University of Economics, Prague
Faculty of Finance and Accounting
Department of Financial Accounting and Auditing
The Development of Financial and Management Accounting after the IFRS
Adoption: A Case from the Czech Republic
Working paper, 2nd version
Comments, remarks, references and other help are very welcomed
Contact:
Ing. David Procházka, Ph.D.
Department of Financial Accounting and Auditing
Faculty of Finance and Accounting
University of Economics
W. Churchill Sq. 4
Prague, 130 67
Czech Republic
Email: <[email protected]>

This paper is processed as an output of a research project „Analysis of Accounting Standards for Income
Reporting – New Approaches in the World and the Possibilities of Their Utilisation in the Czech Republic"
(registration number GA402/09/P523).
Introduction
The fail of communist regime in the late 80’s has brought many challenges to all areas of the
society. Economic and business aspects of the transformation from a centrally planned economy
to a standard market economy were on the top of the list in the Czech Republic and other
Central and Eastern European countries as well. However, the “revolution” of the Czech
accounting has not occurred yet. Despite the fact that the new legislation developed after 1989
respected the new organisation of the economy, the general perception of the functions of
financial reporting and accounting did not change. Financial statements and other information
reported by companies to the external users are still hugely subordinated to the fiscal and other
purposes of the state authorities. This was the main reason for the sharp distinction between
financial accounting for external users (or better said the tax-financial accounting for state
authorities) and managerial accounting for internal users after 1989.
Some positive achievements have occurred due to the accession of the Czech Republic to the
European Union and the subsequent introduction of the International Financial Reporting
Standards into the European legislation. The implementation process of the IFRS into the EU
acquis communautaire is a radical change. The shift from out-of-date accounting directives to a
modern worldwide-accepted financial reporting system has not affected only the legislation. The
impact on preparers and users is more significant. In the case of the Czech Republic, the
implementation of the IFRS provides external users with a potential new source of high quality,
comparable and transparent information to assess the company’s financial position, performance
and other important financial features. As far as preparing of financial statements concerns,
compliance with the IFRS requires more knowledgeable preparers in comparison with financial
statements according to the Czech Accounting Standards.
It turned out that the IFRS adoption has been leading to a greater interconnection between
financial and internal reporting in the context of the Czech accounting practice. The necessity to
prepare information according to the IFRS levies additional costs on the companies. However,
the IFRS are regarded as useful not only for external users, but also as a relevant basis for
internal reporting, control and decision-making. Therefore, the IFRS principles are incorporated
into corporations’ information systems at some extent. Information based on the IFRS has
gradually been serving to various users for their different purposes.
There are three main aims on which I will focus in this 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 both
for external and internal users; and

