National Accounting Standard No. 6 „reserves, passive accruals of costs, contingent liabilities’ – discussion of selected provisions

Article 1 Act on 29 September 1994 on accounting 1 (hereinafter: u.o.r.) lay down rules on accounting and the pursuit of business in the field of service bookkeeping. It follows that this is a necessary piece of legislation governing the keeping of accounts and other activities related to accounting activities.

However, as further part of the Act indicates, it is not the only such act. Article 10(3) U.o.r. states that: “In cases not governed by the Act, by adopting accounting policies, individuals may apply national accounting standards issued by the Accounting Standards Committee.

In the absence of an appropriate national standard, units other than those mentioned under Article 2(3), may apply International Accounting Standards’ (hereinafter: IAS). The author presents the most important aspects of the application of the National Accounting Standard No.

6 „Reserves, passive accruals of costs, contingent liabilities’.

1. Definitions in National Accounting Standard No 6

Before discussing the objectives and issues raised in National Accounting Standard No. 6 „Reserves, accruals and contingent liabilities’ 2 (hereinafter: CRS No 6), it is worth looking at the definitions of the most important wordings used in this document. Under point 2.1.

CRS No 6 We will find a definition of commitments that explicitly refers to Article 3(1)(20) According to this provision, the obligations are ‘exempt from past events the performance of benefits of a reliable value that will result in the use of the entity's already held or future assets’.

In CRS No 6 examples of such past events are given, i.e. "sales of products and goods, purchase of goods, materials and services, use of employment, creation of a tax obligation". For example, the benefits are listed as ‘payment, issue or repair of goods or products, removal of damage’.

Under point 2.2. CRS No 6 the definition of reserves is presented, in which the reference to u.o.r. is repeated, this time to Article 3(1)(21). According to that provision, the reserves are ‘obligations whose maturity or amount is uncertain’. According to further explanations included Under point 2.2.

CRS No 6: „The provisions shall be created in accordance with the legal obligation or the usual commercial obligation, that is, where there is a high likelihood that an entity will have to comply with its obligation and the costs or losses required to comply with that obligation are sufficiently significant that their failure to take account of the financial result of the period in which the obligation arises would result in a material distortion of the image of the entity’s financial, financial and financial situation.’ 3 .

It is worth mentioning at this point that the creation of “the obligations for which the reserve was previously created reduces the reserve.

Unused reserves, in view of reducing or ceasing the risks justifying their creation, shall increase to the date on which the remaining operating revenue, financial revenue or extraordinary profits have proved unnecessary, respectively.’ 4 .

Under point 2.3. CRS No 6 there is talk of passive accruals of costs. There is a reference to Article 39(2)(2) and Article 39(2a) u.o.r.

according to first the entity's provision provides for passive accruals of costs in the amount of probable liabilities for the current reporting period, arising in particular (...) from the obligation to carry out, related to the current business, future benefits to employees, including pension benefits, as well as future benefits to unknown persons whose amount can be reliably estimated, even though the date of establishment of the undertaking is not yet known, including for guarantee and warranty repairs for the products sold for long-term use.

Under Article 39(2a) u.o.r. we read that the obligations in question Under section 2 point 2, shall be shown in the balance sheet as a liability reserve. To put it simply, point 2.3. CRS No 6 defines passive accruals of costs as reserves directly linked to operational activities, i.e.

production, sale (and more generally trade) and after-sales phase and overall management. It is also clarified that when in CRS No. 6 it is referred to as passive accruals of costs, i.e. accruals of costs which are reserves[5].

Under the above item CRS No. 6 it has also been detailed, which should not be included in passive accruals of costs. These are primarily:

„(a) costs for the execution of pending service contracts, including construction referred to in the CRS 3 „Unfinished construction services’,

(b) obligations resulting from the non-invoiced supplies and services accepted by the entity. They shall be included in the obligations for supplies and services, including where the determination by the entity of the exact quantity and/or the price of the supply/service may require estimates." 6 .

Conditional liability, according to Article 3(1)(28) u.o.r. is the obligation to perform benefits which arise on the basis of certain events. point 2.4. CRS No 6 it further specifies that as long as the liabilities are conditional, they are not included in the balance sheet and in the profit and loss account.

