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Therese Baginski

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2016 is a year of changes brought by the amended Accounting Act. They generally apply to the preparation of financial statements for the year started on 1 January 2016 but you can apply some of the changes already with respect to the 2015 financial statements.

Small entities in Poland

One of the major changes is the new category of entities, namely small entities. The classification, like it was with the definition of a micro entity back in 2014, is based on the size of operations.

The amended act defines a small entity as a joint-stock company, a limited liability company, a partnership limited by shares and partnerships formed by them, individuals, civil law partnerships and general partnerships formed by individuals, professional partnerships, other legal persons and branches of foreign enterprises, which in the current and previous financial year did not exceed at least two of the following three thresholds:

balance sheet total: PLN 17,000,000;
net revenue from the sales of merchandise and finished goods: PLN 34,000,000;
average headcount in the financial year: 50 people.

A new appendix to the Accounting Act (appendix 5) contains an illustration of the financial statements for small entities. Abridged financial statements of a small entity consists of:

summary introduction to the financial statements;
abridged balance sheet, consisting of some items only;
abridged income statement, consisting of some items only;
appendix and explanatory notes containing a limited number of disclosures.

Thus, the lawmakers have released small entities from the obligation to prepare a cash flow statement and a statement of changes in equity. Moreover, small entities which Article 49 of the Accounting Act obliges to prepare Management Reports may relieve themselves from that obligation by including information about purchases of treasury shares in the notes to the financial statements

Decision on abridged financial statements

Importantly, to take advantage of the abridged versions a small entity must not only cross the above-mentioned thresholds but also its approval body (e.g. the meeting of shareholders in a limited liability company) must formally resolve that the financial statements will be abridged.. The decision should be in the form of a resolution which stipulates which of the financial statements will be made in an abridged version. The law does not set the time limit for adopting the resolution. The common understanding is that it should be adopted before the financial statements are prepared. As regards the financial statements for 2016, the resolution should be passed before 31 March 2017. If you try to file abridged financial statements with the registry court without the required resolution of the approval body, you may be requested to submit full financial statements.

The lawmakers simply wanted to reduce the administrative costs that small businesses have to pay for preparing full financial statements.

Leasing and deferred income tax

Another good change in the amended Accounting Act is the extended list of entities that may simplify the classification of leasing agreements and disclosure of deferred income tax. As a reminder, under the old regulations only entities not obliged to have their financial statements audited were allowed to classify leasing agreements according to tax regulations and were exempt from creating a provision for deferred income tax. Starting with the financial statements for the period after 1 January 2016, the above rights will vest in entities (with an option to apply already in 2015) which did not exceed two of the following three thresholds in the previous financial year:

PLN 17,000,000 as regards the balance sheet total of assets at the end of the financial year;
PLN 34,000,000 as regards net revenue from sales of merchandise and finished goods for the financial year;
50 full-time equivalents on annual average.

This means that the criterion of the obligatory audit of the financial statements has been lifted and as the new thresholds are higher than the old ones, the number of potential beneficiaries of the simplification has grown.

Materiality principle

The amended statute has introduced a new accounting principle, namely the materiality principle. Thus, there is now a definition of material information that has to be disclosed and properly presented in the financial statements. According to Article 4, omission or distortion of a material piece of information may mislead the reader of financial statements and lead to wrong business decisions. 

The issue of calculation of the materiality threshold remains open but national and international auditing standards may prove helpful. They say that the materiality threshold should be determined as a percentage of a relevant base. The most commonly used bases are total assets, revenue from core business and gross profit. Once you identify the base you need to determine the materiality threshold as a percentage, e.g. for the revenue it can be 0.5–2% of the annual value. The lawmakers have not imposed any strict rules for determining the materiality thresholds allowing freedom in this respect. Noteworthy, you must describe the calculation method of the materiality threshold in the accounting policy. Once you have determined the materiality thresholds, you can post certain transactions in the books of account in a simplified form. 

Our practice shows that companies often simplify e.g. accruals and prepayments in which they disclose only significant items which could distort the profit (loss) of the period if they were expensed immediately.

Management Report

The list of entities obliged to compile the Management Report has been extended to include general and limited partnerships in which all partners bearing unlimited liability are companies, partnerships limited by shares or similar companies from abroad. This new rule is important for increasingly more businesses as the limited liability company limited partnership (an LLC-LP hybrid abbreviated in Polish to "sp. z o.o. sp. k."), in which the general partner is a limited liability company and the limited partner is a shareholder in that company or an individual, is gaining popularity.

Development expenditures and goodwill

The amended Accounting Act has introduced new rules of amortising development expenditures and goodwill. You should not amortise the development expenditures over the economic useful life of the effects of those expenditures. This new solution seems particularly attractive to businesses that invest heavily in development, especially as under the old rules they had to amortise such expenditures within 5 years even if their effects were still economically useful. Now, businesses will have to expense the development expenditures within 5 years only if they are not able to determine the economic useful life of the developed solutions. 

