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Dear Readers,

As you were informed in our Short News, the text of an accounting bill was published in the VeKLEP database on 16 January 2024 (the “AA”). The new Czech AA is to replace the existing standard of 1991 and to reflect the dynamic development in the economic sector. It focuses on providing for a transparent picture of the financial position, reducing the administrative burden, simplifying legislation, and enhancing compatibility with the EU law.

The accounting bill stresses consolidation and unification of implementing regulations into a single law, the key aspect being an explicit definition of an accounting conceptual framework, which fosters true and fair disclosure of an entity’s financial position and, in addition to this, facilitates financial statements’ interpretation. The bill highlights the importance of financial reporting over the accounting process itself (substance over form).

The submitter’s (Ministry of Finance’s) intention is to approve the bill effective as of 1 January 2025. However, this effect is very likely to not be achieved because the accounting bill has not been proposed for the first reading at the Government’s meeting as of today. In addition to this, effectiveness also depends on the new Accounting Act’s incorporation into new implementing regulations and other related legal standards.

Please be advised that certain changes were separately enacted effective from 1 January 2024, e.g. the introduction of a functional currency, the sustainability report, or reports on income tax. This article will inform you about additional selected changes, which can be brought by the new Accounting Act:

Financial Reporting’s Purpose and Principles

The accounting bill defines the purpose and principles of financial reporting at the very beginning, seeking to implement elements that are used in reporting under the IFRS. This part contains, among others, an accurate definition of financial statements’ items and replaces the “payables and other liabilities” items with “debts and equity”.

Accounting Period

The new AA does not use the term “economic year”, and replaces it with the term “individual accounting period”, which corresponds to 12 calendar months. Unless otherwise decided by an entity, its individual accounting period will correspond to a calendar year.

Mandatory Audit of Financial Statements

The new AA also includes an increase in the limits for categorisation of accounting units. The limits have been indexed in accordance with the EU Directive, see below:

• micro-entities (assets up to 11 mil. CZK, annual net turnover up to CZK 22 million CZK, average number of employees up to 10)
• small entities (assets up to CZK 120 million) CZK, annual net turnover up to CZK 240 million CZK, average number of employees up to 50)
• medium-sized entities (assets up to CZK 600 million) CZK, annual net turnover up to CZK 1.2 billion, average number of employees up to 250)
• large entities (assets above CZK 600 million) CZK, annual net turnover over CZK 1.2 billion, average number of employees over 250)

Under the accounting bill, the mandatory audit will apply to:

- Large entities;
- Medium-sized entities; and
- Parent entities that prepare consolidated financial statements.

The bill contains exceptions from this duty for certain entities in bankruptcy or going through a reorganisation.

Changes in Reporting Leases and Rents

According to the explanatory report to the accounting bill, the method of reporting leases and rents will get closer to IFRS (IAS 17 Leases). Important aspects include a new definition of an asset: under the accounting bill, an asset is an “existing resource, which is capable of bringing economic benefits and which is under an entity’s control as a result of a previous matter.“ This definition will be met, if an entity is able to influence such resource’s use and drawing of economic benefits that the resource is capable of bringing, and to prevent others from using the resource and the economic benefits that the resource is capable of bringing. A long-term lease of an immovable asset also clearly falls under this definition. In addition to this, the explanatory report also provides examples of situations where an entity is authorised or able, as a result of holding such asset:

- To receive contractual cash flows or another asset; and
- To exchange assets with another party under favourable conditions, etc.

The above indicates that a right to use an immovable asset (a lease agreement) on a long-term basis will be disclosed in assets in the tenant’s entity. Such asset is assumed to be depreciated.

Present Value of Cash Flows

A cash flow’s present value will newly be used in carrying assets or debts in the form of a monetary supply maturing in a greater than one year. The present (discounted) value of a cash flow is the level of an amount in money, which equals a future cash flow. This method reflects the factor of time using the determined interest rate.

Costs of Disposal as Part of Assets’ Acquisition Cost

Another new aspect of the new AA involves the ability to include costs of a fixed asset’s disposal in that asset’s acquisition cost (through a reserve on the asset’s disposal). This option will not apply to costs of disposing of an asset as a result of inventory’s production.

Interim Individual Financial Statements and Opening Balance Sheet in a Transformation

The accounting bill also regulates the duty to prepare financial statements for entities participating in a transformation. An entity participating in a transformation, which does not cease to exist as the transformation’s result and which does not prepare financial statements as of the date preceding the transformation’s reference date, will newly prepare only interim  financial statements without closing the accounting period thereby. That entity will prepare an opening balance sheet as of the beginning of the transformation’s reference date and will continue in the current accounting period.

The new AA also describes (quite to a detail) situations that relate to consolidated financial statements and reporting in connection with IFRS. The purpose is to make sure that reporting of accounting data for entities following Czech Accounting Standards is comparable on an international level.

As the bill has not had a Parliamentary Press number assigned and has not been included in the agenda of the Government’s meeting, the question is in what form and with what effect the bill will be published in the Collection of Laws. We will keep you informed about the legislative process’ progress.

Marek Švanda                                               Michaela Kozminská
svanda@clarksonhyde.cz                               kozminska@clarksonhyde.cz