to analyse the convergence of financial and managerial accounting in general and to
reveal at which extent this tendency holds for the companies operating in the Czech
Republic.
1 Background
1.1 Literature overview
The IASB’s Framework for the Preparation and Presentation of Financial Statements asserts that
“The objective of financial statements is to provide information about the financial
position, performance and changes in financial position of an entity that is useful to a
wide range of users in making economic decisions” (IASB, Framework, par. 12) .
Despite the fact that IFRS are intended primarily for external users and that reporting for
internal users is beyond the scope of the Framework, the function of accounting as a system for
recording and providing information useful to different users can be extended for the purpose of
this paper. The accounting, as a technical language (Chambers, 1974, p. 298) of communication
within a particular business entity and as a supra-organisational system (Chambers, 1974, p.
299) of communication among various entities, has to react to the changing incentives both from
the internal and external environment in order to meet the users’ informational needs of
accounting information.
The entities have been accommodating to those stimuli in miscellaneous ways. Before the
industrial revolution, the accounting was a one-way, integral system. The specialisation of
production and its rapid growth raised the claims for capital accumulation and external sources
for the financing of large investments. This broke the accounting into two divided modules –
financial and management accounting:
“The separation of running business by company management and informing external
even unfamiliar investors was behind the divergence. For controlling purposes, company
management needed detailed information on cost structure and profitability of products,
business units and investments, not only afterwards but also prior to decisions. For
external investors, new standardized method was needed to inform on the financial
performance of companies and to discharge managerial accountability to outside
parties” (Taipaleenmäki and Ikäheimo, 2009, p. 7).
As far as management accounting concerns, according to Kaplan (1984, p. 391) the demand for
internal purposes arose already in the middle of the 19th century. Management accounting
techniques and procedures were significantly evolving and
“the cost accounting, capital accounting, and financial accounting systems were kept
separately, with the cost accounting system typically designed for and operated by the
manufacturing departments” (Kaplan, 1984, p. 396).
The peak of the evolution of management accounting was reached in 1923, when Clark
published his famous Studies in the Economics of Overhead Cost. His “different costs for
different purposes” have prevailed as the cornerstone for cost and management accounting for
decades:
“… there have been virtually no major innovations by practicing managers or
management accountants during the most recent 60 years to affect contemporary
management accounting thought” (Kaplan, 1984, p. 401).
The Evolution of Management Accounting (Kaplan, 1984) together with Johnson’s and Kaplan’s
Relevance Lost (1987) were the impulses for a rapid development of new innovative techniques
helping the managers especially in their strategically oriented decision-making. Progress in
modern information and communication technologies assists in meeting increasing and
changing (Ashton et al., 1995; Hopper et al., 2007) informational needs of the users (Hoque et
al., 2001; Mendoza and Bescos, 2001). With the growing business complexity, the specialisation
of functions of management accounting systems contributed to the strengthening of the
management accounting as a separate information system. The above mentioned divergent trend
became so strong that some authors describe this process as a duality in relationship between
financial and management accounting (Jones and Luther, 2005). On the other side, the
management accounting techniques became increasingly integrated (Ittner and Larcker, 2001).
The international convergence of management accounting procedures is a consequence of global
competition, enhancing information technology and other factors (Granlund and Lukka, 1998).
The management accounting experienced in the last two decades of the 20th century a great
florescence while shifting from the orientation on “reduction of waste in business processes” to
the focus on “creation of value”:
“The focus of management accountants shifted to the generation or creation of value
through the effective use of resources” (Abdel-Kader and Luther, 2006, p. 234).
The management of value creation is followed by the change of traditional tactically oriented
management accounting to broadly defined and strategically oriented accounting using
innovative techniques such as Economic Value Added, Activity Based Costing/Management,
Customer Time Life Value, Value Based Management, Balanced Scorecard and other valuebased performance measures. Innovative management accounting techniques are viewed as a
universal tool in order to satisfy different purposes of all interested parties. The managers
administrate internal business processes respecting the value creation goal. Thus, they (should)
aim to add a new value not only to the shareholders (owners), but they (should) respect the
needs of various groups of stakeholders (customers, employees, etc.), too. At this intersection,
the management accounting systems and internal reporting interface the financial accounting
systems and reporting for external users. This is the starting point of the integration process
when management and financial accounting have been merging into one system again.
The development of financial accounting is not less interesting than the lifetime course of its
management counterpart. The British Interest Act from 1839 legalized money lending for
interest, a fact which boosted the expansion of business and trade. The financial statements
prepared exclusively for owners became insufficient in order to inform external providers of
capital. External lenders (usually bankers) were interested in information helpful in order to
assess the ability to pay back the borrowed money (liquidity, solvency, indebtedness). The
understatement of net assets and profits was perceived as legitimate measure for the protection
of creditors’ claims.
The conservatism (prudence) started to be one of the guiding principles in preparing financial
statements. The stewardship function grew on strength after the Great Depression by the
establishment of the Security Exchange Commission as a reaction to “Black Thursday Crash”
(Belkaoui, 2004, p. 8). For some reasons (Zeff, 2007), the historical costs were promulgated as a
fundamental measurement basis ensuring the protection of investors and thereby stewardship
function of the accounting as far as publicly traded companies concerned.
Similarly to management accounting, the tendency for the international integration (or rather
harmonisation) of financial reporting has emerged. The first major attempt to harmonise
guidance on financial accounting and reporting failed, as Fourth Council Directive was too
“politically plural”:
“In order to be to obtain agreement, it was necessary to include a large number of
options in the Fourth Directive and there are over 60 points on which countries were
able to exercise a choice” (Watts et al., 1979).1
The real convergence and harmonisation began with the set up of International Accounting
Standard Committee in 1973. The accounting profession reacted to the steady shift from the
stewardship function of financial accounting (oriented mainly on the past course) to the forwardlooking orientation and the need of reliable and comparable information useful in decisionmaking regarding the allocation of scarce resources not only on a national level, but also in the
worldwide context. In the first phase, the use of IAS/IFRS was on a voluntary basis:
“The findings show that companies have voluntarily responded to pressure to produce
1
Taken over from Lewis and Pendrill (2004, p. 48).
more comparable financial information, and that standard setters and regulators have a
key role to play in promoting the harmonization process” (Tarca, 2004, p. 86).
The study by Christensen et al. (2007) has proved similar results regarding the voluntary
adoption of IFRS. In the next step, financial reporting in compliance with the IFRS became
mandatory, as the International Organisation of Securities Commission recommended its
members to promote the usage of the IFRS as a primary reporting basis:
“...the Presidents’ Committee recommends that IOSCO members permit incoming
multinational issuers to use the 30 IASC 2000 standards to prepare their financial
statements for cross-border offerings and listings” (IOSCO, 2000).
Beside IOSCO’s resolution, the second driver promoting further convergence of financial
reporting was the approval of the “EU Financial Reporting Strategy: the way forward”. The
Strategy concluded that
“there is a strong pressure towards the convergence of accounting standards, raising the
importance of international standard setting and thereby encouraging national standard
setters to cooperate more closely” (CEC, 2000, par. 5).
Following the goals set up by the Lisbon European Council, the Strategy proposed that
“all EU companies listed on a regulated market should be required to prepare
consolidated accounts in accordance with IAS” (CEC, 2000, par. 16).
The proposal came about the reality in 2002, when the Regulation (EC) 1606/2002 of the
European Parliament and of the Council of 19 July 2002 on the application of international
accounting standards was adopted. The new strong position of the IFRS within the European
Union and other important world stock exchanges accelerated the further convergence of
financial reporting standards. The most important is of course the joint convergence project of
the IASB and FASB. The process can be described as the emergence of a single set of standards
for preparation of financial statements for external users:
“At their joint meeting in Norwalk, Connecticut, USA on September 18, 2002, the
Financial Accounting Standards Board (FASB) and the International Accounting
Standards Board (IASB) each acknowledged their commitment to the development of
high-quality, compatible accounting standards that could be used for both domestic and
cross-border financial reporting. At that meeting, both the FASB and IASB pledged to
use their best efforts to (a) make their existing financial reporting standards fully
compatible as soon as is practicable and (b) to coordinate their future work programs to
ensure that once achieved, compatibility is maintained” (IASB, FASB, 2002, p. 1).
The aforementioned integration tendency of management accounting techniques throughout the
world and the global convergence of financial reporting are explained variously. The complexity
of business world, innovations and global competition are reasons for management accounting
procedures integration; higher international mobility of capital, integrating capital markets and
the effect of Euro are the drivers for convergence of financial reporting standards. Those
processes are mutual. They are not only interconnected, they are the same phenomena, however
and unfortunately labelled by different names.
The “Berlin Wall Fall” and subsequent integration of the European Union and the opening of
China and other untraditional markets had released new world business gates. As a result, the
companies are expanding worldwide and the investors are not restricted from putting their
money only into the “local projects”. The development of ICT supports the linking of national
capital markets into a single global market. Moreover, it enables more effective international
management of subsidiaries within the concern structures. The management accounting is
influenced by the financial reporting requirements (Kaplan, 1984; Nathan et al., 1996) on the
one hand. On the other hand, the stimuli from management accounting have being incorporated
in the financial reporting (Stewart, 1991).
No wonder some authors have started to cope with the terms like “integration of financial and
management accounting systems” (Angelkort and Weißenberger, 2009) or “the convergence of
financial accounting and the management accounting” (Taipaleenmäki and Ikäheimo, 2009).
The question is not to which extent to converge or integrate (Hemmer and Labro, 2008), but
when the convergence or integration will be finished as:
“contrary to the standard textbook proposition, properties of management and financial
accounting systems are not independent” (Hemmer and Labro, 2008, p. 1209).
Alternatively:
“The properties of an optimal management accounting system depend directly on the
properties of the financial accounting system in a predictable way” (Hemmer and Labro,
2008, p. 1212).
1.2 Model development and proposed hypothesis
For a long time, the accounting systems have been characterised by divided setups when standalone systems were ensuring the information independently for external and internal users.
