IQ for business decisions – getting ideas to germinate
Accountant, business adviser, auditor. I have been in practice in East Europe for 18 years, and have experience in company set-up, mergers and acquisitions, audits, advising on tax, and also internal audits and operational review.
The main considerations are grouped under headings
• The scope of business of the branch may not be broader than the scope of business of the foreign entity.
• The branch must publish the financial statements of the foreign company in the registry of documents kept by the Commercial Register, which effectively means getting the whole report of the company the branch is part of and translating it into Czech, and publicising it even if the accounts were not liable to be made public in the jurisdiction of the Company.
• In general the same statutory obligations apply for both branch and legal entity from accounting and financial reporting point of view, i.e. every corporate entity doing business in Czech Republic must keep the books in Czech language and must file the financial statements to the Commercial Register.
• The only difference we can see is that the statutory financial statements of branch are to be incorporated into the statutory accounts of the founder whereas in case of legal entity financial statements stands alone and the financial asset (i.e. investment in the subsidiary) is to be shown in the accounts of the parent company. Branches do not really have separate equity, as they are not legal persons, but in order for the balance sheet to balance the capital employed needs to be shown as if they were, on a pro-forma basis. Likewise purchases of goods by the branch from the company it is part of is legal nonsense, as there is no tranfer of ownership to a branch, but still in order to give a picture of the performance of the branch as well as to be above board with regard to international transfer pricing, again branch accounts should be done with these intra-company “sales” and “purchases” included as pro forma. Remember that the branch has its own tax life in the country where it is.
• The same statutory obligations apply for both branch and legal entity to have its accounts audited.
• The general rules are as follows:
1) joint stock companies One of the following criterions is met for two consecutive accounting periods: a) gross assets of 40.000K CZK b) revenues of 80.000K CZK c) average number of employees over 50.
2) other legal entities (limited liability companies, branches, etc.) Two of three above criterions are met for two consecutive accounting periods.
• From the Czech corporate taxation point of view the branch must register for corporate income tax only if having taxable income in the Czech Republic through a permanent establishment, the legal entity must register in any case.
• In case of the branch the income and costs need to be allocated to branch activities, however keeping in mind transfer pricing and substance-over-form principle that are applicable under both structures, i.e. under both branch and legal entity constructs.
• Profits/losses will be included in profits of the founder of the branch taking into consideration double taxation reliefs.
• From the VAT perspective in case of the branch the VAT payer is actually the headquarter that has Czech VAT registration while in case of the legal entity it is actually the entity itself being Czech VAT payer.
• Profit repatriation in the case of the legal entity must be taken into account, however, if the parent company being an EU entity with more than 10% shareholding for more than 12 months dividend payments are tax exempt.
Only if taxable income from sources in the Czech Republic
Tax at operational level
Tax at parent/headquarter level in respect of subsidiary’/branch’s profits
Participation exemption or tax credit (in cases of dividend distribution)
Tax rate of the headquarter (note: double taxation relief ® participation exemption or tax credit)
Withholding tax (dividend, interest, royalties)
Often (note: EC Directives and tax treaties)
Loss settlement with foreign parent company/headquarter
In principle no
Yes (unless exempt under headquarters’ domestic tax law)
Liability debt (claims) at operational level
Local operating company (=subsidiary)
The above was based on the amiable co-operation of TGC Corporate Lawyers and Baker Tilly sro in Prague and Brno.
On 15 November 2010 an amendment to the Law on Health Protection against the Consequences of Tobacco Products comes into force. The amendment introduces a total ban on smoking, i.e. in hospitals and health clinics, schools and colleges, cultural and recreation sites, pubs and restaurants, sports facilities, public transport and workplaces. Owners or property managers (e.g. hotels, schools, workplaces) may designate smoking rooms on their territory, which means separate facilities that meet certain standards of construction and air ventilation.
Implications for employers
To date smoking in the workplace was also prohibited, but employers with at least 20 staff were obliged to establish a smoking room, regardless of the number of smoking employees. Specific standards in terms of space and ventilation of smoking rooms are governed by general health and safety (BHP) regulations.