2. Objectives and scope of CRS No 6

CRS objective No 6 ‘Determining uniform rules for the entry in the accounts of reserves, passive accruals of costs and contingent liabilities, as well as their valuation and presentation and disclosure criteria in the accounts’ 7 .

The disclosure of provisions, passive accruals of costs and contingent liabilities ‘allows users of financial statements to have a proper understanding of their nature, deadlines, amounts and changes thereto and to correctly determine the amounts of liabilities, including provisions requiring the outflow of assets, thereby contributing to a reliable and reliable mapping of the assets, financial and financial performance of the reporting entity’ 8 .

Therefore, CRS No 6 provides an explanation for the provisions of the u.o.r. in this respect, including Article 7(1)(5) and section 2, Article 6(1)(2) and Article 8(1) This bill.

According to Article 7(1) s.o.r. ‘The individual assets and liabilities shall be valued using the price (costs) actually incurred for their acquisition (production), with caution. In particular, for this purpose, the financial result, whatever its amount, must be taken into account: ...

5) reserves on a known entity risk, threatening losses and other events.’ But in thought section 2 „Events in question Under section 1, it must also be taken into account when they are disclosed between the balance sheet date and the date on which the accounts are actually closed.’

Article 6 u.o.r. provides for the principle of accrual and the principle of proportionality.

According to section 1 that provision: ‘In the accounting books of an entity, all the revenue generated by it and the costs charged to it relating to that income relating to the financial year in question, irrespective of the time limit for payment of that revenue’ shall be included in the entity’s accounts.

This is an accrual principle which requires that “the accounts, and thus the accounts, should include all economic events that occurred in an economic unit during a given period, so that their inclusion is complete. Completeness of the recognition of economic processes is an obvious feature of accounting’ 9 .

On the other hand, Article 6(2) u.o.r. relates to the principle of proportionality, according to which in order to ensure the proportionality of revenues and associated costs, the costs or revenues relating to future periods and the related costs not yet incurred will be included in the assets or liabilities of the reporting period.

"By establishing the result in accordance with the principle of proportionality, for example for a given month, we must take into account the costs and revenues of this period and the related content" 10 . The last mentioned provision, i.e. Article 8(1) u.o.r. presents the principle of relevance.

According to him, the accounting policy should ensure that all events relevant to the assessment of the asset and financial situation and the financial result of the entity are identified in the accounts, while respecting the precautionary principle in question under Article 7.

point 1.6. CRS No 6 also refers to International Accounting Standard No. 37 „Reserves, contingent liabilities and contingent assets’ and International Accounting Standard No. 19 „Staff benefits’. According to this point, differences between CRS No. 6 a IAS No 19 and IAS No 37 include:

• different treatment of provisions for future benefits to workers, including pensions and provisions created for guarantee and warranty repairs for sold products of long-term use. According to CRS No 6 such reserves shall be treated at the stage of their inclusion in the accounting records as passive accruals of costs, and in accordance with IAS No. 19 and IAS No 37 they are included in the reserve category,
• a different account in the accounts of the reserves. According to IAS No. 37 in the creation of certain reserves, operating costs shall be charged. According to CRS No 6 reserves are created in other operating costs, financial costs or exceptional losses,
• differences in the definition of contingent liabilities. According to IAS No. 37 they cover not only the effects of possible obligations arising from past events and which will be confirmed only at the time of occurrence or non-execution one or more uncertain future events which are not fully subject to the control of an entity but also to the fulfilment of current obligations arising from past events which are not included in the financial statements, because:
• it is unlikely that funds containing economic benefits should be spent in order to fulfil their obligations, or
• the amount necessary to fulfil the obligations cannot be sufficiently reliably assessed. In contrast, CRS No. 6 predicts, similarly to MSR 37, the way in which the financial statements disclose the consequences of such current obligations,
• differences in contingent assets, namely that they are not subject to CRS scope No. 6,
• accounting for profits and losses resulting from actuarial revaluation of defined post-employment benefits. According to CRS No 6 These gains and losses must be recognised in the profit and loss account. However, according to IAS No. 19 other total income is required.

According to the above mentioned point 1.6.

CRS No 6, source of discrepancies in two first The above paragraphs ‘is a different criterion for the recognition of provisions and passive accruals of costs: this criterion in IAS is the degree of certainty in the implementation of the obligation, and in [the accounting act, for example, the author], the type of activity to which the liability event relates.

