The draft of the new Accounting Act (the “NAA”) is currently before the Chamber of Deputies (see our article). If approved, it is currently proposed to take effect from 1 January 2028. Although the categorisation thresholds in the draft are identical to those under the current Act, the draft introduces a number of significant changes, at least three of which may affect the categorisation of a reporting entity.

1. Are you a parent company?

If you are a parent company (i.e., a company that directly or indirectly controls another company and therefore has at least one subsidiary), your categorisation will, under the draft, be based on the figures of the consolidation group rather than on the figures in your separate financial statements, as has been the case to date.

What does this mean in practice? Under the current Accounting Act, every parent company is required to assess whether it must prepare consolidated financial statements. The obligation to prepare consolidated financial statements depends on the category of the group (consolidation is mandatory for medium and large groups). However, the NAA extends the application of categorisation beyond consolidated financial statements to the categorisation of the parent company itself. At present, parent companies of a purely holding nature are often categorised as micro reporting entities, because they rarely meet two size criteria (they usually only have substantial net assets). Under the NAA, however, their categorisation will be based on consolidated figures, and they will therefore usually move into a higher category. A move into the category of a medium or large reporting entity will bring with it a mandatory audit of the separate (individual) financial statements or the obligation to start applying different accounting methods (such as fair value measurement or lease accounting under IFRS 16).

Let us illustrate this with an example. Parent company HOLDING s.r.o. is currently categorised as a micro reporting entity. The group is categorised as medium, but consolidated financial statements are not prepared because HOLDING s.r.o. is wholly owned by MOTHER GmbH, which prepares consolidated financial statements under IFRS Accounting Standards as adopted by the EU. Under the NAA, HOLDING s.r.o. will become a medium reporting entity, which means that it will be subject both to a mandatory audit and to the accounting methods applicable to medium and large reporting entities, including the required content of the financial statements.

2. Do you have rental or lease contracts?

The draft of the new Accounting Act introduces an entirely new accounting method for lease reporting in Czech accounting. Medium and large reporting entities will be required to fully follow IFRS 16, while other entities will report leases under simplified rules described in the Act and the implementing regulation. What does this new accounting method mean for lessees? If a company, as lessee, has entered into any long-term rental or lease contracts (i.e., contracts longer than 12 months), it will newly recognise a right-of-use asset on the asset side and a lease liability on the liabilities side. The amount initially recognised for the right-of-use asset is effectively based on the total lease payments over the lease term. The right-of-use asset is then subsequently depreciated over the lease term or over the useful life of the asset, if different.

In practice, this means that many companies will see an increase in net assets precisely because of these newly recognised assets. How significant that increase will be depends on how many lease contracts the company has and how much of their term remains as of the date of transition to the NAA. Generally speaking, the longer the lease term, the higher the value of the right-of-use asset tends to be. Contracts likely to give rise to significant right-of-use assets therefore include leases of production, warehouse or office premises, as well as the operating lease of an entire vehicle fleet.

As a result, under the NAA a company may suddenly report significantly higher net assets in its financial statements, which may lead to a change in categorisation if the company has so far only met one of the criteria (typically turnover). A higher category (small versus medium) is associated with a mandatory audit and more complex accounting methods.

3. A transformation or acquisition of a business

The NAA removes the uncertainty that has so far existed regarding the categorisation of a reporting entity involved in a transformation. The NAA clearly provides that the category of a reporting entity participating in a transformation is determined according to the category whose requirements it meets at the end of the reporting period in which the legal effects of the transformation occur. Thus, for example, a micro reporting entity may easily become a large reporting entity following a merger, together with all the related obligations. The same applies to the acquisition of a business. Here, a very interesting shift occurs: categorisation is effectively confirmed only when the financial statements are prepared after the transformation has been entered in the public register, i.e., at the end of the reporting period, and it has an immediate effect on categorisation (there is no two-period waiting rule). Since the effective date of the transformation will no longer interrupt the reporting period, as has been the case to date, relatively complex situations may arise if the change in categorisation requires different accounting methods to be applied (for example, the mandatory application of IFRS 16). So far, no implementing regulation has been issued to govern how to proceed where a change in accounting methods is triggered by a change in categorisation. We would also remind you that a transformation or acquisition of a business may lead to a mandatory audit if the reporting entity becomes a medium reporting entity.

The NAA introduces a similar provision for a change in structure (for example, the acquisition or sale of a new subsidiary). In such a case, the categorisation of the consolidation group is determined according to the figures in the consolidated financial statements at the end of the reporting period in which the structural change occurred.

The explanatory memorandum to the NAA provides the following explanation:

The reason for establishing a different procedure for cases involving a change in the composition of the consolidation group is the need to take significant changes within the consolidation group into account as soon as possible after they occur (i.e., immediately in the consolidated reporting period in which such change occurs). Where all conditions are met, such changes will then result in the obligation to prepare and publish financial statements already for the consolidated reporting period in which the change occurs. If the same procedure were applied as in the case of meeting the criteria for classification into a particular category, then a consolidation group to which a new significant subsidiary had been added, and which for that reason met the criteria of a large or medium consolidation group, would not have to consolidate for a further two years, even though compliance with this obligation would be desirable from the perspective of users of accounting information.

A change in the categorisation of a reporting entity or consolidation group may be demanding, particularly where a small reporting entity becomes medium-sized (different accounting methods and a mandatory audit of the financial statements), but also where a micro reporting entity becomes small (scope of disclosure and accounting methods). It is therefore advisable to consider well in advance whether categorisation may change when the NAA is applied and, if such a situation may arise, to take the necessary steps in advance to manage the new obligations (for example, contacting the auditor in good time, reflecting the costs of the first-year audit in the plan, adjusting the accounting system to the required accounting methods, training accountants, or setting up consolidation processes). For small reporting entities that will fall outside the mandatory audit regime in 2026 but return to it under the NAA, it may be beneficial to undergo a voluntary audit or at least a review. One of the benefits of an audit lies in the ongoing feedback it provides, and such an approach is usually less burdensome and less costly than attempting to remedy errors identified only after a longer period of time.