After 15 November 2010 the decision on establishment of a smoking room will belong to the owner or administrator of the building. The existing smoking rooms may continue to operate if they meet the standards required by BHP regulations. In addition, the owner or property manager is obliged to put up in visible places clear information about the ban on smoking tobacco in the building. Employees smoking outside designated sites may be punished by a disciplinary penalty, and the employer may be given a mandate.
While considering the establishment of a smoking room in the office, the employer should take into account many aspects. Creation of a smoking room generates costs, but lacking a smoking room will not result in smokers resigning their habit or improving work efficiency. The need to go outside the office premises to smoke results in a loss of working time, and the sight of groups of smokers and cigarette-ends outside the office entrance does not improve company image. Certainly, more effective would be the prevention of psychosocial hazards and the promotion of healthy behaviour by the employer.
Traditional vs. electronic cigarette
For several years e-cigarettes have been available on the market, which are electronic devices that provide inhaled doses of nicotine. The electronic cigarette is a small device – resembling a traditional cigarette – which is electric or battery powered. The “smoke” from an e-cigarette is almost odourless and much less burdensome for non-smokers.
The e-cigarette is a new product and therefore its legal status is varied. In some countries its sale is forbidden, and in some completely legal or permitted under certain conditions. Poland has not yet developed any regulations on the sale and use of e-cigarettes. Recent legal changes have not covered this issue as well, although the Ministry of Health is considering a prohibition of the sale of e-cigarettes in the near future.
To find out more
If you need a detailed interpretation of the new regulations or consultation on creating healthy work environment, please contact the experts at TGC who are briefing businesses and individuals on this area:
Director of the Labour Law Department
Tel.: +48 22 653 3862
If you have HR matters to look after in the Czech Republic, you probably know how tricky it can be. Here is a sample of Contract Administration Czech Republic’s excellent HR newsletter, which is a very readable and relevant update of the ever-changing world of Czech labour law and payroll tax and insurance issues.
If you are a UK qualified solicitor practising overseas, you probably know that it is an obligation for you under rule 15.27(4) of the Solicitors’ Regulation Authority to have a reporting accountant’s examination on your clients’ monies accounts. This should be done by a qualified auditor who will send back to the Solicitors’ Regulation Authority in the UK an accountant’s report.
If you are not sure whether you are subject to Rule 15, you should seek guidance for your case from the SRA. Their website is http://www.sra.org.uk .
This return needs to be done every year, but the scope is not as onerous as for lawyers who are practising in the UK itself, who are not under Rule 15, and its various easements. Nevertheless, it can cause you some inconvenience if you’re in such places as Eastern Europe dealing with local auditors who are not au fait with the regulations of the SRA, whose English is not up to dealing with the legal nuances they contain, and who will therefore not be able to do a very economical job for you.
If sorting out this requirement has been a problem for you in the past, then you’ve come to the right place. Please get in contact with me at email@example.com in order to sort the problem out for a very reasonable fee. You won’t be charged for me reading the SRA’s rules – I’ve already read them. I’ve already got my work programme, I already know the report template, I already have the lists of what to ask you for, so not only will it be cheaper, it’ll also be quicker. So if you want a client monies’ account audit for a UK solicitor in East Europe who needs to file an accountant’s report under the provisions of Rule 15.27(4) of the SRA’s code of conduct, you know where to come.
I would like to tell you a cautionary tale, in which I may definitely not identify the parties involved and all I will say is it took place some years ago, somewhere in Eastern Europe.
A certain foreign investor, prior to coming to me for advice, had already down-paid a million on non-refundable deposit (so-called “vadium”) to the seller in order to be allowed to proceed with Due Diligence on an SPV containing a building he considered (although I disagreed with that too) to be worth a lot more. Let’s say five million. I’m hiding the actual transaction details in order not to embarass anyone, so five million is in fact correct, but the currency I’m using is fictional.
