Implementing IFRS: A Case Study of the Czech Republic

Abstarct

This empirical paper presents a study of the implementation process for International Financial Reporting Standards (IFRS) in one of the accession countries, the Czech Republic. Based upon a review of the legislation, institutional framework and context, and drawing upon recent interviews with Czech companies required to prepare IFRS accounts, auditors and institutional players in the Czech Republic, the paper highlights some of the key issues that are arising with the move to the implementation of IFRS reporting for listed group companies and other enterprises in the Czech Republic.

The paper considers the issues that arise when implementing new accounting regulations, some of which are not new and have been well covered in the literature, but others of which are particular to the implementation of IFRS reporting. The method of implementation, the scope of IFRS, particular issues with local accounting practice and IFRS, the issue of enforcement of compliance with IFRS and its relationship with audit, the link between IFRS reporting and taxation and the provision of education and training are all considered. There is also a review of the state of preparedness of local group listed entities with respect to the implementation of IFRS reporting.

There are many potentially rich areas for accounting research where the work could also inform the practice of IFRS accounting. The paper provides a contribution by highlighting how one country has moved to implement the requirement for group listed enterprises to prepare IFRS accounts and the issues that then arise for legislators, preparers and users.

Notes

1. Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia.

2. Though International Financial Reporting Standards (IFRS) were named International Accounting Standards (IAS) before 2002, we will use IFRS as a phrase to encapsulate previous and current IAS, unless they are so named in a paper.

3. Though see Alexander and Archer (2000) for a discussion of the ‘myth’ of Anglo-Saxon accounting.

4. The RM system was originally a one-off mechanism for distribution of shares in the Voucher Privatization in the early 1990s. During the privatization company shares were administratively created, based on the book information of privatized enterprises (Jindrichovska, 2001). The distribution algorithm assigning shares to privatization vouchers was matching supply and demand of these administratively created shares. After distribution the shares began to be traded on the RM system, which now resembles an over-the-counter market. In comparison to the Prague Stock Exchange (PSE), the RM system has less restrictive regulations, and its population is mostly mid-size companies. Most shares were, and still are, traded on both the RM system and the PSE, even though some companies have de-listed from the PSE as a reaction to introduction of stricter reporting regulations.

5. This was for the convenience of the researchers.

6. The World Bank Report on the Czech Republic suggests that companies listed on the PSE must prepare up to four sets of audited financial statements – legal entity accounts and consolidated accounts under IFRS and Czech accounting standards – which seems somewhat onerous (ROSC, 2003b).

7. Equivalent figures for other Central European accession countries in 2002 are as follows: Poland, 14.3%; Hungary, 17.4%; Estonia, 33.6%; Latvia, 8.0%; and Lithuania, 9.5% (EBRD, 2003).

8. Discussion with a member of the Commission.

9. Interviewee L.

10. Article 37.

11. Article 37(1c) and 37(2b).

12. Which would seem to be practical, given the likely problems of ensuring that tax inspectors are trained in IFRS, in the short term. A representative at the Union of Accountants confirmed that it was currently unclear how the tax inspectorate will check the IFRS accounts.

13. Usually this consists of taking the client's trial balance and then converting it to IFRS and presenting all the disclosure notes.

14. This sample was not supposed to include subsidiaries of overseas companies. It had not been clear from the information held on the RM system that this company was a subsidiary of an overseas company.

15. See section 3, above.

16. Though this research is now slightly out of date, as it was based on a review of the 1999 IFRS financial statements, which were prepared by enterprises listed on the PSE before it became obligatory to prepare IFRS financial statements.

17. Though this is not an area we investigated, except for the one interview with a subsidiary of an overseas company.

18. Though one firm was fined, in 2003, in relation to its audit of a leading Czech bank in 1998–99 (Lesenarova, 2003).