In addition, this Standard shall, in accordance with the provisions of the Act, respect the principle of proportionality of revenue and costs’ 11 .

3. Recognition of provisions and passive accruals of costs

The condition for taking account of the reserve or the reverse clearing of the costs in the accounts is, in particular, the occurrence of an event requiring an entity to carry out future benefits, while it is reasonable and possible to reliably estimate the costs or losses that will be incurred by the entity in carrying out its duties. How To Make Up Under point 3.2. CRS No 6, a reserve shall only be created if:

• „(a) on the unit the current obligation to provide (legal or customary) 12 resulting from past events,
• (b) it is likely that compliance with the obligation will result in the use of the entity's assets already held or future assets,

(c) a reliable estimate of the amount of performance of the obligation may be made’ 13 .

At the same time, the above conditions also justify the recognition of passive accruals of costs.

The accounting books, in the form of reserves or a passive settlement of periodic costs, shall contain only the effects of the performance of the obligation arising from past events that exist independently of the entity's future activities or intentions.

Reservoirs may not be created or accruals cannot be made for the costs of future activities. point 3.4. CRS No 6 determines what is involved in the accounting records of the reserve/passenger settlement of accrual costs.

After first, This is an increase in the cost of operating and passive accruals of costs (if it relates directly to the entity's operating activities). After second, This is an increase in other operating costs and reserves, if indirectly related to the entity's operational activities.

After third, This is an increase in financial costs and provisions, if any. In the end, it is an increase in exceptional losses and reserves, if this relates to events related to risks other than the general risk of operating.

In the same way, the amount of reserve/passenger accruals of costs shall be increased if the risk of the entity having the necessary to fulfil its obligations.

If an obligation for which the reserve was created arises, the reserve shall be used. This rule is almost identical under Article 35d(1) u.o.r., according to which the obligation for which the reserve has previously been set down reduces the reserve. point 3.7. CRS No 6 determines what is involved in the dissolution of a part (or all) of the unused reserve in the event of a reduction or cessation of the risk justifying its creation. This is a reduction in reserve status and an increase in:

1. Other operating revenue where the reserve is indirectly operating;

1. Financial revenues where the reserve relates to financial operations; 3. extraordinary profits where the reserve relates to events related to risks other than the general risk of operating. The above was also presented under Article 35d(4) u.o.r. (‘Unused reserves, in view of reducing or ceasing the risks justifying their creation, increase to the date on which the remaining operating revenue, financial revenue or extraordinary profits have proved unnecessary, respectively’).

Under point 3.8. CRS No 6 a description of the non-use, in part or in whole, of the passive settlement of the accrual costs in the event of a reduction or cessation of the risk justifying it.

It consists of a reduction in the passive cost settlement and a reduction in the operating costs incurred during the reporting period, in which it was found that the related liability was less or less incurred. The above was also presented under Article 39(5) u.o.r.

(‘The obligations included as passive accruals reduce the costs of the reporting period in which it was found that they were not created’). Reserves and passive accruals of costs shall be inventoryd by comparing the data from the accounts with the relevant documents and verification of the actual value of the components.

The inventory should take place at least on the last day of the financial year.

Further, CRS No 6 other detailed rules for the recognition of reserves, including:

• • provisions for liabilities arising from the effects of ongoing legal proceedings,
• • provisions on guarantees granted,
• • provisions relating to penalties or costs for the elimination of environmental damage,
• • provisions for future liabilities due to restructuring,
• • passive accruals of costs for future benefits to employees.

points 3.17 and 3.19 CRS No 6 the recognition of contingent liabilities has been specified. A conditional obligation occurs when the existence of a benefit obligation depends on the occurrence of a specific event. Conditional liabilities are not included in the balance sheet.

In addition, if an entity is subject to joint liability, that part of the obligation which cannot be fulfilled by the parties third, is treated as a contingent liability. According to point 3.18.

CRS No 6 compliance with the criteria relating to the recognition of an item as an obligation requires the existence of a current obligation to provide and the likelihood of an outflow of measures in order for the entity to fulfil that obligation.

1. Valuation of provisions and passive accruals of costs and contingent liabilities

In Chapter IV of CRS No. 6 the valuation of reserves and passive accruals of costs and contingent liabilities has been discussed. As stated Under point 4.1. CRS No 6 and under Article 28(1)(9) U.o.r., the entity shall assess the reserves at least at the balance sheet date at a reasonable, reliable estimate.