Processing of data into information, which is requested by the users for their informational
needs, under separate financial and management accounting system is formalised in Figure 1.
Data processing into information
Fig. 1: Model I – Dual Accounting System
Users 1
Users 2
Users 3
Outputs 1
Outputs 2
Outputs 3
Calculation in FAS
Calculation in MAS
Data recording and storing
Data recording and storing
Definition of rules for data recording, ordering and registering
- 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;
- Users 2 ... owners, creditors, trade partners, etc.;
- Users 3 ... managers.
Model I can be denoted as a purely dual (separate) accounting system. Both systems are
considered to be completely independent. The some kind of integration is present only on the
lowest level; namely the rules for data recording (e.g. balance sheet equation, two-sided
accounts and double entry, measurement in monetary unit, etc.) are the same in the financial
accounting system (FAS) and the management accounting system (MAS). In reality, there has
always been some connection at least on the second level (i.e. on data recording and storing).
However, for the purpose of this paper, I assume that this model has wholly separated FAS and
MAS.
Recent progress in the business environment can be characterised by gradual intergrowth of two
originally separate systems, financial and management accounting, into one integrated structure.
There are plenty of possible ways of integration, e.g. on the data recording level or on the
calculation level, sometimes even on the output level. The integration on the users’ level appears
to be also feasible, but nowadays it seems to be just a theoretical variant. The potential
alternative of an integrated model with the entire integration on the second level (data recording)
and the partial integration up to the “output level” is suggested by Figure 2.
Data processing into information
Fig. 2: Model II – Integrated Accounting System
Users 1
Users 2
Users 3
Outputs 1
Outputs 2
Outputs 3
Calculation in FAS
Calculation in MAS
Data recording and storing
Definition of rules for data recording, ordering and registering
The full integration of FAS and MAS is depicted only on the second level. The bookkeeping
link-up of all transaction in FAS and MAS within one database storage has been supported by
the development of ICT, e.g. complex ERP systems, which enable the entity to process a huge
volume of data. In this regard, the ERP systems are tools for processing not only accounting
records, but also for recording the data from other areas needed for the managing and decision
making (customers and suppliers relations management, human resources management, finance,
etc.).
For better understanding of this paper’s conclusions, it has to be outlined that the integration of
FAS and MAS on the data record level has occurred independently on the IFRS implementation
in the adopting countries. It is rather a general development due to the progress in the ICT. The
effort to lower or eliminate costs of maintaining the systems could be one of the economic
reasons for the integration on the data record level by implementing ERP systems. However,
ERP solutions are very complex systems with considerable requirements on hard- and software
equipment. Therefore, implementation costs are significant and maintenance costs are usually
higher than in the case of two independent, but relatively unsophisticated systems. The main
reason for the implementation of more costly ERP systems is the synergy effect from the
integration of all business spheres in order to manage the company more efficiently. For some
companies, the integration of financial and management accounting is rather a positive side
effect than a primal motivation for the ERP introduction.
Therefore, separate accounting systems serving only for one specific group of users have been
replaced by a single accounting system assisting a wide range of users in their economic
decision-making. It is time for ONE accounting for different users and for their various
purposes employing various integrated techniques. This process was already launched, as the
drivers of convergence have started to dominate those of divergence (Granlund and Lukka,
1998).
It is argued that IFRS is an important trigger for the shift to integrated accounting systems, as
“IFRS focus on providing decision support for investors […]. In consequence, IFRS are
much more suitable for internal decision-making and control purposes. […] Secondly,
IFRS rely … heavily on information provided by the managerial accounting systems …”
Angelkort et al. (2008, p. 4-5).
However, the integration of both modules to an integral system can take some time and there are
some doubts whether the process can be successfully completed.
“These two separate fields are currently converging but not converged, i.e. there is
already an intersection where these disciplines are heavily overlapping, but are and
potentially will never be fully (re)-integrated” (Taipaleenmäki and Ikäheimo, 2009, p. 3).
1.3 Suggested contribution of the paper
I will try to explore whether the integration of financial and management accounting occurring
in developed economies (as described in the previous part) is also relevant for transitional
countries. In addition, I will analyse the role of the IFRS adoption in this process.
The historical development of the local accounting standards in a particular country hugely
influences the fact how users and preparers of financial statements perceive the usefulness of the
IFRS. There are different opinions on the quality, usefulness and complexity of the IFRS
principles between two main groups of countries: those with a long history of accounting
standards issued by an independent professional body (e.g. Great Britain), and those, where the
regulation of financial reporting is based on the roman code law (most of the European
continental countries). For the first group, the high-quality financial reporting standards for
external users (esp. owners) are considered to be commonplace and the introduction of the IFRS
does not bring any substantially new quality. The latter group is characterised by accounting
standards issued by the state authorities, which aim to protect creditors and minority owners and
to ensure tax collection. This impedes the utilisation of financial statements for investors who
therefore welcome the adoption of the IFRS.
A specific situation occurs in the transitional countries such as the Czech Republic. Financial
reporting is regulated by the state authorities like in developed continental countries. However,
financial reporting is subordinated to the tax laws and other informational needs of the state.
This subordination is much more significant than in the developed countries. Moreover,
companies’ managers are reluctant to prepare useful financial statements which would inform
the external users. They rate the financial statements to be a “necessary evil”, which brings
useful information only to the entity’s competitors. Therefore, many Czech companies do not
fulfil their information duty (i.e. they do not submit their financial statements and/or annual
reports at the Business Register). From this point of view, the strong role of the state regulator is
inevitable.
Czech entities have to cope with the low-quality financial reporting standards. They are forced
to eliminate those lacks at the level of their own management accounting in order to manage
their business effectively. The adoption of the IFRS has impacted this process. The
implementation of the IFRS has become a trigger for the integration of financial and
management accounting systems. Since transitional countries suffer from low quality of
financial reporting, some companies view the IFRS as a useful tool for enhancing the quality of
financial statements for external users and for internal reporting as well. However, we cannot
assume that the IFRS adoption can be a factor for the integration of FAS and MAS on the
second level of Model II (i.e. on the data recording level). This kind of integration should be
ascribed to the development of ICT at the first place.
Because of specific conditions in each particular country, the findings of this paper could be
primarily useful for the Czech financial reporting regulator (i.e. the Ministry of Finance) in its
deliberation over the way how to change the regulation of financial reporting. It could be
reasonably assumed that the regulation of financial reporting has been developing in a very
similar way in other Central- and East European countries. Therefore, some conclusions can be
also relevant for the regulators in other transitional countries.
The crucial question is whether and at which extent the integration on the “higher” levels is
feasible and beneficial. Those findings could be significant in general and be useful for all
parties interested in financial and/or management accounting.
2 Regulation of accounting and financial reporting in the Czech Republic
This chapter focuses on delineating current regulation of financial reporting in the Czech
Republic and on revealing some evidence confirming the general tendency to integration of
accounting both for external and internal purposes as outlined in the literature overview.
2.1 Requirements of legal framework
The Czech financial reporting regulatory framework can be classified under “transitional
economy accounting system oscillating between the European continental approach2 and AngloAmerican approach to accounting regulation3”. This mixture of approaches deserves the
denotation by a label “hybrid system” (Žárová, 2007). The main means of accounting regulation
is the code law. The Czech accounting and financial reporting is regulated by:
1. Inland legislation, i.e.:
a) Act No. 513/1991 Coll., Commercial code;
b) Act No. 563/1991 Coll., on accounting;
c) Decree of Ministry of Finance No. 500/2002 Coll., amending some enactments of
Act No. 563/1991 Coll., on accounting, in the financial statements of business
enterprises;
d) Czech Accounting Standards (further “CAS”) for business enterprises subject to
Decree of Ministry of Finance No. 500/2002 Coll.
Accounting regulatory system remains under regulation of the state with a little influence from a
private sector and/or an accounting profession sector.
“Regulation of accounting remains traditionally conducted by governmental institutions
only and the position of professional independent accounting bodies is nil or very weak”
(Žárová and Mejzlík, 2009).
The positive progress was expected with the implementation of the European law into the Czech
legal framework. The chief source of guidance comes from the following documents.
2. Legislation of the European Union, i.e.:
a) Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54 (3) (g) of
the Treaty on annual accounts of certain types of companies (incl. subsequent
amendments);
b) Seventh Council Directive 83/349/EEC of 13 June 1983 based on the Article 54 (3)
(g) of the Treaty on consolidated accounts;
c) Regulation (EC) 1606/2002 of the European Parliament and of the Council of 19 July
2002 on the application of international accounting standards.
The Directives were incorporated directly into the Act on accounting, but with a little impact on
quality of the financial reporting of the Czech companies.
The implementation of the IFRS is perceived of a greater importance. To contribute to a better
functioning of the internal market, the European Union undertook some measures and arrived at
the conclusion that publicly traded companies must apply a single set of high quality accounting
2
3
Influence of the German-French tradition of accounting combined with the incorporated EU Directives.
As a consequence of IFRS implementation into EU law.
standards for the preparation of their consolidated financial statements. The standards should be
accepted internationally; contribute to the efficient and cost-effective functioning of the capital
market and help to protect the investors and maintain their confidence in the financial markets.
Therefore, “for each financial year starting on or after 1 January 2005, publicly traded
companies governed by the law of a Member State shall prepare their consolidated accounts in
conformity with the international accounting standards” in accordance with the Article 4 of
Regulation (EC) 1606/2002.
Despite the fact that regulations are generally binding in its entirety and directly applicable in all
member states of the EU without any further implementation in the national legislation, the
provisions of Regulation (EC) 1606/2002 are incorporated directly in the Act No. 563/1991
Coll., on accounting. According to § 19, article 9 “entities, which are business companies and
which are the issuers of securities publicly traded on a regulated market in the member states of
the European Union, shall apply the International Accounting Standards as adopted by the EU
for keeping their accounts and for preparation of financial statements”.
Entities, which are subject to reporting under IFRS, can be divided into 2 groups:

