
situations the acquisition cost will obviously not correspond with the fair value, which
is based on market data about the same or similar instrument or is determined using
valuation techniques based on market data. Moreover, Czech conditions lack a liquid
and active financial market. The differences from the initial valuation then affect the
balance sheet total, as well as the value of the equity of the trade corporation.
Models for the subsequent valuation of financial instruments are determined by their
initial classification and are basically identical for both accounting systems in
question. The differences arise in the assets and liabilities applying the model of
amortised cost, in which different time value of interest income or costs incurred is
determined. While the IFRS apply the effective interest rate model, the CAL uses the
linear model. The effective interest rate model discounts more accurately the
estimated future cash payments for the expected duration of the financial instrument.
The IFRS do not allow at all for the model of equivalence designed by the CAL as an
alternative to subsequent valuation of equity instruments with control or substantial
influence. Instead, the IFRS require revaluation of these instruments using the fair
value model. The differences in the calculated value when using different models are
reflected in the other comprehensive income (OCI) or in the reported equity
according to the CAL.
2 Results and Discussion of the Problems
The time factor may be considered one of the causes of the differences identified
between the two accounting approaches to the valuation of receivables and liabilities
(both financial and non-financial) held to maturity. Liabilities (including reserves) and
receivables held to maturity are in principle valued at discounted value (with the
exception of those financial receivables and liabilities revalued at fair value), which
happens continuously starting from the time of their inception. Discounting is not
necessary only when the impact of the time factor is insignificant, which may be the
case of short-term liabilities and receivables. This is then the amortised cost method,
Financial Assets and Investing
44
receivables and liabilities are at the time of recognition recorded as discounted in the
accounts, their value is increased over the time (using the method of effective
interest rate) by adequate interest expense in the case of a liability, or by interest
income in the case of receivables, so at maturity they are valued at nominal value
which is to be reimbursed. The projection of the time factor makes it possible to
differentiate in terms of time the interest falling into individual accounting periods
(based on the principle of material and temporal commensurability of costs and
revenues and the accrual principle), in which the resources are used (in the case of
liabilities) or in which the trade corporation lends money, e.g. by deferring the
maturity date. To calculate the amortised cost, it is possible to use the basic equation
for the present value, which discounts future net cash flows:
= (1)
= − 1 (2)
Where: x0 – present value
xn – future value
i – effective interest rate
n – term to maturity
Under the CAL, long-term receivables and liabilities are valued at the nominal value
or the acquisition cost, and this value does not change from the moment of
realisation. The revenue is then the sales or costs in full, without separation of the
time value of money. The impact on profits or losses of a trade corporation may then
be illustrated on e.g. receivables from a supply of goods in the amount of CZK 1
million payable in three years, when the discount would be 5% if paid in cash. It is
clear from Fig. 2 that while the value of receivables remains constant throughout the
whole period of maturity, the supplier reports the revenues from sales of goods in full
amount at the time of realisation in the Czech accounting, i.e. a higher amount
compared to the discounted receivables.
This leads to overvaluation of receivables and reporting higher sales in the first period
compared to the IFRS, which in terms of time differentiate revenues (costs in the
case of liabilities) by the method of effective interest rate.The cause of the
differences identified in the category of HTMI is primarily not the issue whether or not
accruing at recognition of assets or liabilities is applied, but it is the method of its
calculation. The IFRS apply – just as with the L&R category – the model of amortised
costs, whereas the CAL distinguishes revenues or costs in a linear way in nonfinancial
corporations.
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Figure 2 The development of the initial and subsequent valuation of long-term
receivables in the accounts of a supplier
Source: Author’s elaboration
The calculation of the differences may be shown on the example of bonds held to
maturity, when the costs are different from the nominal value of the bond – the bond
is sold (at the time of bond issuance) with a discount or with a premium. Both the
price reduction and discount are split into individual periods (for the issuer as well as
the investor) in the same way as it is in the case of interest in the above-mentioned
case. These are bonds in the nominal value of CZK 0.5 million with a two-year
maturity acquired with the discount of CZK 62,000. The differences in the time value
of the bond and the value of interest recognised in profit or loss are shown in Fig. 3
and 4.