Well, needless to say, as ever I discovered plenty of question marks in the SPV, in fact SPV was not the correct word for this company at all. “SPV” means “Special Purpose Vehicle” and in real estate that basically means it’s there to own a building so as to allow some flexibility on the way of sale of a building and the choice with depend on the seller and buyer’s tax positions whether the building is sold out of this then empty company as an asset or whether it is sold in it’s corporate coating. There isn’t supposed to be anything else going on in an SPV. Well, there was in this one. Some proper monkey business, as we say in the trade. Although, in fairness, zoological supplies was about the only thing they hadn’t done. Among other things this company was holding shares in other entities which had been written off to a nominal value of one Euro in the balance sheet, but which under local law entailed liability for the owner and therefore had negative worth (of about five million Euro in total therefore nullifying the value of the Entity even if the building had been worth what the seller claimed and the buyer believed) It’s not easy by the way to spot such things using traditional audit methods. There’s a tendency to see no figure in the investments line on the balance sheet and then not even ask the question – but you have to ask it. Continue reading “Never make non-returnable down payments when buying a business.”→
I was recently asked whether there was any value in a loss-making business that had had a good reputation for 30 years.
Put very simply, and almost as a philosophical maxim, the sum of the value of an enterprise is equal to the sum of the NPVs of its projects (including as one project the liquidating of its assets, if that’s what it has to do). If it has no projects, it has no value. If it has only or overwhelmingly negative NPV projects, then it has negative value. Even the case of Woolworths shows you that a name that we all grew up with cannot prop up negative NPV projects for long. Therefore the way to assess value is to make a business plan for all the projects based on assumptions analysed down to the smallest level logically appropriate, with values ascribed to those assumptions which are objective and as researched as possible, and then to run PV calculations on the business plan.
Sure, someone will come along and say “Hey, that’s too complex. What something is worth is what someone else would be willing to pay for it. This I know, for the IFRS tells me so” – but in the final analysis what that other person is willing to pay will only be based on what he thinks he can make from it in the terms stated above, less his margin for risk of buying it. No business person actually buys at the value in use, they want to make a profit on buying it at less than that, but their perception of the ultimate value should be based on the sum of the NPVs of the projects. Continue reading “Where’s the value in an Enterprise?”→
This article talks about the seasonal business of inventory counting from a Polish perspective. It is also broadly true, with variations in the details, for most countries in the region.
It’s that time of the year again. Already some businesses with financial years corresponding to the calendar year (which is still the vast majority of businesses in this country) will count their inventories at the end of November just to avoid interrupting their employees Christmas breaks, some however will be pulling in the warehouse staff and others around Christmas and New Year to do their yearly duty. Some businesses, even with material amounts of stocks, will however not be stock-taking at all, as they believe that they can take advantage of article 26 paragraph 3 point 2 of the Ustawa o Rachunkowosci and only perform this task every two years, and among those who will be doing it this year, a surprising number will not be taking it too seriously.
The point of this article is to remind you that the stocktake is one of the most important things that need to be done in order to be sure that the annual report is right, and to urge Quoracy.com readers to think again and invest some time and energy into this process if it has not been given adequate attention in your Company in the past.
For many businesses – at least half of the manufacturing ones and also a number of service enterprise performing long-term contract work-in-progress, the figure for stock is the largest asset and the largest item on the balance sheet. It is also one of the more complex to account for, as unlike the monetary items such as debtors and cash, which are simply denominated in value, you need to keep volume and value information and to that end most businesses with sizeable stocks run special warehouse programs to keep track of stocks and manage such matters as goods received notes and goods issued notes, reordering, and these systems often interface with the main accounting system showing the amount of stocks purchased against creditors for the given period and sold against debtors also.
For stock accounting an evidential or standard cost is often used, enabling the system to concentrate on the issue of volumes, and a system for allocation of deviations between actual cost and the standard costs.
In my experience the area is found difficult to get right by businesses, and where issues do occur in audits or errors appear which are of a size that could entirely upset the usefulness of the financial statement, more often than not it is precisely in the area of stocks, and a properly conducted stock-take could have helped avoid the problem. In many cases, years of sloppy stocktakes failed to spot a problem until it became critical.