The same applies to amortisation of goodwill. At present, the amortisation period should match the economic useful life, and must not exceed 5 years only if that period cannot be estimated. Be mindful that the rules on the straight-line method of amortisation and recording of such expenses under other operating activities have remained unchanged. 

Responsibility for financial statements

The amended Accounting Act makes more people responsible for the financial statements. Now the responsibility for reliability and accuracy of the financial statements and the Management Report rests with the entity's manager as well as members of the supervisory board or another supervising body of the entity (if appointed). As a reminder, the responsibility used to rest with the entity's manager only. Both bodies bear joint and several liability towards the entity for any damage caused by their actions or omissions which are legally considered a breach of duty.

Changes to balance sheet and income statement

The amended Accounting Act changes the presentation of treasury shares and outstanding share capital contributions. These items used to be disclosed in liabilities, under equity, with a negative value. Now there are new items C and D in assets in Appendices 1, 4 and 5, whereas appendices 2 and 3 now include items XVII and XVIII as well as G and H. 

The lawmakers have removed the item "extraordinary gains and losses" from the income statement and have left it only for three types of entities: banks, insurance and reinsurance companies, and credit unions. As a consequence, entities other than those mentioned above have to disclose the effects of fortuitous events under other revenues and expenses and operating income.

Conversion of revenue of EUR 1,200,000 into PLN

According to the current law, the threshold amount of revenue of EUR 1,200,000 which obliges businesses to start keeping books of account from the next year if crossed, should be converted at the average exchange rate of the National Bank of Poland as of the first working day of October last year. The lawmakers have moved the deadline from 30 September and you will have to apply the new deadline for the first time to convert revenue in foreign currencies of 2015. 

This means that the deadline has been aligned with the VAT Act and income tax regulations.

Consolidated financial statements

Another set of amendments affect consolidated financial statements. These have to be prepared by entities which have not exceeded two of the following three thresholds: 

PLN 38,400,000 as regards the balance sheet total of assets at the end of the financial year;
PLN 76,800,000 as regards net revenue from sales of merchandise and finished goods for the financial year;
250 full-time equivalents on annual average.

Consolidated financial statements have to be prepared also by entities which have made consolidation exclusions. These include entities which have exceeded at least two of the following three thresholds: 

PLN 32,000,000 as regards the balance sheet total of assets at the end of the financial year;
PLN 64,000,000 as regards net revenue from sales of merchandise and finished goods for the financial year;
250 full-time equivalents on annual average.

The amended Accounting Act has introduced also a few significant novelties and modifications to definitions. There is a new term "equity interest" which means any interest in another entity suggesting a durable relationship. A durable relationship is established when one entity acquires, buys or otherwise obtains equity interest in another entity, unless such interest is very likely to be sold shortly after it is acquired, bought or otherwise obtained by signing a contract or taking other active steps to dispose of the interest. This means that even if you have just one share that you want to keep, you have an equity interest in another entity. 

A significant investor has been redefined. Now, a significant investor means a commercial company/partnership or a state-owned enterprise which has an equity interest in another entity and exerts significant influence on that entity. Just one share makes an entity a significant investor. 

Reporting on payments made to public administration

Another major change effective in 2016 includes a new report on payments made to the public administration. The report has to be prepared by enterprises involved in extraction of natural resources and clearcutting of old-growth forest, subject to certain restrictions as regards the headcount, balance sheet and legal entity form. Pursuant to Article 63f(1)(1) and (2), the above-mentioned entities have to report on payments made to the public administration if they are:

operating on the financial market in the form of a partnership limited by shares or a general partnership in which all partners bearing unlimited liability are companies, partnerships limited by shares or similar companies from abroad; or
listed in Article 63f(1)(2), provided that in the financial year for which the financial statements are prepared and in the previous year they exceeded at least two of the following three thresholds:

a) PLN 85,000,000 as regards the balance sheet total of assets at the end of the financial year;
b) PLN 170,000,000 as regards net revenue from sales of merchandise and finished goods for the financial year;
c) 250 full-time equivalents on annual average;

- and if a single payment or a sum of related payments equalled or exceeded in one financial year the equivalent of PLN 424,700.

Article 63f(2) describes the scope of information to be disclosed in the report on payments made to the public administration. 

Obligatory audit of financial statements in Poland

The lawmakers have extended the obligatory audit to a new group of businesses, namely payment institutions and electronic cash institutions. The auditor's opinion (Article 65(2) and (3)) will have to include information whether the financial statements contain significant distortions. The thresholds which trigger the obligation to have the financial statements audited have remained unchanged.

Summary to Changes to the Polish Accounting Act 2016

You will have to prepare the 2016 financial statements in accordance with the amended Accounting Act. This means that you have to make changes to your ongoing bookkeeping, reporting and accounting policy. Following these legislative amendments we recommend determining the materiality thresholds for your financial statements. Our consultants are at your service to help you with the implementation of the new solutions in your accounting system.

We would be glad to offer more information if you are interested in this subject. In addition, our auditors and audit consultants remain at your service in our offices in Cracow, Gdansk, Gliwice, Poznan, Warsaw, Wroclaw to answer all questions about financial audit in Poland.

3.08.2016