In mid-January 2024, the Ministry of Finance of the Czech Republic proposed a new accounting law that approximates the International Financial Reporting Standards (IFRS). The new legislation, which is the result of a lengthy legislative process, will come into force in the course of next year, following final approval and implementation of the relevant implementing decrees.
Accounting
The new law aims to reduce the administrative burden for certain categories, such as organisational units of foreign entities, natural persons or small non-profit organisations (which are not VAT payers and whose net turnover and total assets do not exceed CZK 3 million). These entities will be exempt from bookkeeping, while retaining the obligation to maintain records for tax purposes.
In line with IFRS, financial statements will be treated as a communication tool between companies and the public. The new regulation emphasises its content and form in terms of fairness, comparability and truthfulness of information, rather than the accounting process. In addition to the date or time of preparation, the financial statements will have to state the period for which they are drawn up, the type (individual, consolidated, regulatory or interim) and the relevant regulatory framework (Czech, IFRS, cash accounting). A statutory current report, i.e. a set of documents containing accounting and financial information and additional documents required by law, shall also be included. The purpose is to faithfully represent the financial situation of the entity and facilitate the forecasting of future development for the benefit of internal and external parties, such as creditors, banks and investors.
As of 1 January 2024, domestic accounting entities that meet certain criteria can also report in foreign currencies, such as the euro, US dollar or pound sterling. This opportunity is advantageous for companies that operate internationally and handle financing and transactions in currencies other than the crowns. This facilitates reporting for parent companies, minimises the risks associated with financing and simplifies reporting processes.
Leasing and goodwill
The amendments will include a new approach to long-term leases, which will be managed in accordance with IFRS. The law envisages treating leases as an acquisition of the right of use, therefore, the lessee will have to include the asset in his balance sheet and record depreciation.
In contrast to the current rules, which identify goodwill as the difference between the value of purchased or consolidated assets, the new proposal aims to unify the procedures. Goodwill will be classified as an intangible asset and amortised over a period determined by law.
Present value and fair value
Long-term credits and debts must be valued at the time of their initial recognition, however, micro and small enterprises may choose whether or not to do so. Medium-sized and large enterprises will have to value these items at present value, i.e. at the discounted value of current net cash flows. It is planned that the specific valuation methods will be set out in a dedicated decree. However, this approach, has attracted criticism due to the complexity of its implementation, the ambiguity of the benefits it offers, its optional nature and the resulting negative impact on the comparability of information between different accounting units or over time.
In addition, all assets and liabilities will have to be recognised at fair value in subsequent valuations, eliminating the possibility of holding them at their value in the accounts. The concept of fair value will be further clarified in accordance with IFRS 13.
Reserve for liquidation and mergers
If an entity has information about the liquidation of a particular asset at the end of its useful life, it will be possible to include its costs in the purchase price through a specific reserve for liquidation.
According to the new legislation, an entity that participates in a merger without ceasing to exist will only account for the merger from the date of conversion, and will no longer close its accounting books as a result of it.
Revision
The bill suggests raising the thresholds for the audit requirement. Currently, the criteria include a turnover of 80 million CZK, total assets of 40 million CZK, and 50 employees. Under the new proposal, the values would rise to CZK 240 million in annual turnover, CZK 120 million in total assets and an average number of employees exceeding 50. A company is required to undergo an audit if it exceeds at least two of these three parameters. If the entity is required to be audited, the auditor’s report is included in the annual report required by law.
Offences
Finally, the new legislation establishes specific statutes of limitation for accounting offences, extending them to 4 years, with a maximum limit of 10 years from the date of the offence, compared to the previous limit of 1 year extendable to 3 years. Furthermore, penalties will no longer be calculated as a percentage of the value involved, but will be based on a fixed maximum amount depending on the category of the accounting entity. For example, for micro-enterprises, in the case of erroneous publication of financial statements, the maximum penalty is CZK 50,000, whereas previously it could be up to 3% of the value of the assets.
This bill will be further discussed and potentially amended by the Government Legislative Council and the Government itself before it finally comes into force, which will depend on the full implementation of all subsequent regulations and amendments. This reform is a step towards harmonisation with international accounting standards, reflecting an increasing orientation towards transparency and efficiency in financial reporting in the Czech Republic.
Sources: https://www.crowe.com/ https://www.pkfapogeo.cz/ https://portal.pohoda.cz/
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