New Act on Accounting

At its October session, the Government approved the draft substantive intent of the new Act on Accounting. The new Act on Accounting will reflect the current needs of users and processors in the field of information and communication technologies and, last but not least, will bring the Czech accounting legislation a little closer to international accounting standards by enshrining various accounting principles and concepts (what is called the conceptual framework).

The current legislation allows the use of international accounting standards for keeping books and compiling financial statements:

• Obligatory – for the accounting entities listed in Section 19a of the Act on Accounting – issuers of investment securities
• Voluntary – if it can be assumed that the accounting entities will be required to prepare consolidated financial statements using international accounting standards.

The new Act on Accounting foresees the application of international accounting standards to other accounting entities as well – obligatory for:

• Companies whose investment securities are admitted for trading on a regulated EU market;
• Banks;
• Cooperative saving banks;
• Pension funds;
• Transformed funds;
• Mutual funds;
• Investment funds;
• Investment companies; and
• Non-bank securities traders.

International accounting standards may also be used voluntarily by accounting entities whose securities are no longer traded on a European regulated market. Such entities are currently required to abstain from the application of international standards. However, there are complications as a result of the method used to calculate income tax. The current legislation requires for the calculation of income tax that the profit/loss be determined according to the Czech accounting regulations, not according to the international ones. For this reason, accounting entities are forced to adjust their profit/loss for income tax purposes, which imposes an additional administrative burden on them. Another big breakthrough is the proposal for accounting in what is called the functional currency – the new draft of the Act operates with the term “currency of financial statements”. For the time being, accounting may only be performed in Czech crowns. The use of the concept of what is called the functional currency will allow accounting entities to use the euro as the functional currency, as most transactions take place in euros, thus minimizing exchange rate differences. However, in order for this change to happen, tax laws must also be updated. Accounting principles and concepts are listed in various places in different accounting regulations (Acts, implementing decrees), which is quite confusing. On the other hand, some of the terms are not explained in any of them. Therefore, the new Act on Accounting comes with what is called a conceptual framework, which is already in use in the international accounting standards. The conceptual framework will thus be aligned with the international conceptual framework in order to avoid conflicts with the requirements of EU law. The new conceptual framework should include the objectives of accounting, the definition of basic concepts and individual elements of financial statements, and the definition of basic assumptions and principles.

Other innovations and novelties in the published draft include:

• A two-tier accounting system – double-entry accounting and cash accounting (formerly referred to as single-entry accounting).
• The voluntary nature of double-entry accounting for individual entrepreneurs – those with revenue from business activity under the Value Added Tax Act exceeding CZK 25,000,000 in the calendar year immediately preceding the year of assessment, including payments exempt from tax, which are excluded from the turnover, currently have the obligation to use double-entry accounting from the first day of the calendar year.
• Simplification for micro and small accounting entities – the new Act does not envisage a change in the accounting procedures that are in place, but the draft foresees “minor requirements for disclosure of information in an annex to the financial statements for some accounting entities”.
• Consolidated financial statements – currently, consolidated financial statements are regulated by the Act on Accounting and, at the same time, by three separate decrees. The enshrinement in the new Act on Accounting will bring about clarification; the new Act on Accounting should be followed by an implementing regulation common to all accounting entities.
• Moment of valuation – the current legislation recognizes two moments of valuation: 1. as of the time of the realization of the accounting event, or 2. as of the balance sheet date, or another time at which the financial statements are prepared. Once again, the new concept is based on IFRS – first initial valuation – as of the time of the accounting event, second and subsequent valuation – whenever the accounting entity needs to value an asset or liability.
• Standardization of the electronic form of financial statements.
• Empowering provision – the Ministry of Finance is authorized by the draft to issue implementing legislation regulating financial statements and consolidated financial statements, cash accounting, inventory-taking, accounting records and the issuance of Czech Accounting Standards.
• The coming into effect of the Act will be postponed by 12–24 months so that accounting entities have the opportunity to become acquainted with the new Act and adapt to its requirements.

The draft substantive intent of the Act on Accounting envisages the repeal of Act No. 563/1991 Sb., on accounting, and of implementing legal regulations for this Act. Implementing regulations for the new Act on Accounting will be subject to further expert discussions. If you have any questions or need help with any details relating to the above measures, do not hesitate to contact us.