The new Accounting Act: Objectives of accounting reports and requirements for the quality of accounting information

This article is the first in our series on the new Accounting Act, where we would like to gradually introduce the principles and novelties arising from it.

The first part of the new Accounting Act deals with the objective of financial reporting and the requirements for the quality of accounting information.  This is essentially the conceptual framework of the new Accounting Act. Some elements are already known from the existing Accounting Act, others have been added.  In this respect, the explanatory memorandum explaining the individual quality requirements is also interesting.

The objective of financial reporting is to provide external users with accounting information, which is information about financial position, financial performance and other changes in financial position necessary for:

• its economic decision-making,
• predicting future cash flows, financial position and financial performance,
• assessing the consequences of the actions of the person responsible for the management of the accounting entity and
• assessing due management of public funds in the exercise of public administration in the case of financial reporting by a public sector entity.

Overall, the law places much more emphasis on financial reporting rather than accounting.  At the same time, it abandons the existing distinction between double-entry and single-entry accounting.  The distinguishing criterion for these two types (systems) of accounting should be the subject matter of their reporting, i.e. whether the system tracks changes in the financial position on accrual basis or through income and expenditure.  Defining the objectives of financial reporting for the public sector is also new.

Accounting information needs to be:

• Relevant and credible, i.e. it must capture the economic nature of the portrayed reality and at the same time portray that reality completely, neutrally and accurately.  Relevant information must enable the user to correctly assess the financial situation, predict future development, assess the actions of the persons responsible for the management of the accounting entity and assess proper management of public funds.  A complete presentation of reality is a presentation that includes all the information necessary for a complete understanding of the reality presented by an external user, including the relevant explanatory notes to the financial statements.  A neutral presentation is one that does not influence an external user’s decision-making to achieve a predetermined outcome and, in case of uncertainty, does not overstate an asset and income or understate an accounting debt and expense.  Furthermore, correct information is the result of an appropriate and error-free procedure that takes into account the available data.
• Timely, clear, reliable and comparable. Information is timely if it is available to the external user at a point in time, when it can influence the decision that the external user makes on the basis of it.  Information is reliable if it enables a person with relevant expertise independent of the entity, to which the information relates, to find it credible.  Information is comparable if a comparison with other accounting information enables a conclusion to be drawn about similarity or dissimilarity between accounting periods or between different entities.

In the next part of the series, we will discuss the elements of financial reporting and their definitions.

Author: Alice Šrámková, Petra Vaněčková