issuers of listed securities, which are influenced by the obligation to report in compliance
with IFRS directly;

non-issuers of listed securities, which are however owned by the entities that are issuers
of publicly traded securities.
Non-issuers of publicly traded securities are obliged to keep their accounts in conformity with
the provisions of the Czech accounting legislation (see “list of inland legislation” above).
2.2 Reporting requirements under Czech accounting law and main features of the Czech
Accounting Standards
Based on the Czech regulatory framework for financial accounting and reporting, the companies
can be grouped as follows:

Category I (big Czech companies that are publicly traded on stock exchanges in the EU
markets – IFRS reporting only):
These entities have both to account for their transactions and to prepare their financial
statements using the IFRS. These companies are not required to prepare their financial
statements according to the Czech Accounting Standards (further “CAS”)4 as financial
statements prepared in accordance with the IFRS are also accepted for the statutory purposes.5
4
This is not the full truth. As far as the filling of income tax report concerns all companies have to start with the
accounting pre-tax income, which has to be computed based on the rules defined by CAS. This means of course a
big and meaningless workload for companies.
5
All Czech companies have the informational obligation to submit their financial statements and/or annual report to
the Business Register.
The question stands how to account for in compliance with the IFRS. The IFRS govern the
preparation of the financial statements; they do not ordain how to account for the transactions!
For further discussion of the problem, see Žárová and Mejzlík (2009).

Category II (Small and medium-sized enterprises – both CAS and IFRS reporting):
This category covers a diverse group of companies. The common feature of Category II is that
companies in question are not a direct issuer of publicly traded securities. Nevertheless, their
owners are such issuers. Therefore, the companies belonging to this category shall prepare their
financial statements in accordance with the CAS for statutory purposes. In addition, they shall
provide their parent companies with financial statements and other information needed for
consolidation in compliance with the IFRS. Act on accounting does not permit any voluntary
application of the IFRS instead of the CAS what would be useful and helpful for the entities
covered by this category.

Category III (Small and medium-sized enterprises – only CAS reporting):
Category III covers family owned companies and other companies that are neither direct, nor
indirect issuer of publicly traded securities. They shall account for and report in accordance with
the CAS (again without possibility to apply the IFRS voluntary).
The previous exposition is recapitulated in Figure 3.
Fig. 3: Financial reporting according to the Czech accounting legislation
O
n
l
y
O
n
l
y
Both IFRS and CAS
C
A
S
I
F
R
S
Category I
Category II
Category III
Source: Own presentation based on Act No. 563/1991 Coll., on accounting
As far as usefulness of financial statements for economic decision-making concerns, the crucial
weak points of financial reporting under the CAS are:

no identification of users of financial statements and of their needs;

absent specification of objectives of financial reporting;

vague requirements on qualitative characteristics that determine critically usefulness of
information in financial statements;

absent definitions of fundamental accounting elements;

misinterpreted notion of true and fair view;

