According to the data of the Ministry of Finance, a total of 991 comments were submitted during the comment procedure, of which 435 comments were identified as essential. The bill published in January 2024 will now be discussed by the Legislative Council of the Government and then submitted to the Government for approval. Alongside the draft of the new Accounting Act (new AA), an updated explanatory memorandum and revised theses of the implementing decrees have been published, all available on the portal of the Office of the Government of the Czech Republic.

An overview of the changes brought about by the original draft of the new AA published in October 2022 was provided in the article The Ministry of Finance published a draft of the new Accounting Act. It is clear at first glance that the original draft of the new AA has been significantly revised in the new version published in January 2024, with some clauses being completely reworded (e.g. sections on valuation, accounting, offences, and penalties). We will look at the biggest changes in the draft of the new AA and the theses of the decrees that may affect a large number of reporting entities. Please note that further changes may be made to the draft of the new AA during the legislative process.

Conceptual framework

In the conceptual framework, which sets out the objective of financial reporting, the requirements for the quality of accounting information, the definition of the individual elements of financial statements and the principles of financial reporting, the biggest changes were made to the definitions of the elements of financial statements (asset, debt, equity, income, expense, and profit or loss). As related concepts, a receivable was redefined, and the definition of reserve was modified. Conditions for recognition of asset and debt have been added, and the recognition of income and expense will be regulated in the implementing decree.

Of the financial reporting principles, the most significant amendments were made to the materiality principle and the sections relating to accounting policies and retrospective adjustments to financial information. In this context, there is a new requirement to disclose the identification of a material error that causes the disclosed financial statements not to meet the requirement of a true and fair view. Information about a material error may take the form of corrective financial statements; for entities with statutory audits, these corrective financial statements are also subject to audit.

Definition of reporting entities

In the original draft, branches of foreign entities from non-EU countries on the territory of the Czech Republic were considered reporting entities, which has been removed from the new draft. However, they (as well as branches of foreign entities from EU member states) are now subject to the provisions of Section 34 governing selected accounting procedures (i.e. application of accounting regulations except for the obligation to consolidate, report, audit and disclose).

Health insurance companies were excluded from the set of public interest entities in the original draft of the new AA, but they remain public interest entities in the new draft. Health insurers are also newly included among the public sector entities.

Categorisation of reporting entities

In the original draft of the new AA, the limits for the categorisation of reporting entities were taken from the old, still valid Accounting Act. In the new draft, the limits have been indexed in line with the EU Directive, and are as follows for business and non-profit entities:

The definition of net turnover in the new AA draft remains the same as in the decree effective from 1 January 2024 (i.e. the amount of revenue on which the business model of the entity is based).

The new AA draft keeps the provision that for an entity that is a parent (and not a public interest entity), the determination of the category of the entity will be based on values resulting from consolidation for its entire consolidation group.

There was also a 20% increase in the limits for the categorisation of consolidation groups.

Statutory audit

The categorisation of reporting entities is closely related to the obligation to have the financial statements audited. While the original draft of the new AA contained two options, in the new draft, only large and medium-sized entities and the parent entity preparing consolidated financial statements are subject to statutory audit.

Compared to the current situation, the audit obligation will not apply to small entities.

Consolidation

In the original draft of the new AA, consolidation groups corresponding to the existing small and medium-sized group of entities were exempt from the consolidation obligation. According to the new draft, this exemption only applies to small consolidation groups, which means that medium-sized and large consolidation groups will be obliged to consolidate (as under the current AA, but with a change in the value criteria).

There has been a change in the consolidation methods, with the proportionate consolidation method being completely deleted in the new draft. Subsidiaries will therefore be reported using the full consolidation method, and interests in jointly controlled entities and associates will be measured at equity less impairment in the consolidated financial statements.

Accounting and functional currency

The text regulating the accounting currency has been largely taken over from the Accounting Act and Decree No 500/2002 Coll., effective from 1 January 2024, in the new draft. A new definition of the accounting currency has been added and the conversion methods have been specified. The choice of functional currency will not be limited to EUR, USD, or GBP.

A new definition of the reporting currency as the currency in which the financial statements are prepared has been added. While for individual financial statements, the reporting currency is the same as the accounting currency, for consolidated financial statements, the reporting currency may be any currency.

Valuation

Valuation is one of the sections that has been completely revised in the new AA draft. The whole area has been brought closer to the treatment in IFRS accounting standards, with some definitions taken from IFRS (e.g. fair value, amortised cost, residual value of an asset). Medium-sized and large entities are required to use IFRS 16 for the recognition and measurement of transactions that are subject to IFRS 16 Leases (micro and small entities may do so but must use present value wherever it is used for initial measurement).

Changes to the decree theses

In the area of leases, an important clause has been added stating that the existing procedure for short-term leases will remain. “Right of use” will be presented on the balance sheet under the existing categories – by type of asset.

It remains unchanged that a subsidy received for fixed assets will be accounted for as deferred income. Release is accounted for in the period under the grant conditions (the option “in the same period as it is depreciated” has been removed).

On the balance sheet, only “reporting on a net basis” will now be possible.

We are monitoring developments around the new law for you.

We have listed above only the most important changes contained in the new draft of the Accounting Act and the theses of the decrees. 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 those interested in the new method of accounting for leases, we are planning a seminar IFRS 16 in practice: How to account for leases? For more information about all events, please follow our website.