International Accounting Standards, in particular IAS 2 “Inventories” talk in detail about the principals for the value to be shown for each individual item of stock, but there is no help in IAS for the question of how often and in what way to go about establishing the volume of the stock items actually present. There is no mention of inventory counting or stocktake methodology or frequenct, and there is not even a definition given for these in the glossary to IFRS. This is extremely disappointing, given the importance and centrality of this item for so many businesses, and one is driven to wonder about the practicality of IFRS when one sees a regular “taniec godowy” being made in IFRS about the question of derivatives (instrumenty pochodne) which effects only a minority of businesses and is non-routine in nature for many of them, and then total silence on a matter which actually creates more practical hicoughs in accountancy for more businesses than most others do.
So we are thrown back on national law for any kind of realistic guidance in the matter – the requirements of Polish law for businesses accounting under the “Ustawa o Rachunkowosci”. There have been queries coming across my desk from businesses which are accounting under IFRS asking what they should do when they are “not under the UoR, but the IFRS are silent in the matter” – it seems to me that they must also abide by the tenets of Polish law in matters not regulated in IFRS, but is the Polish law actually strict enough?
As you can see from the text of the Ustawa, almost all classes of asset must be counted from life (spisem z natury) on the last day of each accounting year. That’s the basic rule from 26.1 and 26.2. And a very fine rule it is. But then we come on the 3rd paragraph, which is where certain relaxations from the main rule are allowed, and we see that on the basis of these rules people are performing stock-takes of very material amounts of inventory where there are systems that do historically allow in errors and where there is rapid movement of stocks, anywhere between 3 months before and 15 days after their financial year end, and also these cases where whole years are skipped (which is only supposed to happen where warehouses are properly guarded and there is a proper stock system, but people take a very subjective interpretation of what that means). And this is where the law as it stands is rather deficient, and we have to rely on the good practice of well trained business managers, such as the people reading this magazine, to make sure they do the right thing anyway.
Here then is my advice about stocktaking for this fine magazine’s readership
DO give more attention to the stocktake if your stock is:
A major asset in the balance sheet
Controlled by special laws such as explosives and pharmaceuticals
Easily removable and able to be used by employees or sold onwards
Not tracked over the reporting period by volume and value (some businesses in Poland whose owners come from countries which have a relaxed system forget the implications of the monthly tax system in Poland and do not realise that if they do not have a full volume-and-value system, they actually need proper stock takes every month in this country)
Difficult to count because of being “materialy sypkie” which need special mathematical algorithms to apply depending on the shape of the prism
Obsolescent, or partly aging or damaged
In numerous locations or needs at least several man days to count
Known in the past to show up errors at stock take
(If you have any of the conditions in this list, then you have high risk stock, and shouldn’t in my view be taking advantage of biennial stock taking even if the Ustawa allows you to. If you have several then you should be ensuring that you have the time and resources allocated to take this exercise seriously, as failure to do so could upset the smooth-running of your business at some stage)
In planning the stocktake DO
Start planning early, don’t leave it till the last minute
Ensure auditors are informed and can attend. (Auditors are well within their rights to qualify your accounts if they are not enabled to attend the stocktake)
Consider your stocks held at other locations and stocks at your location that belong to third parties.Certificates may be requested/issued for these items.
Ensure that the count sheets do not contain any info on the expected volume of the stocks. This would compromise the count being a proper “count from life”. Counters will blindly accept any suggestion on the sheet about values and save on counting if they can. Count sheets should clearly identify the stock number, description, location and unit of measurement, and should be signed off by the counter and double-checked at least on a sample basis by another team)
Ensure BHP training for each participant, especially those not normally working in the warehouse, and proper protective clothing on the day if needed.
Ensure that there is an adequate number of teams to do the job in the available time – which ought to be the time over which the business can afford to avoid moving the stock around. Where stocks must be moved during the count, it is necessary to devise some marking system so that all items are counted, and once only.
Ensure that the wareouse people who are responsible are all there, and that they are teamed up with people independent, such as bookeepers or other administrative people.
