The reason for this rather unusual step is the start of interministerial comment procedure regarding the accompanying act to the Accounting Act (for more details, please refer to Ministry of Finance Published the Accompanying Act to the Accounting Act). The accompanying act is based on certain changes in the draft Accounting Act which respond to the comments of the Legislative Council of the Government (discussion of the draft Accounting Act was suspended on 7 March 2024).

The working version of the updated draft of the new Accounting Act is available on the website of the Ministry of Finance.

What are the principal changes in the draft act comparing to the original version presented to the Legislative Council of the Government that we discussed in the article published earlier?

The most significant proposed change is an introduction of the possibility to subsequently remeasure tangible fixed assets at fair value under the regulations similar to the revaluation model in IAS 16 Property, Plant and Equipment. What does it mean in short? An entity should have the possibility to choose to measure a selected group of tangible fixed assets at fair value subsequently decreased by accumulated depreciation (unless it is an undepreciated asset, such as land) and impairment and increased by subsequent acquisition costs (i.e. similar to current technical improvements). An entity will not remeasure every year, it will do it in a frequency in which the carrying amount (the most recent revaluation – depreciation – impairment + subsequent acquisition cost) does not significantly differ from the fair value of the asset. The impact of the remeasurement at fair value will not be recognised in the profit or loss; it will be recognised in equity (revaluation reserve). It will not be possible to pay out this reserve, it will be gradually released in retained earnings as the remeasured asset is depreciated, or it will be transferred to retained earnings on a one-off basis at the moment when the asset is sold. The revaluation will then be reflected in the profit or loss in depreciated assets by an increase in depreciation amount in the following period. This new method will make it possible to depart from the historical valuation and increase the value of tangible assets without necessary transformations, which has so far been the only method. The new Accounting Act does not prohibit, with exceptions, the remeasurement of assets and debts at fair value in transformations and investments under identical control (i.e. identical controlling entity).

Another change involves a cancellation of the entire provision on statutory annual report (part seven of the new Accounting Act). This term will be removed from the Draft Act. In addition, provision on information disclosure will be significantly simplified.

The obligation to disclose information on a material error remains; however, it will no longer be in the form of corrected financial statements under the Draft Act; it will only be a document informing about the material error and containing the information, among other things, and contains information about, among other things, the impact of the error on the financial statements and how the financial statements would look if the error had not occurred. This information is not published if the information on the error was disclosed in the auditor’s report on the financial statements (i.e. if the auditor issued
a qualified opinion regarding this error).

A proposal for an introduction of a statement on financing of a non-for-profit entity and its use is interesting for the non-for-profit sector. This potential new obligation would involve a disclosure of information considering the needs of key users which include donors, subsidy providers and other entities that invest their funds in a non-for-profit organisation and expect that these funds will be used for a predetermined purpose.

Numerous other changes in the Draft Act are of a rather formal nature and they do not change much in terms of the content. These for example include a replacement of the term “acquisition cost” by “acquisition expense” or “cash accounting” by “cash-based accounting” or “notes to the financial statements” by “notes to the accounts”.

What do the more detailed theses of the decree for businessmen and the non-for-profit sector bring?

The draft of the factual version of the decree contains, among other things, a template of the balance sheet and the profit and loss account (both only for business entities). The theses for the form and arrangements of the statements clearly suggest that newly there will be an obligation to refer every statement line (if material) to a note in the notes to the financial statements, which discusses it in more detail. The balance sheet will contain only carrying amounts, there will no longer be the “gross” and “corrections” column in assets. Further, the possibility to compensate items in the profit and loss account will be expanded by those that do not directly relate to entity’s principal business activities.

The section on measurement is elaborated in more detail. The theses of the factual solution define, for example, how a discount/interest rate should be determined for the calculation of current value. The principal idea is to use the incremental interest rate (i.e. an interest rate for the determined purposes available on the market for the specific entity), except for reserves where the discount should be similar to the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets (general market interest rate).

Many theses regarding the measurement of fixed assets refer to the provisions in IFRS that are supposed to be reproduced from or are inspired by the IFRS. These include e.g.
a definition of the development and capitalisation of the costs for the development of intangible assets (IAS 38 Intangible Assets), the obligation to report key spare parts as tangible assets (IAS 16 Property, Plant and Equipment), determining the moment of started depreciation (moment from which it is possible to use the asset) or impairment of the asset (IAS 36 Impairment of Assets). An interesting new change will be, among other things, the prohibition of capitalisation of the amortised cost of the previous construction in acquisition cost of a new construction, capitalisation of incremental costs for negotiation of a contract with a customer in intangible assets and a proposal for non-depreciation of goodwill (depreciation should be replaced by an annual impairment test).

The theses describe in detail the manner of reported leases in small and micro entities which do not have the obligation to follow IFRS 16 Leases under the Draft Act. Nevertheless, these entities will also report the right of use and debt from leases for all leases except for short-term leases
(up to 1 year); however, there are numerous simplifications (e.g. amounts not discounted to the present value, simplification in assessing the lease period).

A major change elaborated in more detail in the theses is the moment and amount of reported revenues. The proposed solution is again inspired by the IFRS, this time by IFRS 15 Revenue from Contracts with Customers, primarily for contracts with gradual performance (gradual recognition of revenues depending on the stage of completeness) and contracts with several performances (allocation of revenues to individual performance depending on their actual amount).

Investments will include non-financial investments such as crypto assets or gold, or emission allowances, if these are not used by an entity for business activities.

An interesting new fact for farmers may be the fact that the Czech Ministry of Finance has been considering measurement of biological assets at fair value.

What is not available yet and what are the next steps?

So far, the published material does not contain provisions for non-for-profit entities, provisions from transitions from IFRS to Czech accounting and provisions on consolidations. Furthermore, the Czech Ministry of Finance has not yet published how entities will handle the transition from the current to the new Accounting Act (it is expected that a special decree will be published).

Although the Czech Ministry of Finance states that the anticipated effective date of the new legislation and accompanying changes in the documents will be 1 January 2025, it is highly probable that its effect will have to be postponed at least by one year. The reasons primarily include the current situation of presented documentation and the scope of changes that the new legislation brings and to which the entities and their accounting systems will have to adapt.

Please note that the above text is based on materials published on 31 May 2024 and it is possible that the final version of the draft new Accounting Act will differ from these materials. The list of changes and other current information on the new Accounting Act can be found on our special website.