The most significant changes were brought by the amendment to Act No. 563/1991 Coll., on Accounting that was adopted as the thirty-fifth part of the Government’s consolidation package. It was published in the Collection of the Laws as Act No. 349/2023 Coll. on 12 December 2023. We informed you about the most important changes brought by the amendment to the accounting act in our article The Impact of the Government’s Consolidation Package on the Accounting Act, describing in detail the introduction of the concept of a functional currency, the obligation for certain reporting entities to prepare a sustainability report from 1 January 2024 and an income tax report from 22 June 2024.

On 14 December 2023, the Ministry of Finance issued Decree No. 443/2023, which amends the following implementing decrees on the accounting act:

• Decree No. 500/2002 Coll., for entrepreneurs;
• Decree No. 501/2002 Coll., for banks and other financial institutions;
• Decree No. 502/2002 Coll., for insurance companies; and
• Decree No. 504/2002 Coll., for reporting entities whose main subject of activities is not business.

Since 1 January 2024, the follow-up amendments to the Czech Accounting Standards have been introduced. These changes are only minor; most of them are related to the replacement of the term “Czech currency” by the term “accounting currency”.

The amendments to the implementing decrees respond to changes in the accounting act and newly regulate the method of determining the functional currency and the procedure for changing the accounting currency, the method of determining net turnover, and the relationship between the top-up tax and the deferred tax. We look at these three areas in more detail below. We will focus on Decree No. 500/2002 Coll. for entrepreneurs – the other decrees are regulated similarly, only the numbers of incorporated and amended Sections differ.

Functional currency

Regulation in the amendment to the accounting act

A new Section 24a has been incorporated in the accounting act that introduces the term accounting currency. The accounting currency may be not only the Czech currency but also the euro, the US dollar, or the British pound, provided that they also meet the defining characteristics of the “functional currency” of the reporting entity. The functional currency is defined as the currency of the primary economic environment in which the reporting entity operates. In contrast to IFRS, where the use of the functional currency for accounting is mandatory, the use of a non-Czech currency in accounting is voluntary under the Czech regulation. However, if the reporting entity chooses a currency other than the Czech currency as its functional currency, it may revert to the Czech currency only if that other currency ceases to be the functional currency. The accounting currency may be changed only as of the first day of the reporting period. We would like to point out that the unauthorised use of the functional currency is the breach of an obligation pursuant to the accounting act that establishes liability for an offence with a sanction up to 3% of the value of assets.

Sections have been incorporated in the accounting act to regulate when and at what rate to convert foreign currencies into the accounting currency. In general, the reporting entity will use the “general exchange rate” for the conversion of assets and liabilities denominated in a foreign currency that is the exchange rate announced for the foreign currency by a central bank competent for the accounting currency on the date of conversion. The central banks are the Czech National Bank (CZK), the European Central Bank (EUR), the Federal Reserve (USD), and the Bank of England (GBP). The option to use a fixed exchange rate has also remained.

Regulation in the amendment to the implementing decree

Section 61d has been incorporated in implementing Decree No. 500/2002 Coll. to regulate the method of determining the functional currency. This Section is quite short as it only refers to the criteria for determining the functional currency under IFRS (specifically IAS 21 The Effects of Changes in Foreign Exchange Rates).

In contrast, the newly incorporated Section 61e describes in detail how to proceed with a change in the accounting currency.

Upon the change of the accounting currency, opening balances are converted with the latest closing rate of the central bank, as well as comparative figures for the previous reporting period. Only in the case of significant deviations will the average rate be used for the conversion for the off-balance statements.

The difference resulting from the conversion of figures in the profit and loss account is shown in the balance sheet on line “A.IV.2 Other profit or loss from prior years”. The difference arising from the conversion of figures in the cash flow statement and the statement of changes in equity is shown on a separate line in the statements entitled “Difference from conversion to the accounting currency”.

The decree defines a special process for foreign currency securities measured at fair value and non-derivative cash flow hedging.

The decree also requires that, upon the change of the accounting currency, the change is disclosed in the notes to the financial statements, including the reasons for the change, foreign exchange rates used for the conversion, and impact on the financial statements.

The decree also introduces the option to report individual items in the financial statements in whole millions for reporting entities with the total assets (net) of at least 10 billion of units of the accounting currency.

Determination of net turnover

Regulation in the amendment to the accounting act

The definition of the net turnover has been amended, in 2023, net turnover for accounting purposes meant the amount of revenues less sales discounts. Since 1 January 2024, net turnover has meant the amount of revenue from the sale of products and goods and from the provision of services. We would like to remind you that the annual net turnover is one of the criteria for categorising reporting entities, groups of reporting entities and also, for example, for determining statutory audit.

For banks, saving banks, insurance companies, and reinsurance companies, the law refers to the sum of items in the profit and loss account pursuant to Decrees No. 501 or 502.

Regulation in the amendment to the implementing decree

Section 35 of Decree No. 500 specifies that “revenues from the sale of products and goods and from the provision of services” mean revenues on which the business model of the reporting entity is based. In defining such revenues, the sector and market in which the reporting entity operates and the nature of the reporting entity’s business for its customers are considered. Conversely, the line in the profit and loss account on which the revenue is shown is not considered.

The explanatory memorandum on the amendment to the decrees includes areas of activities that show revenues from their ordinary economic activities on lines other than sales – e.g. currency exchange companies, factoring companies, loan providers, agricultural reporting entities, or leasing companies.

Top-up tax and deferred tax

In the section of the decree that regulates the method of the deferred tax, a sentence has been incorporated that the calculation of the deferred tax does not consider the top-up tax. This news will certainly be welcomed by large multinational and domestic groups of companies with annual revenues of more than EUR 750 million (in 2 of the 4 previous taxation periods) that will become payers of the top-up tax starting from 2024.

According to the decree, these reporting entities are already required to disclose in the notes to the 2023 financial statements that they expect to become the payer of the top-up tax and describe and quantify the expected impact of the top-up tax on the reporting entity.