unsound and/or missing accounting principles for many accounting spheres; etc.
Because of missing definitions within the CAS, an asset is not recognised with reference to the
inflow of future economic benefits from the asset to an entity; the basis for recognition is the
legal ownership of the asset. Therefore, assets acquired by a financial lease are not recognised
on the face of the lessee’s balance sheet. Further, the CAS does not work with the component
depreciation (component deprecation is enacted starting from 2010, but the usage of this method
is just on voluntary basis). Basic treatment for non-current asset-components with a shorter
useful life consists in crediting the provision for replacement of the non-current asset. The
corrections of immaterial errors are accounted for as a corresponding revenue or expense
through the profit and loss; material errors are corrected by accounting for an extraordinary
revenue or expense. The changes in accounting policies are extraordinary items again. The
changes in estimates are not dealt with under CAS. The offsetting of revenue and expenses is
not allowed (except for few cases).
3 Discussion – the extension of Model I and Model II
3.1 Dual vs. integral relationship between financial and management accounting in the
Czech Republic before IFRS adoption
The state authorities are the main users of accounting and other information presented in
financial statements. The regulation of accounting and financial reporting is (at least implicitly)
subordinated to tax purposes. The traditional relationship between dual accounting system and
tax system is outlined by Figure 4.
Fig. 4: Model I – Extension for the Czech republic (before IFRS adoption)
Users 1
Users 2
Outputs 1
Users 3
Outputs 2
Outputs 3
Calculation in FAS
Calculation in MAS
Data recording and storing
Data recording and storing
Definition of rules for data recording, ordering and registering
- FAS … financial accounting system (based on Czech Accounting Standards);
- MAS … management accounting system (based on “sound” accounting principles);
- Outputs 1 ... tax reports;
- Outputs 2 ... financial statements (according to Czech Accounting Standards);
- Outputs 3 ... budgeting, planning, performance measuring, control;
- Users 1 ... tax authorities;
- Users 2 ... owners, creditors, trade partners, etc.;
- Users 3 ... managers.
There are several changes in the extended Model I in comparison with the basic Model I.
Firstly; the extended Model captures the fact, that financial statements are subordinated to tax
requirements. Although the regulators always assert that financial accounting is independent on
income tax law, the reality is contrary. This could be proved even by the elementary analysis of
income tax law. The financial statements according to CAS is the starting point for all tax
consideration as accounting income before taxation is the first variable in income tax report.
This is a procedure also common in the developed countries. However, the Act on income taxes
indirectly prescribes obligatory accounting treatment for some items. E.g. the accounting
treatment of financial leasing is missing within Czech accounting standards; this topic is solely
solved by the tax law and entities have to adopt the tax solution into their accounting books.
Secondly; the extended Model I depicts the crucial influence of the state regulator on the
financial accounting. Decree of Ministry of Finance No. 500/2002 Coll. defines the obligatory
format of balance sheet and income statement to be used by all entities. In addition, CAS set
rules how to record specific transactions (e.g. it is not allowed to offset the proceedings from the
sale of long-term asset with the carry amount of the sold asset neither in the financial statements,
nor in the accounting books).
Thirdly; management accounting is in some extent subservient to the financial reporting. E.g.
according to the Czech law on accounting, the management accounting has to provide solid
basis and evidence for the measurement of the work-in-progress and finished own products.
This calculation is subsequently used as the measure of inventories also for the tax purposes.
3.2 Accounting research on the usefulness of the IFRS
Low usefulness of accounting information based on CAS strengthens the general tendency to the
dual relationship between financial accounting and managerial accounting. There are several
general reasons in favour of separate coexistence of management and financial accounting.
Angelkort and Weißenberger (2009, p. 2) lists imputed costs for replacement values, lump-sum
provisioning or opportunity costs for owners’ capital or labour input as the main factors for the
dual relationship. Therefore – in addition to the traditional tools (budgeting, cost calculations,
responsibility accounting, controllership, etc.), Czech management accounting is characterised
by very distinctive approach to the definition, measurement and recognition of accounting
elements beyond the boundaries usual at developed economies. Due to weaknesses of financial
accounting and reporting regulation, entities reporting under CAS are forced to remove those
lacks at least on the management accounting level in order to prepare information needed for
internal management and decision-making. The separate existence of management accounting
from financial accounting is therefore inevitable (Král, 2006).
As a result of implementation of the IFRS in conformity with the Regulation (EC) 1606/2002
into the national legislation, the situation is becoming more favour. Recent researches
demonstrated the usefulness of information according to the IFRS both for external and internal
reporting purposes. The adoption of the IFRS has increased the quality of disclosed information
comparing to national GAAP (Barth et al., 2008, p. 496). Moreover, the IFRS adoption in
Europe has not only contributed to the enhancement of financial reporting, but has also assisted
in improving the comparability between countries Macías (2008, p. 8.). This improvement in
quality is significant across Europe as shown by Aubert and Grudnitski (2009) and esp. in
countries with code law (Morais and Curto, 2007a) where accounting was and still is more
closely linked to taxation systems. The same authors (Morais and Curto, 2007b) proved that this
tendency is accompanied (in case of Portugal) with less smooth earnings since financial
reporting in accordance with the IFRS is not closely related to the taxation as local accounting
standards are. Inwinkl and Aussenegg (2009) supports this view and adds that lower level of
earnings management under the IFRS is more substantial factor in the Central and Eastern
European countries as the IFRS allow less discretion than national tax-oriented accounting
standards.
The IFRS have had a material impact on firms’ financial information in some countries
(Jeanjean 2008, Ferrer, 2008). The increase in value relevance is demonstrated esp. in countries
with significant level of discretion in financial reporting, such as Italy (Paglietti and
Conversano, 2007; Cordazzo, 2008) or Spain (Pardo et al. 2009; Ferrer et al., 2009). The
positive influence of the IFRS adoption is also evidenced in transitional countries, e.g. in
Romania (Mustata et al., 2009) Poland (Jaruga et al., 2007) or Russia (Bagaeva, 2009). The
evidence confirming the value relevance of the IFRS is also available for countries traditionally
focused on supplying the high quality information for external users, such as United Kingdom
(Christensen et al., 2007; Ferrer et al., 2009),
From the companies’ perspective, the benefits from adoption are quite important esp. for firms
with lower quality of pre-adoption information environments (Armstrong et al., 2007). The
IFRS implementation has changed also internal processes in respect to controllership with
significant mutual relationship to external financial reporting (Angelkort et al., 2008 and
Angelkort and Weißenberger, 2009).
The shift to the IFRS (mandatory or voluntary) is not without any problems. Akman (2009)
shows that culture effects on financial reporting and disclosure are relevant and could not be
wholly eliminated by the use of single set of accounting standards. Low level of development of
accounting profession together with cultural tradition (Fontes, 2009) and/or institutional factors
(Cristobal, 2009) can cause that adoption of accounting framework is not always sufficient itself
as shown for example on the case of Greece by Andre et al. (2009). The difficulties with
interpretation and irrelevancy of IFRS figures can be affected by the entities’ approach to the
fulfilment of their reporting duties, e.g. Daske et al. (2007) distinguishes label and serious IFRS
adopters pursuing different intentions by adopting IFRS.
Despite abovementioned weaknesses, harmonisation of financial reporting through the
worldwide IFRS implementation and their convergence or integration with management
accounting can be considered as the genuine “way forward”. The IFRS adoption process helps
in solving problems on microeconomic level by reducing informational asymmetry between
providers and recipients of capital Dumontier and Maghraoui (2007) and by intensification of
foreign direct investments flows (Marquez-Ramos, 2009) on macroeconomic level as well.
Thus on previous research, the IFRS can be presumed to be sound accounting principles, which
are useful for external users and for internal users as well. Some of the previous researches have
revealed that this is valid argument esp. for transitional economies. Some of Czech entities,
which are subject to the IFRS reporting, have been adopting the IFRS principles as basic system
of internal management and accounting. The differences between financial and managerial
accounting has been becoming less significant and the border between both systems has been
blurring. Not the approach, but the level of detailedness makes the difference. This tendency
started four years ago and it has been becoming stronger and stronger.
The introduction of the IFRS into the Czech accounting law has been struggling with some
problems from the very beginning. Five years ago, Sucher and Jindřichovská (2004) verified
that the difficulties are caused (similarly to other countries) by tough linkage between
preparation of accounting information for external parties and taxation purposes. The situation is
further complicated by the prevailing status of mind of Czech accountants, who are reluctant or
even unable to forsake traditional thinking oriented on tax matters. However, this is not only the
case of transitional economies as manifested by Pajunen (2008) and Pajunen (2009) – partly
analogical development can be traced e.g. in Finland, too.
3.3 Dual vs. integral relationship between financial and management accounting in the
Czech Republic after IFRS adoption
Despite the positive accomplishments in management accounting in the last years, Czech
financial reporting struggles with problems outlined in Chapter 2.2. Many entities have to cope
with the duty of conversion of financial statements based on the CAS to the IFRS requirements.
Table 1 ranks the most important variances between the CAS and IFRS. The focus is primarily
put on areas, which lead to significantly different results as far as income per period and
evaluation of financial performance in particular concern.
Tab. 1: The important differences between CAS and IFRS with impact on net income
Topic
Income concept
CAS
IFRS
transaction approach; strong
influence of legal framework capital maintenance approach
(esp. taxation)
not permitted except for the
financial instruments
financial derivatives, the most
securities and some biological
assets revaluated compulsory;
PPE, intangibles and investments
in properties as alternative
treatment
Offsetting
offsetting within income
statement not permitted (except
for some marginal cases)
allowed, if appropriate
Extraordinary
items
transactions of unusual nature
accidently occurring, changes in
not applied
accounting politics and material
prior period errors restatement
Prior period errors
correction through the related
retrospective restatement
item of revenue or expense; if
through retained earnings
material error, extraordinary item
Fair value
revaluation model
extraordinary items
retrospective restatement
through retained earnings
Revenues
no guidance, based only on
formal legal requirements
