David Procházka Department of Financial Accounting and Auditing Faculty of Finance and Accounting

1. Adoption of IFRS and Its Impact on the Financial and Management Accounting: A Case from the Czech Republic David Procházka Department of Financial Accounting and Auditing Faculty of Finance and Accounting University of Economics, Prague Email: prochazd@vse.cz

2. Motivation for the paper • to summarise theoretically the current development in the external and internal financial reporting • to reveal the special features of general development in the case of the Czech Republic

3. The aims of the 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 for both external and internal users; and • to analyse the convergence of financial and managerial accounting in general and in the Czech Republic in particular

4. Literature overview – historical development • strong tendency for the divergence of FAS and MAS due to specialisation and rapid capital accumulation already from the 19the century (Kaplan, 1984) • the peak of the tendency after WWI – e.g. Clarks´ (1923) „Different costs for different purposes“ • „Berlin Wall fall“; European integration and opening of the China together with the turbulent progress of ICT help: • linking of national capital markets into single global one • companies to expand worldwide by more effective international management of subsidiaries

5. Model I – Dual Accounting System • 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; Users2 ... owners, creditors, trade partners, etc.; Users 3 ... managers

6. Literature overview – recent development • separate coexistence of FAS and MAS till 1990´s; then: • integration of management accounting techniques (Granlund and Lukka, 1998 or Ittner and Larcker, 2001) • harmonisation of the financial reporting (IOSCO, 2000; CEC, 2002 or IASB and FASB, 2002) • MAS is influenced by financial reporting requirements (Kaplan, 1984; Nathan et al., 1996) • stimuli from MAS incorporated in FAS (Stewart, 1991)

7. Literature overview – current status • “integration of financial and management accounting systems” (Angelkort and Weißenberger, 2009) • “the convergence of financial accounting and the management accounting” (Taipaleenmäki and Ikäheimo, 2009) • „question is not to which extent to converge or integrate, but when the convergence or integration will be finished“ (Hemmer and Labro, 2008)

8. Model II – Integrated Accounting System

9. Financial reporting in the Czech Republic • Based on the Czech Act on Accounting (respecting the Regulation (EC) 1606/2002), Czech companies can be divided into 3 groups: • Category I (big Czech companies that are publicly traded on stock exchanges in the EU markets – IFRS reporting only) • Category II (Small and medium-sized enterprises – both CAS and additional reporting) • Category III (Small and medium-sized enterprises – only CAS reporting) • Additional reporting according to the statutory standards of parent company (mostly IFRS, sometimes US GAAP)

10. Financial reporting in the Czech Republic

11. Model III - Dual Accounting System (before IFRS adoption) • financial reporting according to CAS hardly subordinated to tax requirements and other information needs of state authorities

12. Organisational structure of the Czech economy [1] Incl. businesses which did not report their numbers of employees

13. The relation between CAS and IFRS • CAS reporting obligatory unless entity is publicly traded (only +/- 60 Czech companies on stock exchanges) • at least 40 % of companies under foreign control, they must report to parent companies – usually IFRS • huge number of differences between CAS and IFRS (study by EY contains 188 pages!), therefore conversion very complex, time- and cost- consuming process • in order to low cost burden, the IFRS becoming leading principles for internal management => integration of financial and management accounting to some extent

14. Model IV – Integrated Accounting System (after IFRS adoption) • FAS … financial accounting system; MAS … management accounting system; • Outputs 1 ... tax reports; Outputs 2 ... financial statements (CAS); Outputs 3 ... financial statements (IFRS); Outputs 4 ... budgeting, planning, performance measuring, control, etc.; • Users 1 ... tax authorities; Users 2a ... external users excluding owners; Users 2b ... owners; Users 3 ... managers

15. The differences between CAS and IFRS

16. The differences between CAS and IFRS

17. Conclusions • the Czech accounting is schizophrenic • quality financial reporting standards are used for internal purposes • external users have to satisfy with low-quality financial statements (although quality information are available) • to avoid time, labour and cost burden; entities apply IFRS in the way they can serve as a useful internal reporting system for the management • current status quo is useful in terms of meeting informational demand of owners and managers in some extent, but not for the general public • resolution could be twofold: • to amend and improve the current CAS or • to broaden the scope of entities subject to IFRS reporting • the will for the change is missing

18. That's all ... ... looking forward to your remarks and questions 