Accounting policy according to National Accounting Standard No. 7

According to the bill of 29 September 1994 on accounting 1 (Further: u.o.r.) on matters not regulated by this act, entities may apply national accounting standards issued by the Accounting Standards Committee, and if there is no appropriate national standard, non-listed entities under Article 2(3) u.o.r.

may apply International Accounting Standards. In Communication No. 3 Minister of Finance from 25 June 2012 2 a resolution has been issued no.

6/12 Accounting Standards Committee with 24 April 2012 on the adoption of National Accounting Standard No 7 „Changes in accounting policies, estimates, correction of errors, events following the balance sheet day — take-up and presentation’. This standard was later updated.

In the Official Journal of the European Union 4 January 2019 a resolution was issued no.

Regulation (EU) 3/2018 Accounting Standards Committee with 13 November 2018, concerning the updating of CRS No 7, which applies once first to financial statements drawn up for the financial year starting from 1 January 2019, with the possibility of prior use.

The subject of the study of the author is issues concerning accounting policy, which are highlighted in CRS No. 7.

1. Objective of National Accounting Standard No. 7

Objective CRS No 7 was presented Under point 1.1. This document. It includes rules on accounting books and annual accounts for the impact of changes in rules (policy) 3 accounting, changes in estimated values and corrections of errors (including those made in previous financial years) and events which occurred after the balance sheet date, in the light of the provisions of u.o.r.; in addition, the standard also sets out how to present data in financial statements, ensuring their comparability.

According to point 1.2. CRS No 7, that document specifies:

„(a) the conditions for amendments adopted by the accounting policy unit,

(b) the way in which the accounting books record the effects of changes in the accounting policies adopted, the correction of errors, including those made in previous financial years, the recognition of changes in the estimates and the accountancy of events occurring after the balance sheet date,

(c) the extent of the information disclosed in the financial statements on changes in accepted accounting policies, correction of errors made in previous financial years, changes in estimates and events following the balance sheet date,

(d) the presentation of comparative data in the financial statements, ensuring their comparability." 4 .

The further part of the document indicates that the change in accounting policy and the correction of errors may affect tax settlements and the amount of deferred income tax; as they are discussed in National Accounting Standard No. 2 „Income tax’, are not discussed in CRS No. 7.

In addition, CRS No 7 not applicable under Article 2(3) u.o.r. 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.

2. Accounting policy

The essence of accounting policy reflects Article 10(1) Accounting Act according to which the principles adopted by an entity should relate primarily to:

• 1. Determination of the financial year and its reporting periods,
• 2. Methods of valuing assets and liabilities and determining the financial result,

3. The method of keeping accounts, including at least:

• the establishment plan of accounts setting out the list of accounts of the master book, the accepted rules for the classification of events, the rules for the keeping of accounts of ancillary accounts and their links to the accounts of the master book,
• a list of the accounts and, when keeping the accounts using a computer, a list of the datasets forming the accounts on the IT media, specifying their structure, interlinking and their functions in the organisation of the entire accounts and in the processing processes,
• a description of the data-processing system and, when keeping accounts using a computer, a description of the information system, including a list of programmes, procedures or functions, depending on the software structure, together with a description of the algorithms and parameters and software data protection rules, including in particular methods of safeguarding access to data and the processing system, and, furthermore, the definition of the software version and the date of its operation,

1. a system for data protection and data collection, including accounting evidence, accounting books and other documents underlying their records.

At the same time, according to Article 5(1) u.o.r., the adopted accounting policy paper should be ‘applyed on a continuous basis, with the same grouping of economic operations, valuation of assets and liabilities in subsequent financial years, including depreciation or write-downs, the setting of the financial result and the drawing-up of financial statements so that the information resulting from them is comparable for subsequent years. The assets and liabilities shown in the accounts at the date of their closure shall be recorded at the same amount, in the accounts open for the following financial year.’