risk and reward approach;
reliable measurement of revenue
at fair value of the consideration;
reliable measurement of related
costs
Financial leasing
lessee recognised instalments of asset recognised by lessee based
Changes in
accounting policies
Topic
CAS
IFRS
leasing obligation as the expense
(incl. the principal); asset not
recognised on the balance sheet,
therefore not depreciated
on inflows of future economic
benefits; asset depreciated; only
interest (not principal)
recognised as expense
Impairment
temporary vs. permanent
carry amount vs. recoverable
distinction; insufficient guidance
amount; solid guidance
on calculation
Depreciation
asset considered as a one
technological unit
component approach
solving problem with faster
not allowed – component
reparation of long- obsolesce of asset’s components;
approach to depreciation
influenced by taxation
term assets
Provisions for
Interest calculation
linear method in all cases
effective interest method
Discontinued
operations
special reporting requirements;
not solved, only the possibility to
each discontinued operation
incur provision for restructuring
disclosed separately
Segment reporting
no reporting
very detailed requirements
Source: Own comparison of CAS and IFRS principles
The presented list is incomplete; number of differences6 is much bigger. Ernst&Young (2006)
published such an analysis, which comprises differences on 188 pages. Recalling Figure 3, the
discrepancy seems to be the most problematic for the companies under Category II. These
companies (non-issuers of publicly traded securities, but owned by such issuers) shall account
for all transaction and prepare the financial statements and/or annual report for statutory
purposes in accordance with Czech accounting legislation in the first place. The conformity with
CAS is a subject of control by tax authorities, which supervise over the accounting and financial
reporting in the Czech Republic. From the perspective of the Act on accounting, preparation of
financial statements and other information needed for the consolidation by the parent company
is regarded as a voluntary, internal matter of the entity.
The conversion of financial statements according to the CAS in order to be in the line with the
IFRS is a very complex process, which imposes high expenses upon a significant number of the
Czech entities. For better understanding of the extent of the problem, Table 2 shows the
organisational structure of the Czech economy. The corporations are split into groups based on
the number of employees and ownership structure.
6
The significance of the differences is supported by the simple study, which outcomes are presented in the
Appendix.
Tab. 2: Organisational structure of the Czech economy by number of employees7
08
1-5
6-19
20-249
269 185
78 052
35 677
22 203
1 685 406 802
136 093
64 687
31 316
18 008
885 250 989
559
670
216
111
132 425
12 581
4 090
3 995
108
114
55
89
26
392
Share of national corporations
50,8%
83,7%
88,4%
81,6%
52,9%
62,1%
Share of foreign corporations
49,2%
16,3%
11,6%
18,4%
47,1%
37,9%
Total corporations
250+
Total
there of under national control:
Non-financial corporations
Financial corporations
6
1 562
there of under foreign control:
Non-financial corporations
Financial corporations
768 153 859
Source: Own computation based on the statistics of the Czech Statistical Office9
According to the author’s survey, there were 203 financial instruments issued by 55 issuers on
Czech capital market10 as at the beginning of 2009. Only those 55 corporations are captured by
Category I as far as reporting requirements of Act on accounting concern. Their proportion to
the whole economy is marginal. Table 2 shows that almost 40 % of the Czech enterprises are
effectively controlled by foreign subjects.11 The most of these companies are covered by
Category II. Along with the primary duty to report under the CAS rules, Category II-companies
are internally obliged to report financial results to the foreign owners – mostly in accordance
with the IFRS. Besides its main function, the IFRS create also the foundations for internal
management, decision-making and control. The leading factor for the integration of financial
and management accounting on higher levels (calculation and output level) is the effort to lower
the cost burden levied by the duty to prepare two sets of financial statements for external users.
Besides their main function to provide high-quality information for external users, the IFRS are
becoming the “leitmotiv” of management accounting for internal users. The reporting to the
parent company according to the IFRS combined with mandatory bookkeeping according to
CAS (and inappropriate interferences of tax law into CAS) is the driver narrowing the gap
between financial and management accounting. The special adjustments (Král, 2006), heading
7
Excl. self-employed persons
Incl. businesses which did not report their numbers of employees
9
Available on-line, url: <http://www.czso.cz/csu/2008edicniplan.nsf/t/6E004991B1/$File/0001081214.xls>
10
There are two capital markets in the Czech Republic, which meet conditions of a regulated market delimited by
the Regulation (EC) 1606/2002 – i.e. Prague Stock Exchange and RM-System.
11
The number is certainly higher than data from the Czech Statistical Office reveal, because cited statistics covers
only direct control over companies. Some of Czech companies, which are parent companies to other Czech
companies, are under control of foreign subjects. These indirect relationships are not captured by the statistics.
8
for removing the lacks of CAS for internal informational needs,12 are steadily replaced by the
IFRS principles, which are sound and respectful to the economic nature of entrepreneurship.
Czech management accounting is returning to “normal, standard” state, which had long and
famous tradition in the Czech countries. E.g. the responsibility accounting, performance
measurement and other management accounting technique were employed by Tomáš Baťa in
his company already in early years of the 20th century (for some historical background see
Matyáš and Stránský, 2005).
Of course, information and reporting systems architecture reflects this change.
Fig. 5: Model II – Extension for the Czech republic (after IFRS adoption)
Users 1
Users 2
Users 3
Outputs 1
Outputs 4
Outputs 2
Outputs 3
Calculation in FAS (CAS)
Calculation in MAS (IFRS)
Data recording and storing
Definition of rules for data recording, ordering and registering
- FAS … financial accounting system (based on Czech Accounting Standards);
- MAS … management accounting system (based on IFRS);
- Outputs 1 ... tax reports;
- Outputs 2 ... financial statements (according to CAS);
- Outputs 3 ... financial statements (according to IFRS)
- Outputs 4 ... budgeting, planning, performance measuring, control;
- Users 1 ... tax authorities;
12
Unfortunately, all influential Czech textbooks on managerial accounting use an inappropriate example justifying
the need for separate coexistence of FAS and MAS. A different presentation of financial leasing in financial and
management accounting serves a basic example of the dual relationship of the both systems. In my opinion, these
can not be conceived as an expression of the dual relationship, but as an example of elimination of the deficiency of
the Czech financial accounting. Better example of the dual relationship could be a distinct measurement of ownproducts.
- Users 2 ... external users;
- Users 3 ... managers.
The full integration on the second level is a consequence of the implementation of new
sophisticated ICT systems. This trend is similar as in the developed countries. The IFRS
introduction into Czech accounting legislation could be one of the factors in favour of the
implementation of such information systems, but not decisive. In my opinion, the IFRS affect
the integration of financial and management accounting systems on the third and fourth level.
The Czech Act on accounting does not permit any voluntary application of the IFRS for
individual financial statements, if a company is obliged to submit its parent company with such
a set of financial statements for consolidation purposes. Individual financial statements of the
companies cover by Category II prepared in compliance with the IFRS are available only
managers. Owners and other external users have to satisfy just with information on a
consolidated basis without any possibility to gain complete set of information on each particular
company.
The management of a company is the exclusive group of users having detailed and structured
knowledge of all accounting records both under the CAS and the IFRS. For practical reasons,
Czech managers seek to integrate some calculations (e.g. revenue recognition, measurement of
own-products, etc.) in financial accounting systems (which are based on the CAS) with their
counterpart in management accounting systems (which are based on the IFRS). Detailed
information needed for the internal decision-making of the top management is very often
included as “secrets elements” of financial statements sent to the parent companies for the
purpose of consolidation. These elements are hidden to the external users; however from the
technical point of view, they are incorporated in the reports primarily intended for the preparing
of the financial statements for external users. As a consequence, the integration of FAS and
MAS appears even on the fourth (output) level at some extent. “Only” the degree of detailedness
makes the difference between what kind of information available to managers owners get.
Conclusion
The implementation of the IFRS into the Czech legislation has brought new quality to financial
reporting. Due to their usefulness in comparison with the CAS, the IFRS infiltrate into
management accounting systems. In fact, the IFRS carry out (satisfy, meet) the function of
internal management accounting, with some modification allowing better internal performance
evaluation, in many companies. Companies reporting under the CAS and IFRS simultaneously
often view the financial accounting according to the CAS as “necessary evil” to able to comply
with the tax duties. Therefore, those entities incorporate the IFRS in their internal informational
systems.
When comparing the attitude of the Czech accounting regulator with what it is really done in
practice, we can derive to an interesting conclusion. From the perspective of regulatory
framework, the entity’s accounting system should be labelled as (almost) wholly separate. From
the entity’s perspective, the accounting system could be denoted as strongly integrated. The
high-quality financial reporting standards are used for internal purposes because of “unlucky”
status of the Czech accounting legislation not allowing voluntary utilisation of the IFRS (see
Figure 5 again). In order to avoid additional burden in the process of preparing information for
internal users, the IFRS principles have been replacing “standard” management accounting. This
remark refers to many Czech companies (see Table 2 again).
The paper reveals some motivations which lead the managers to introduce the integrated
financial and management accounting system. The integration on the data recording level is
primarily driving by the enhancements in ICT. Despite increased costs, the ERP and other
systems help the managers to steer their business more effectively. In transitional countries such
as the Czech Republic, we can be witnesses of the integration tendency on the calculation and/or
even on the output level. The integration of FAS and MAS has not been directly designed in this
way. We can consider this kind of the integration as a side unintended effect of the approval of
Regulation (EC) 1606/2002 on the application of international accounting standards and its
implementation into the Czech accounting law. Having in mind rather inauspicious provisions
of the Czech Act on accounting, there is no wonder that management accounting systems have
to solve additional problems not occurring in the developed countries.
Management accounting systems have to get over the complications caused by low-quality of
the Czech accounting standards. The IFRS adoption brings a new variable to the decisionmaking of the managers of the companies covered by the Category II how to setup accounting
systems. There is impossible to operate three separate accounting systems:

financial accounting system according to the CAS in order to meet compulsory
requirements of statutory reporting;

financial accounting system according to the IFRS in order to fulfil information duty to
the parent company publicly traded on capital markets of the European Union;

management accounting system to manage the ordinary course of an entity.
Due to tense deadline for submitted financial statements, there is not enough time to record and
process data in those three systems simultaneously. Moreover, the additional costs to maintain
such a complex database could be very prohibitive. When striving for the clear-cut and
satisfactory solution, managers of have to respect that first two sets of financial statements are
compulsory and they can avoid the duty of preparing them. The utilisation of the IFRS, with the
modifications, extensions or simplifications if proper, as leading principles for the management
accounting is a solution that seems to be working. However, the schizophrenia of Czech
accounting could not be more obvious. High-quality financial reporting standards are used only
by the internal users; the external users have to satisfy with financial statements based on low
quality standards.
I suggest that two basic solutions can lead to the improvement of the accounting and financial
reporting in the Czech Republic. The regulator should either implement some provisions of the
IFRS into the CAS (this way is followed e.g. by the Slovak Ministry of Finance), or to broaden
the scope of entities which are obliged or allowed to report in compliance with the IFRS. In
addition, both proposals would be welcome by Category II entities thanks to saving costs for
keeping the accounts in accordance with the CAS. Proposed solutions are very simple, but the
political will to amend and approve current legislation is missing. The main reason for the
resistance of regulatory body is the endeavour to keep the control over the accounting due to the
tax collection reasons. Without tax reform, we can hardly expect that the linkage between taxes
and accounting will weaken and consequently the quality of financial reporting will improve.
Question is how to evaluate the tendency to the integration of FAS and MAS and the Czech
specifics of this process. I guess, that introducing of the IFRS as integral part of internal
reporting and management accounting should be apprehend as a noticeably positive issue. Thus,
entities are able to reduce costs of preparing needed information and – if properly modified – the
IFRS can be a surrogate to management accounting in cases when entities are obliged to use
simultaneously local standards for the tax purposes and statutory reporting and the IFRS for
reporting to superordinate consolidating entity.
Although the integration on the calculation and output level is driven by unusual factors, the
development in the Czech Republic can be relevant for the entities in other countries – even for
entities operating in the developed countries with high-quality local financial reporting
standards. Mutual interconnection of outputs from FAS and MAS can serve as a solid
multifunction informational basis for a wide range of users (external and internal) in their
decision-making. In fact, this change of the course has already started as evidenced by
provisions of IFRS 8 Operating Segments.
On the other hand, current status quo is useful only in terms of meeting informational demand of
managers. Recalling Figure 3 and Figure 5, the financial reporting in compliance with the IFRS
(e.g. for consolidation purposes) is just an internal affair of entities covered by Category II.
There is no legal requirement to disclose the IFRS individual financial statements publicly.
Therefore, users other than managers do not posses access to more useful set of information in
comparison with local accounting standards. Many interested parties would appreciate if the Act
on accounting had been amended by the provision allowing or requiring to present individual
financial statement in conformity with the IFRS either on voluntary or on compulsory basis.
This would lead to presenting accounting information, which is more useful for public. The
second favourable effect would be the reducing cost connected with recording transactions and
preparing financial statements under two different set of accounting standards. Essential
prerequisite for the successful achievement in this point is the release of financial accounting
from the income tax laws. This conclusion can be valid for all countries, in which state regulator
carries out the regulation of financial reporting mainly for the tax purposes.
There is one chief restriction impairing inferences of this study. The usefulness of the IFRS as
reporting standards by Czech companies is only assumed without any empirical testing. As
selected researches have demonstrated, the successful implementation of the IFRS leading to
increase in quality of accounting information is connected with certain prerequisites. The
improvement is more significant in countries with code law, in countries with strong position of
taxation system and esp. in CEE countries (e.g. Morais and Curto, 2007a; Inwinkl and
Aussenegg, 2009). There is no valid evidence why the Czech Republic should be the exception
from this “rule”. Hellström (2006) provides some support that the development in the Czech
Republic is in the line with the development in other countries, but additional research
confirming or rejecting the premise is needed. One of the authors of the paper is a member of
the research team, which analyses costs and benefit of the IFRS implementation in Czech
companies. The team has carried out trial pre-research13 which indicates that the IFRS adoption
has affected significantly the setup of information systems. Moreover, pre-research has
demonstrated the integration tendency of financial and management accounting based on the
IFRS as important background for decision-making, even for internal users. Those and many
other questions are going to be subject of validation or rejection under standard research planned
for next years.
13
As the research sample is not entirely representative, the exact results from pre-research are not intended for
public presentation. The aim of the pre-research is to verify the correctness of a questionnaire, which has been
preparing for a standard research.
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Abstract
Latest research indicates that business and reporting process have been gradually integrated. As
a reaction to growing complexity of business, innovations, global competition, higher mobility
of capital and integrating capital markets, the convergence of financial and management
accounting has been emerging. The integration is supported by the development of information
and communication technology. Financial and management accounting converge on the various
levels, e.g. on data recording, calculation level and/or output level. Those motivations for
integration are typical especially for developed countries.
The transitional countries are in process of switching to standard accounting practice similar to
those utilised in developed countries. Unfortunately, financial reporting is heavily influenced by
the tax legislation, which impairs the usefulness of financial statements for decision-making of
external users. Due to weaknesses of financial accounting and reporting regulation, entities
reporting under local accounting standards are forced to remove those lacks at least on the
management accounting level in order to prepare information needed for internal management
and decision-making. The separate coexistence of management accounting and financial
accounting is therefore inevitable under such circumstances.
The implementation of the IFRS into the legislation of the European Union and its member
states has brought new quality to financial reporting, esp. in the transitional countries, despite
the fact that the necessity to prepare information according to the IFRS levies additional costs on
the companies. In order to lower the cost burden, the IFRS are becoming the leading principles
of management accounting for internal users. The paper assumes that the IFRS are the driver for
convergence of financial and management accounting in the transitional countries such as the
Czech Republic.
Key words: IFRS; Czech Accounting Standards; Duality and integration of financial and
management accounting; Performance; Revenue
Appendix
The next tables confirm assertion that the CAS and IFRS differences in financial statements are
significant. The authors took a sample of companies which securities are publicly traded on the
Czech capital market, namely on Prague Stock Exchange (further PSE) and made a simple
analysis of financial statements prepared in accordance with CAS compared with financial
statements in compliance with IFRS. The Czech capital market can be characterised by small
involvement of companies in gaining capital though stock exchange. The number of listed
companies reached 55 as at the beginning of year 2009. However, there are not available both
sets data for those companies for recent years.
Analysed data are gathered for year 2004. It was utilised well-known fact that for the periods
ending in 2004, listed companies on PSE published their financial statement under CAS
guidance. In concord with Regulation (EC) 1606/2002, issuers have to shift to IFRS from the
periods starting in year 2005 (or later). The IFRS figures have to be presented also as far as
information for previous comparative periods (at least for one period) concerned. Therefore,
both CAS and IFRS data for year 2004 are at disposal.
The analysis excludes:

all financial institutions,

extremely big Czech companies (like Škoda Auto or ČEZ),

companies which reported their consolidated statements according to IFRS on voluntary
basis even before 2005, and

companies, listed on PSE in years 2004-2005, but not traded nowadays anymore.
This restriction was exercised to ensure at least some homogeneity in the sample. Unfortunately
due to undeveloped capital market in Czech Republic, the sample is restricted to only ten
“average” companies from non-financial sector.
Tab. 3: The list of analysed companies in the sample (Tables 4 – 7)
Company
Name of Company
Company A
Léčebné lázně Jáchymov, a.s.
Company B
Energoaqua, a.s.
Company C
Pražské služby, a.s.
Company D
Spolek pro chemickou a hutní výrobu, a.s.
Company E
Východočeská plynárenská, a.s.
Company F
Severomoravské vodovody a kanalizace Ostrava a.s.
Company G
Severomoravská plynárenská, a.s.
Company H
Mero ČR, a.s.
Company I
Pražská energetika, a.s.
Company J
Philip Morris ČR, a.s.
Next four tables summarise the differences between the CAS and IFRS figures for the key items
(assets, liabilities, equity, revenues, net profit). Outcomes of the analysis can served as a starting
point for a deeper analysis of differences between the CAS and IFRS and impact of this
discrepancy on the architecture and mutual relationship of financial and management
accounting.
Tab. 4: CAS figures of key items (in thousands CZK)
Company
Revenues
Net profit
Assets
Equity
Liabilities
Company A
467 769
57 200
854 017
623 680
230 337
Company B
687 573
59 066
1 641 406
1 402 876
238 530
Company C
1 637 725
37 217
3 460 017
3 309 332
150 685
Company D
2 757 351
-183 995
3 588 362
1 823 020
1 765 342
Company E
5 959 003
337 996
5 987 676
3 067 204
2 920 472
Company F
1 484 505
218 654
7 166 055
4 614 067
2 551 988
Company G
9 881 954
349 434
8 211 501
4 252 082
3 959 419
Company H
1 567 058
62 690
12 133 497
9 656 006
2 477 491
Company I
11 397 538
964 271
13 549 645
8 473 624
5 076 021
Company J
13 008 075
3 740 652
17 514 032
11 189 514
6 324 518
Source: Own computation based on “2004 and 2005 annual reports” of the analysed companies
Tab. 5: IFRS figures of key items (in thousands CZK)
Company
Company A
Revenues
Net profit
Assets
Equity
Liabilities
452 932
39 955
977 687
789 135
188 552
Company B
694 535
148 205
1 579 878
1 468 312
111 566
Company C
1 626 380
38 676
3 458 737
3 248 995
209 742
Company D
2 667 690
-182 238
5 063 393
1 812 453
3 250 940
Company E
5 932 445
326 941
4 637 624
2 920 602
1 717 022
Company F
1 445 993
228 979
6 873 588
4 221 801
2 651 787
Company G
9 874 181
343 741
6 027 101
4 303 748
1 723 353
Company H
1 532 307
84 840
12 159 615
9 388 550
2 771 065
Company I
11 008 703
1 077 355
12 453 379
9 253 520
3 199 859
Company J
12 233 000
4 414 000
15 165 000
11 085 000
4 080 000
Source: Own computation based on “2004 and 2005 annual reports” of the analysed companies
Tab. 6: Differences between CAS and IFRS figures (absolute amounts in thousands CZK)
Company
Company A
Revenue
Net profit
Assets
Equity
Liabilities
-14 837
-17 245
123 670
165 455
-41 785
Company B
6 962
89 139
-61 528
65 436
-126 964
Company C
-11 345
1 459
-1 280
-60 337
59 057
Company D
-89 661
1 757
1 475 031
-10 567
1 485 598
Company E
-26 558
-11 055
-1 350 052
-146 602
-1 203 450
Company F
-38 512
10 325
-292 467
-392 266
99 799
Company G
-7 773
-5 693
-2 184 400
51 666
-2 236 066
Company H
-34 751
22 150
26 118
-267 456
293 574
Company I
-388 835
113 084
-1 096 266
779 896
-1 876 162
Company J
-775 075
673 348
-2 349 032
-104 514
-2 244 518
Source: Own computation based on “2004 and 2005 annual reports” of the analysed companies
Tab. 7: Differences between CAS and IFRS figures (relative in %)
Company
Company A
Revenue
Net profit
Assets
Equity
Liabilities
-3,17%
-30,15%
14,48%
26,53%
-18,14%
Company B
1,01%
150,91%
-3,75%
4,66%
-53,23%
Company C
-0,69%
3,92%
-0,04%
-1,82%
39,19%
Company D
-3,25%
-0,95%
41,11%
-0,58%
84,15%
Company E
-0,45%
-3,27%
-22,55%
-4,78%
-41,21%
Company F
-2,59%
4,72%
-4,08%
-8,50%
3,91%
Company G
-0,08%
-1,63%
-26,60%
1,22%
-56,47%
Company H
-2,22%
35,33%
0,22%
-2,77%
11,85%
Company I
-3,41%
11,73%
-8,09%
9,20%
-36,96%
Company J
-5,96%
18,00%
-13,41%
-0,93%
-35,49%
Source: Own computation based on “2004 and 2005 annual reports” of the analysed companies