This also applies to passive accruals of costs. According to point 4.2.

CRS No 6 ‘the amount to which the reserve is created should be the result of a reliable, rational assessment of measures containing economic benefits necessary to fulfil the current obligation at the balance sheet date or to be transferred to the party third for that day’ 14 .

The amount of the reserve should reflect the most accurate estimate of the amount required to meet the current obligation at the date of the creation or verification of the reserve, taking into account the risks and uncertainties that are related to the business activity of the unit. The amount of the reserves justifies the choice by the entity concerned of different valuation methods, depending on the circumstances.

From the provisions described above, it deserves special attention point 4.10. CRS No 6. As has been rightly noted, the creation of reserves should take into account changes in the value of money over time (while maintaining the principle of materiality).

The amount of the reserve for future estimated liabilities (by applying the discount rate) should reflect their current value (at the date of creation or verification of the reserve). ‘When applying the discount, the balance sheet value of the reserve shall increase over each period of time.

This increase is recognised as a financial cost in the profit and loss account.

The discount rate to be applied shall be the discount rate established on the basis of the valuation date (day of creation or verification of the reserve) of the market rate of return on highly rated corporate bonds or the market rate of return on government bonds, depending on the choice made by the entity in the accepted accounting policies.

If the market rate of return on government bonds is chosen, an entity may increase the discount rate by a risk-related factor, if the provision relates, for example, to financial operations carried out in markets where risks and, therefore, interest rates are higher than the average interest rate on government bonds.

Time limits for the redemption of corporate and government bonds should be consistent with the estimated time limit for the use of the reserve.’ 15 .

According to point 4.18. CRS No 6, in view of the likely changes in circumstances accompanying the decision to disclose the conditional obligation, ‘the entity should assess the conditional obligations at least at the balance sheet date in order to determine whether the outflow of the measures has become likely.

If it is likely that the outflow of funds will be necessary in relation to the position treated as a contingent liability, a reserve shall be created, showing it in the books and accounts of the period during which the probability change occurred.’ 16 .

When discussing CRS No. 6 The presentation and disclosure of reserves, passive accruals of costs and contingent liabilities in the accounts shall also be provided. Entities other than banks and insurance undertakings should demonstrate provisions for liabilities and passive accruals of costs in liabilities under B.I. ‘Reservations for liabilities’. At the same time, they should be distinguished:

1. I.2 – „Retirement and similar provisions, in the form of passive accruals of costs broken down by: long-term (i.e. reserves or parts thereof, whose expected maturity is longer than 12 months from the balance sheet date) and short-term (i.e. reserves or parts thereof expected to be used during the period 12 months from the balance sheet date;
2. I.3 – „Other reserves’, i.e. reserves created on the basis of Article 35d u.o.r. as well as provisions in the form of passive accruals of costs created on the basis of Article 39(2)(2) u.o.r. (other than pensions and similar). Other reserves are also broken down by long-term and short-term.

As regards contingent liabilities, an entity is required to disclose their status at the balance sheet date in the notes provided that the possibility of the outflow of funds for the fulfilment of the obligation is not negligible. In addition, a brief description of the nature of the conditional obligation must be added and the following shall be disclosed:

• • estimates of the financial implications of the undertaking,
• • evidence of uncertainty as to the amount or timing of the outflow,

• the possibility of obtaining returns. In addition, if the reserve and conditional liability arise from the same circumstances, the entity is required to disclose information in a manner reflecting the relationship between the reserve and conditional liability.

5. Summary

National Accounting Standards (CRS No. 6) are in some cases a necessary addition to u.o.r., which is directly due to Article 10(3) that bill. In addition, in the event that a given issue is not addressed both in u.o.r. and in National Accounting Standards, individuals may apply the relevant International Accounting Standards.

This does not apply only to units submitted under Article 2(3) u.o.r., i.e. bodies drawing up financial statements in accordance with International Accounting Standards, International Financial Reporting Standards and related interpretations published in the form of European Commission Regulations. These entities shall apply the u.o.r.

and the implementing rules issued on the basis thereof, to an extent not regulated by International Accounting Standards.

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[1] i.e. Journal of Laws of 2019, item 351, as amended