Ensure that enough forklift drivers will be on hand if access to stock depends on that
Take advantage of sensible techniques, such as digital photography, weighing homogenous stocks and the use of dipsticks for liquid tanks.
Do try to arrange a stock-take at the time when the company’s stocks are at their annual low. The counting then is at its most accurate, and it is worth doing even if it is not the main stock count of the year. This is the probable origin of why the inwentaryzacja is sometimes known in informal language in Polish as the “remanent” – it refers to checking the ‘remnant’, the small amount left over at the end of a season.
Some DON’Ts of stock taking:
Don’t cut corners – especially if the stock is risky stock as identified in the first list above. All year round you are paying good money to the accounts department to get a good set of financial statements, but if you don’t get this bit right, what chance do they have?
Ignore likely weather or lighting conditions in planning. Last year alone I had to abort one count because it was planned after sundown in a poorly lit location and in another case the outside guages were frozen over so the apple juice concentrate involved would not flow over them. In another case it was hard to tell where the snow stopped and the coal started on one prism.
Don’t try to measure a hałda or prism at a distance or use photography without a proper measurement. For complex shapes of materialy sypkie, don’t try to measure them unless you have specialist resources – get a surveyor in (geodeta).
Don’t allow the people who are materially responsible for the stock to be responsible for the count of it, although they should be there at the time to answer questions.
Don’t let the counters go from books to life, only from life to the books. Don’t give them access to the volume the system thinks is there
Don’t delay in turning the results of the count into an adjustment to the books. You also need to analyse the possible reasons behind any surprising divergences between expacted volumes and actual volumes. This is a cue to check controls, especially access controls to avoid theft and also the correct functioning of the guages and scales that measure the inflow and outflow of stock – have they been checked for accuracy and maintained properly by the producer?
Don’t forget to reward the count people with some kind of special thank-you, especially if they have been pulled out of their homes at Christmas time. This job is worth doing well, so it’s worth motivating people to take it seriously. Let it become one of your Company’s traditions that people actually might even start to enjoy and look forward to!
I would like to close this article with a story from my casebook about a company who had failed to get their stocktaking right – and this was a company in the heating sector which burned coal. They had had a problem with their weighing apparatus and for some time had been getting very good calorific results for each ton of coal they put into their furnaces, or so they thought. What had actually been happening was that they were reading 1 tonne of coal but putting in in fact 15% more.
Of course they suddenly ran out of coal in the depths of winter when the system was telling them that they had enough to go easily to the end of the season. They then assumed that the coal had been stolen and asked me to do a forensic accounting exercise to discover what had happened. This analysis led to the broken rolling scale and the both good and bad news that no-one had in fact stolen their coal, they had simply been overusing it for the previous six months. This would have showed up on their stock take (and saved them a lot of money not least in not needing to employ a top consultant) had they used the correct manner of measuring the coal, and not relied on two inexperienced children fresh from university sent in by their auditor, one of the largest companies in the world, who later needed to withdraw their audit opinion and redraft it with the correct figures in. When I asked what procedures these kids had applied at the stocktake attendance, I was told that they had looked at the coal pile from the third floor (about 300 metres away) as it was rather cold that day and they were young ladies and didn’t want to go outside. Please take your stocktakes a bit more seriously than that!
Some businesses holding large amounts of stock in their balance sheets are going to be audited and so they automatically will get an auditor to look (hopefully more closely than the above mentioned case) at their stock count, but even if your business is too small to fall under obligatory audit, but has relatively a large figure of stock or difficulties with control of stock, remember you can ask an auditor to make an audit style stock-take attendance without doing a full audit, and just report to you on the quality of the stocktake with recommendations for improvements. This shouldn’t cost more than a thousand Euro or two, and has a chance of giving you a good proportion of the value back that you would have had from a much more expensive full audit, if it’s a stock intensive business you are in. This comes under “agreed upon procedures” and auditors will be very pleased to help you with just what you need without making a full audit or review assignment out of it. Many people in business would find it useful, but just haven’t thought of asking an auditor in just for their view on the inventory count.