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Tower of Babel in practice (or what the law requires of managers)

Tower of Babel in practice (or what the law requires of managers)

4.1.2012 15:50
Autor: Petra Nováková, KSB

Comprehending the intentions of a legislator, such as understanding the differences between an affiliated and interconnected party or between an actual and ultimate owner, may be beyond the abilities of a company’s management team.

The old legal principle that ignorance of the law is no defence still applies. Unfortunately, it has become a stale cliché. The jungle of legal regulations grows thicker and thicker each year and finding one’s way around is virtually impossible. Whether the main reason for this dire situation is the negligence of legislators or the result of a more and more complicated globalized world, hopefully the following crash course will serve as a small machete to help cut a path through a small part of the jungle of corporate terminology.

Let’s start with the term “affiliated party”, which is commonly used in written reports that some legislator gave the rather unpoetic name: “report on the relationships between a controlling and controlled entity and on the relationships between a controlled entity and other entities controlled by the same controlled entity.” The report, which is based on the definition of control pursuant to the Commercial Code (in Section 66a) must be prepared within three months from the end of the accounting period and must be attached to the annual report for the given year.

“Interconnected”: one word, two meanings

Now, to complicate things a little, let’s look at the term “interconnected party”, which is connected with accounting. In an annex to a company’s final financial statements, managers state receivables, liabilities, costs and revenues in relation to companies in a group. Such companies include not only daughter and sister companies but all companies in the group.

Regular financial statements must comply with the relevant decree. The decree sets forth inter alia that each accounting unit must provide information on all transactions closed with an “interconnected party”. To show transactions in the group in the financial statements, the definition of interconnected parties pursuant to IFRS (International Financial Report Standards) is used.

I’m afraid I must disappoint those who think that the Czech term “interconnected parties” and its English counterpart “related parties”, which is mentioned in the IFRS, mean the same thing. Compared to “interconnected parties”, as defined in the Czech Commercial Code, IFRS defines “related parties” in much broader terms. Under that definition, related parties include key management members, the parent company and close family members. Yet this by no means helps clarify things.

Actual and ultimate

On top of that, banks sometimes require that a company’s “actual owner” be identified pursuant to the Act on Certain Measures against Legalizing Revenues from Criminal Activities and Terrorist Financing, which is a formal transposition of EU legislation.

A bank may therefore ask the company for cooperation if it wishes to identify it as a client or if it wishes to identify the people acting on the company’s behalf. For this purpose, the bank sends a special form in which the “actual owner” is to be disclosed.

For any manager ready to take on more, consider that he/she may also need to fill in a document for the Statistical Office in which the “ultimate owner” is to be disclosed. To make this task a real challenge, the precise meaning of this term cannot be found in any law.

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