Figure 3 The development of monthly amortisation of a discount for the owner
of a bond under the CAL and the IFRS
Source: Author’s elaboration
For a corporation which owns the bond (the investor), the difference between the
national and the international approach is caused by the use of different variants of a
valuation model. The chart in Figure 3 shows the constant development of the
discount amortisation as a result of the linear model applied in the Czech accounting,
unlike the rising curve resulting from the model of the effective interest rate under
the IFRS. It is obvious that under the IFRS, the owner reports lower yields in the first
920
930
940
950
960
970
980
990
1000
1010
0 1 2 3
inths.CZK
years
CAL IFRS Amortised cost
3950
4050
4150
4250
4350
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
CZK
month
CAL IFRS
Financial Assets and Investing
46
half of the maturity of the bond and higher yields in the other half. The different
development of discount amortisation then influences not only the reported profits of
the trade corporation during the bond tenure, but also the bond value reported in the
balance sheet, which grows linearly under the CAL or by a convex curve under the
IFRS. Upon maturity of the bond, the values of the asset and the reported profit are
equal and the use of different models therefore does not affect the total financial
situation of the corporation, nor its performance.
Figure 4 The development of the value of a bond in individual months on the side of
the issuer under the CAL and the IFRS
Source: Author’s elaboration
In a trade corporation issuing a long-term bond, the liability under the CAL is
recognised at the nominal (future) value, which is not adjusted in any way over the
course of time. As a result of the gradual amortisation of the discount, reduction in
costs for next periods and thus also in the total balance sheet occurs. In contrast, the
IFRS value a bond at the present value which is gradually increased by amortisation
(see Fig. 4). Amortisation is at the same time recognised as an expense in profit or
loss and, therefore, the total balance sheet does not change. Allocating the discount
in the profit or loss of a corporation has a similar effect as on the investor, arising
from the different models used (linear vs. effective interest rate models).
If a trade corporation chooses the model of equivalence to value capital instruments,
it then reports any differences in subsequent valuation as differences from
overvaluation, which will affect the value of the equity as well as the total value of
assets. Influence may be significant due to the high volumes of equity investments
reported in the Czech industrial corporations e.g. from sector of manufacturing
industry or sector of electricity, gas and water, see Tab. 3. In place of equivalence,
the IFRS apply the model of fair value and the changes in fair value are reported in
FVTOCI (similarly to the Czech accounting). The differences arising from the different
approaches to valuation instruments could be possibly quantified by means of a case
study elaborated for a particular trade corporation, but owing to the individual
conditions, a generalising criterion can hardly be found.
980
1030
1080
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
inths.CZK
IFRS CAL
No. 1/2016
47
Table 3 Volumes of equity instruments in the sector of manufacturing industry (SMI)
and the sector of electricity, gas and water (EGW) in millions of CZK
2007 2008 2009 2010 2011 2012 2013 2014
Equity instruments
in SMI (total)
184224 175797 111118 124230 125090 128235 198120 190552
Equity instruments
in EGW (total)
259464 240035 327199 337339 343074 325231 297611 439379
Equity instruments
in SMI (held in PLC)
48272 62737 45697 46061 41647 45155 88226 79864
Equity instruments
in EGW (held in PLC)
102735 101943 128404 145097 144660 151843 160192 281133
Source: Ministry of Industry and Trade of the Czech Republic (2015)
3 Conclusions
Global financial markets require adequate financial instruments and new approaches
to their recognition and valuation. The IFRS have gained a global position and are
gradually adopted (completely or partially) by economic groups and individual
jurisdictions. The Czech Republic has adopted the IFRS for some trade corporations
and the other corporations are bound by the national accounting legislation. Despite
the continual amendments to the Czech accounting legislation, which follow the
amendments to the IFRS and which basically absorb their newly adjusted versions,
some differences remain in the recognition and valuation of financial instruments.
This fact in effect restricts their mutual comparability. The difference is then reflected
in reporting of the financial situation and performance of trade corporations.
The results of the conducted research have confirmed the differences in reporting,
which are particularly caused by different categorisation of financial instruments and
the associated method of their valuation. Different classification of a financial
instrument in individual accounting systems and the associated method of recognition
and model of valuation are the primary causes of the differences. Depending on
whether the IFRS or the CAL are followed, a different balance sheet or profit or loss
of a trade corporation are stated in the financial statements.
In long-term trade receivables, the value of difference arising from the method of
acquisition cost versus the model of amortised costs was at the level of the time
value of the interest income or expense. The differences quantified in the area of
long-term bonds are caused by the methods of discount amortisation based on a
calculation of the present value or on the model of the effective interest rate.
Depending on whether it is the owner or the issuer of the bond, the total reported in
the balance sheet and in the profit and loss statement will be influenced.
It is necessary to assess individually the differences caused by using the model of
equivalence, which is applied by the CAL, but not by the IFRS.
Financial Assets and Investing
48
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Decree no. 501/2002 Coll., which implements certain provisions of Act no. 563/1991
Coll., on accounting for entities that are businesses maintaining double-entry
accounting, as amended.
Decree no. 502/2002 Coll., which implements certain provisions of Act no. 563/1991
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Act no. 563/1991 Coll., on accounting, as amended.