News

Insurance of assets – operating or financial cost?

We often encounter a question whether insurance related to fixed assets or inventory should be accounted for as an operating or financial cost.

In our opinion, this item factually belongs to operations. It is not a part of financial costs, as insured assets usually serve for an accounting entity’s production or business activities themselves, and the related costs should be a part of the accounting entity’s profit or loss.

We are aware of Provision 3.8.5. of Czech Accounting Standard No. 019 – Expenses and revenues for businesses, which provides that the costs of monetary transfers, especially bank charges or insurance, are recorded in accounting group 56 – Financial expenses. We believe that this provision is related to insurance of a purely financial nature (e.g. insurance of contributions). Nevertheless, we do not think it applies to insurance which is related by its very nature to a company’s operating activities.

We therefore suggest that such costs related to the financing of a company, i.e. interest, bank charges etc., are carried over to financial expenses.

Accounting for discounts is a similar area. Previously (in accordance with the expired provisions of the VAT Act), discounts were accounted for as financial expenses. We do not think this attitude to be quite appropriate. If a discount is provided under the arm’s length principle (i.e. with a regular due date), it is a regular discount and, as such, reduces the revenues from the related activities. The recipient of the discount then carries it to that account which also records the item related to that discount (e.g. inventory in stock or the acquisition cost of fixed assets is reduced), or, if the item has been delivered from the warehouse, the related cost is reduced (e.g. costs of goods sold), and not the financial expenses account. This account could perhaps be used only if a discount was provided for a period significantly longer than a regular payment period, e.g. for a year. In such a case, this would apparently be a form of financing and its recognition using financial expenses would be in order.

Hana GREGÁSOVÁ, Head od TACOMA Audit

Tel: +420 226 219 000

Mobil: +420 605 292 807

E-mail: hana.gregasova@tacoma.eu

www.tacoma.eu