According to point 3.2. CRS No 7, where the accounting rules do not regulate the classification, valuation or presentation of a particular transaction, event or condition, the head of the entity may use the National Accounting Standards or, in the absence thereof, the International Accounting Standards. The application of National Accounting Standards is not mandatory.

National Accounting Standard No. 7 points 3.3 and 3.5 report what an entity should specify in its accounting policy. These are:

• 1. Rules for classifying and grouping economic events into the relevant items of financial statements according to their nature, as assets and liabilities, income and profits or costs and losses, or cash flows,
• 2. Methods adopted for the valuation of assets and liabilities at initial recognition in the accounts and at the balance sheet date,
• 3. Methods adopted for determining the financial result,
• 4. The method of presentation of information in the accounts adopted,
• 5. Estimated values adopted, for example: fair value, depreciation periods or rates for fixed assets or intangible assets.

Principles and methods set out in the above points 1 and 4 they must be used continuously. At the same time, the adopted accounting policy may establish the use of simplifications permitted by the accounting rules, provided that this does not have a significant negative impact on the fair and clear presentation of the assets and financial situation and the financial result of the entity.

Simplifications may consist primarily of:

1. Determination of the limit of the purchase price or cost of the production of fixed assets or intangible assets below which an entity makes (not earlier than when put into service) a one-off write-down of the value of such assets,
2. Valuation of materials and goods in the purchase price instead of the purchase price and production in progress – with an estimated execution time less than 3 months – in the amount of direct costs of manufacturing or only direct materials or not being valued at all,
3. Non-accounting of revenues and costs for long-term services not completed, in accordance with the rules Article 34a and Article 34b u.o.r., if the share of revenue from unfinished services at the balance sheet date is not significant in all operating revenues of the reporting period.
4. Changes in accounting policy

Accounting policy should be amended within certain time limits 5 , if such an obligation arises from the amendment of those accounting provisions or if the entity has lost the right to apply the simplifications provided for in the accounting rules.

It may also be possible, in justified cases, to refrain from continuing to apply the accounting policy adopted and to amend it by retrospectively converting comparative data. This is possible if the entity considers that this is necessary for a clearer presentation of its financial and financial situation and the financial result.

According to point 3.7. CRS No 7, the new rule applies from first the date of the financial year; depending on the decision of the manager of the unit, this is the first the current or subsequent financial year.

Under point 3.9. CRS No 7 examples of situations that do not constitute a change in accounting policy are described. This includes:

• 1. Adoption of new accounting policy events and transactions different from those previously applied to similar but not identical events and transactions,
• 2. The adoption of a new rule with regard to events which have not previously occurred or occurred but were irrelevant and became relevant,
• 3. Changes in estimates,
• 4. Take a decision to absorb newly acquired fixed assets by a method other than that used for similar facilities,
• 5. Changes in depreciation rates (periods of use) of fixed assets or intangible assets as a result of their verification,
• 6. Reclassification into fixed assets or vice versa of long-term investment property resulting solely from the change in the use of that property.

The change in accounting policy is included in the accounts for two methods i.e. through a full retrospective or transitional approach.

A full retrospective approach shall be applied where: (a) amendments to the accounting rules resulting in a mandatory change in accounting policy do not include transitional provisions setting out how to take them into account; (b) the entity on its own initiative changes the accounting policy adopted; (c) there is a loss of the right to apply simplifications resulting from accounting rules.

In turn, transitional provisions are applied when amendments to the accounting rules, which result in a mandatory change in accounting policy, determine how to take account of changes.

How is the retrospective approach applied? According to point 3.12. CRS No 7 unit:

• „(a) has the effect of modifying the accounting policies adopted into equity, demonstrating them under Article 8(2) [Accounting] as profit (loss) from previous years or other equity items (funds), if otherwise provided for in other accounting provisions,
• (b) transforms retrospectively the comparative data in the accounts;

(c) shows the effects of a revision of the adopted accounting rules (policy) under the relevant heading of the statement of own funds changes where it is required to draw it up." 6 .

