Not much has been happening lately in the accounting field, aside from the upcoming new Accounting Act, but it is already clear that, since it has not yet been presented to the Parliament, it will most likely not take effect before 1 January 2027. It may thus seem like it is enough to “change the numbers” in the financial statements for 2023 to get those for 2024. That is, however, not the case. In the paragraphs below, we summarise the changes that need to be reflected in the 2024 financial statements, as well as reminding you of the correct treatment of changes in policy, changes in estimates, and errors.
If you want some inspiration for how to incorporate the changes, you can use our financial statements template that can be found on our website.
According to the amendment to the Accounting Act and related implementing decrees that we described in detail in our article Changes in the Czech accounting legislation from 1 January 2024, a new definition of net turnover has been applicable since 1 January 2024 for the purposes of categorising reporting entities and groups of reporting entities. Net turnover is no longer understood as the sum of all income accounts or the relevant income lines in the profit and loss account. Every reporting entity now has to define what income accounts will be included in its net turnover, as it should only comprise the income on which the entity’s business model is based. It certainly includes sales of products, goods and services, i.e. accounts in group 60, but in many cases, it is also necessary to add other income types, and they may not always be entire accounts but only their parts. For example, a holding company whose activity consists primarily in holding stakes in subsidiaries and providing intragroup loans should include income from dividends and interest in its net turnover. In the case of companies whose activity is based on received subsidies (most commonly agricultural businesses), these subsidies should also be included in income, but only those that are not of a one-off (random) nature.
In the financial statements for 2024, you need to:
The impact of the change in the method of determining net turnover on comparative information for 2023 is the subject of the opinion of the Ministry of Finance of the Czech Republic (MoF), which is published on the website of the Chamber of Auditors of the Czech Republic. The MoF recommends that net turnover for 2023 should not be reported in the 2024 profit and loss account. The net turnover indicator is used, among other things, for the categorisation of the reporting entity in line with the Accounting Act. For the purposes of this categorisation, the turnover for the 2023 reporting period is determined according to the policy applicable in 2023 and is not adjusted retrospectively. Thus, presenting the 2023 net turnover figure in the 2024 profit and loss account as a restated amount (under the new methodology) would be misleading for the users of the financial statements. At the same time, if the figure from the 2023 financial statements determined under the previous rules was included in comparative information, the 2024 and 2023 figures would not be comparable. This would violate one of the basic principles defined in the Accounting Act (Section 19(7)).
Many companies also use net turnover as one of the performance indicators in their annual report. If this is the case, it is essential that the figure for 2023 be adjusted in the annual report according to the new methodology and that this adjustment be accompanied by appropriate commentary.
However, practice is much more varied. For example, there may be a retrospective adjustment to a prior reporting period, in our case 2023 – either as a result of a correction of a material error relating to a prior period or as a result of a change in accounting policy. Should such a retrospective adjustment have an impact on the amount of net turnover, the 2024 financial statements would need to include a restated net turnover figure for 2023 based on the methodology for 2023, in order to disclose the correct indicator for categorisation for 2023.
The 2024 reporting period is the first where selected companies become payers of top-up taxes. We have provided detailed information on top-up taxes in a previous article on our blog.
If a reporting entity is liable for the top-up tax, it has to do the following in its financial statements for 2024:
If a reporting entity is not a payer of the top-up tax, it does not need to make a negative statement to that effect. However, we recommend that reporting entities that are part of a large group of entities make this negative statement together with a brief justification, e.g. that the group did not achieve consolidated income of at least EUR 750 million in at least two of the four preceding reporting periods. If it is highly probable that the entity will become liable for the top-up tax in a subsequent period, we recommend that this fact also be disclosed in the financial statements together with an estimate of the potential impact, if material for the reporting entity.
One of the very frequent questions asked with respect to the preparation of financial statements is whether a change in accounting method, a change in accounting procedure, a change in an internal directive or a change in an amount is a change in estimate, a change in policy, or an error, and how to present those changes correctly in the financial statements. This matter is also addressed in the National Accounting Board’s Interpretation NUR I-29.
A change in policy is not a very frequent occurrence. The Accounting Act requires consistency in the use of accounting policies and changes are permitted only if they are required by legislation or improve the transparency of the financial statements (Section 7 (4) of the Accounting Act). A change in policy is a change in a method of valuation, reporting or disclosure. The most common error is confusing a change in estimate with a change in policy. For example, a reporting entity changes the method of calculating a reserve for complaints or the method of determining a provision against inventory, or changes the useful life of an asset or the method of depreciating it from straight-line to machine-hour-rate. The common feature of all of the above changes is that they result from new information. Economic reality has changed, and therefore the reporting entity calculates the reserve or determines the provision differently. Alternatively, because it has started to use the asset differently, it has changed the period and method of depreciation. Thus, all of these examples represent a change in estimate, not a change in policy. The accounting policy is to reflect impairment through a provision or accumulated depreciation. How and in what amount these items are determined is an estimate.
Why is it so important to distinguish between a change in accounting policy and a change in estimate? A change in estimate is recognised prospectively, meaning that from the moment of the change, we start to apply the new procedure, and the impact of the change is reported in the current reporting period in profit or loss. Comparative information is not restated. In the case of assets, for example, we start to depreciate the new net book value over the newly determined remaining useful life. If it was a change in policy and it had a material impact on the financial statements, a retrospective adjustment would have to be made. This means that the figures should be restated from the beginning of the comparative period as if the new policy had applied in the past so that the figures for the current and prior periods are comparable in terms of methodology. The impact of the change as of the beginning of the reporting period is reflected in other profit or loss. The most common example of a change in policy is a switch from the weighted average to the FIFO method of measuring disposals of inventory or a change in the (non-)revaluation of foreign currency prepayments.
Moreover, a change in estimate and a change in policy have to be distinguished from an error. If a transaction has been reported incorrectly in the past, for example, if there was a mathematical error in the calculation of a provision, then the correct calculation is not a change in estimate but a correction of an error. When correcting an error, it is first necessary to assess whether the error is material. If the error in the previous reporting period did not have a material impact on the financial statements, the correction is prospective, i.e. the adjustment is only reflected in the profit and loss account for the current reporting period. Conversely, if the impact of the error is assessed as material, the adjustment has to be made retrospectively, i.e. the comparative information has to be restated to eliminate the error and the impact of the error has to be recognised through other profit or loss. Keep in mind how materiality is defined in paragraph 19 (7) of the Accounting Act: “Information is considered material if its omission or misstatement could reasonably be expected to influence the judgement of the user, and the materiality of individual items of information is assessed in the context of other similar information.”
Varied accounting practice sometimes brings about the concurrence of a change in estimate and a correction of an error, in which case the accounting professional must correctly assess the effects of these phenomena and reflect them adequately in the financial statements.
To conclude, we would like to draw attention to the fact that although both the Accounting Act and the implementing regulations (decrees) define the mandatory elements of the financial statements, including the notes, this mandatory list cannot be considered the only guide to what a reporting entity should disclose in the notes to the financial statements. In particular, materiality and user needs should be taken into account when reporting additional information in the notes. If the failure to disclose information (even if not directly required by an implementing regulation) would affect the judgement of the user of the financial statements, then such information needs to be disclosed in the notes. Such cases may include, for example, a material uncertainty in the determination of estimates or the (non-)recognition of reserves, the amount and nature of related party transactions, or the amount of overdue liabilities.
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