Current Czech legislation

According to the current Czech accounting legislation, in the case of both financial and operating leases, the owner (lessor), who also depreciates the asset, recognises the asset provided for use in their assets. The owner also recognises the consideration for the use of the leased asset in income. The lessee recognises the consideration for the use of the leased asset as an expense based on the accrual principle, i.e. typically using a deferred expense account.

Proposed amendment from 1 January 2025

The amendment to lease reporting in the draft of the new Accounting Act (new AA) is based on the definitions of the elements of financial statements and the emphasis on the economic concept of transactions rather than the formal-legal approach. According to the provisions of the implementing decrees to the new AA, a lease is a contract in which the lessor grants the lessee the right to use an asset for a specified period of time in return for a one-off payment or a series of payments. A finance lease is a situation in which all the significant risks and benefits typically associated with the ownership of an asset are transferred to the lessee. It should be noted that the term ‘lease’ is broader in meaning than is often perceived at present. Lease is synonymous with rental and thus typically includes contracts for the use of offices, warehouses, handling equipment or vehicle fleets. However, it can also refer to contracts for the use of various infrastructure or photovoltaic power plants, which have previously not been considered leases.

Short-term leases according to the new accounting legislation

For short-term leases, i.e. leases with a term of less than 12 months, it will be possible to maintain the current status where the transfer of an asset for temporary use is regarded as a service.

Long-term leases according to the new accounting legislation

Long-term leases will be treated as a ‘right-of-use’ acquisition and will be accounted for in a manner similar to the acquisition of assets through purchase. According to the implementing decrees to the new AA, the specific accounting method will be based on the concept of leases under international accounting standards, specifically IFRS 16 Leases. The fundamental change will thus be the accounting on the part of the lessee, who, when the conditions for the recognition of the asset are met, will recognise the right-of-use in the relevant item of tangible assets on their balance sheet and will depreciate the asset. At the same time, the lessee will recognise the debt and charge interest on its repayment to finance expenses.

It can be said that large and medium-sized entities will entirely follow IFRS 16, i.e. including discounting of future cash flows. For micro and small entities, discounting will be optional to reduce complexity, i.e. they will be able to apply it if they choose to do so voluntarily. It is expected that these entities will measure the leased asset and report the amount of debt in the total amount of undiscounted payments under the lease contract.

Accounting for leases under IFRS 16 Leases

IFRS 16, effective as of 1 January 2019, sets out the principles for the recognition, measurement, presentation, and disclosure of leases. The standard is relatively detailed and includes application guidance on several topics, such as determining the lease term for contracts with extension options or the identification of the lease. The standard also provides illustrative examples to help entities with its correct application.

According to IFRS 16, a contract is a lease contract or contains a lease if it transfers the right to control the use of an identified asset for a specified period in exchange for consideration. Control exists if the customer has the right to obtain substantially all the economic benefits from the use of the identified asset during the period of use and the right to direct the use of the identified asset. Assessing whether a contract contains a lease can be challenging in practice.

Lease accounting – lessee

The standard provides a single accounting model for lessees that requires them to recognise assets and liabilities for all leases except those with a lease term of 12 months or less or where the underlying asset is of low value.

The lessee recognises a right-of-use asset and a lease liability on the balance sheet.

The right-of-use asset is initially measured at the amount of the lease liability, taking into account payments made before the commencement date and initial direct costs incurred by the lessee or the cost of restoring the leased asset to its original condition. After the commencement of the lease, the lessee measures the right-of-use asset using the cost model less accumulated depreciation and impairment losses.

The lease liability is initially measured at the present value of the lease payments to be made over the lease term, discounted at the implicit interest rate of the lease, if the rate can be readily determined. If the rate cannot be readily determined, the lessee shall use their incremental borrowing rate.

In the income statement, the lessee recognises depreciation of the right-of-use asset and interest on the lease liability in finance expenses. Thus, total lease expense (excluding short-term leases and leases of low-value assets) is reported in EBITDA (if the company uses it).

Lease accounting – lessor

Lessors classify each lease as either an operating or a finance lease.

A lease is classified as a finance lease if it transfers substantially all the risks and benefits of ownership of the underlying asset. Otherwise, the lease is classified as an operating lease.

The lessor recognises assets held under finance leases as a receivable at an amount equal to the net investment in the lease at the inception of the lease. Lease payments therefore represent a repayment of a receivable.

Assets leased under operating leases are retained by the lessor on the balance sheet and depreciated in a standard manner. Lease payments received are recognised in income.

The standard also addresses specific situations that may be encountered in practice, such as separating components of a contract, combining contracts, variable lease payments, lease modifications, sale and leaseback.

We are monitoring developments around the new law for you.

For those interested in the new method of accounting for leases, we are preparing a one-day seminar in April, IFRS 16 in practice: how to account for leases?

The preparation of the new accounting legislation will be discussed in further articles on our blog. We also plan to continue to hold seminars where we will discuss the new AA in detail.

For more information about all events, please follow our website.