In the event of a change in the adopted accounting policy, the nature of the changes, the reasons for their introduction and their numerical impact on the financial result or equity (fund) and the retrospective transformation of comparative data, respectively, should also be disclosed in additional information and explanations.

4. Estimates

Chapter IV of CRS No 7 presents the issue of estimates. The determination of estimates shall be made on the basis of reliable information, using the appropriate methods of estimation under the conditions. Under point 4.1. CRS No 7 examples of objects of respect are exchanged, i.e. Among others:

• (a) claims whose recovery is doubtful,
• (b) periods of use subject to depreciation: fixed assets, intangible assets, real estate investments and rights,
• (c) deferred tax assets and reserves,
• (d) costs of producing long-term, unfinished services,

(e) provisions for liabilities and treated as ancillary costs, e.g. provisions for employee benefits, provisions for losses on commercial transactions in progress (including the effects of ongoing litigation, guarantees, guarantees).

According to point 4.2. CRS No 7, estimates shall be verified by the entity if:

• (a) the circumstances underlying the estimates made have changed,
• (b) the entity has obtained additional information which was previously unknown to the entity,

(c) the entity has acquired more economic experience.

Additionally, as Waldemar Gos points out:

„1. The change in the estimated values or the application of estimates to the valuation of assets previously shown at the purchase price or cost of production, possibly less the write-offs made against the loss of value, does not constitute a change in the accepted accounting policy.

1. Similarly, replacing a fair value with an adjusted purchase price or a purchase price, if a reliable fair value is not possible, does not constitute a change in accounting policy.
2. The change in valuation rules (e.g. materials in the purchase price instead of the purchase price) is a change in the accepted accounting policy.
3. In the event of difficulties in contrast to changes in accepted accounting policies and changes in estimated values, an estimate change is assumed to have occurred’ 7 .
4. Bugfixing

Chapter V of CRS No 7 concerns error correction. All errors detected should be corrected whether they have been committed in the current or previous financial years.

‘Under the concept of errors made in previous financial years, omissions or irregularities in the entity's financial statements for the preceding year or previous financial years shall be understood to cause a significant distortion of the reporting data contained in the approved financial statements for the preceding years; these reports shall not be regarded as clearly and reliably representing the entity's financial, financial and financial performance.’ 8 .

Under point 5.2. CRS No 7 examples of situations that do not constitute error correction are listed, i.e.:

• (a) the effects of a change in the accounting policy adopted due to a change in the accounting provisions or to an entity's initiative,
• (b) the effects of events which the entity could not have known, despite due diligence, and was therefore not able to take them into account in previous annual accounts,

(c) changes in estimates which, by nature, are some approximations and need to be updated after obtaining additional information.

In the following points of the CRS No 7 the methods of accounting for the consequences of correction of errors are presented and disclosed in the accounts. Where errors made in the current tax year are detected, such errors shall be corrected in the accounts of the current financial year before the accounts are drawn up.

On the other hand, detected after the annual accounts were drawn up but before their approval and considered as material 9 , require adjustments to the accounts of the current financial year and to amend the annual accounts accordingly.

In turn, the effects of errors considered irrelevant are recorded in the accounts of the following financial year.

According to point 5.5. CRS No 7, errors made in previous financial years, contained in approved financial statements, detected during or after the current financial year, and before approving the financial statements for that year, shall be corrected in the accounts of the current financial year.

At the same time, if that is the case, the accounting provisions, the correction of errors made in previous financial years, recognised by the entity as irrelevant, shall affect the net profit or loss of the current financial year or other own funds, respectively.

6. Summary

The accounting policy is a key document for the accounting officer and when drawing up financial statements. The basic regulations relating to what it should contain, how it is to be drawn up and how to change it are included in uro.r.

The general legal standards were subsequently clarified in National Accounting Standard No. 7.

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