The following article briefly summarises the main points of the new interpretation of the National Accounting Board I-47 Received Prepayments Denominated in Foreign Currencies.
Interpretations of the National Accounting Board
The interpretations provide NAB’s professional opinion on the practical application of Czech accounting principles. They aim to facilitate the formulation of optimum and unified procedures for accounting and financial reporting. The interpretations focus on matters that are not addressed by Czech accounting legislation or are addressed insufficiently, and on issues being resolved differently in the accounting practice.
Even though the interpretations are not legally binding, The Supreme Administrative Court has accepted them several times as a valuable source complementing accounting legislation.
Interpretation I-47 Received Prepayments Denominated in Foreign Currencies
Interpretation I-47 (“Interpretation”) was issued in January 2022 with the aim of determining the accounting treatment of reporting received prepayments denominated in foreign currencies in the financial statements. The issue of provided prepayments denominated in foreign currencies is addressed by Interpretation I-43 Provided Prepayments Denominated in Foreign Currencies issued in October 2020. We informed about it in the article New Interpretations of the National Accounting Board I-42 and I-43. Both interpretations include a conceptually consistent practice.
Interpretation I-47 distinguishes whether or not, from the perspective of the seller, the completion of the particular sales transaction is expected.
The sales transaction is likely to be completed
If the seller’s transaction to which the receipt of the prepayment relates is in a state where it is likely that the asset will be delivered, or the service rendered (e.g. materials have been ordered, production has begun, the contract has been scheduled), the received prepayment is a separate (partial) part of the total selling price of the asset or service denominated in a foreign currency. In such a case, the prepayment should be treated as follows:
- The balance of the received prepayment is translated to CZK as of the date of the provision of funds; it is no longer translated as of the balance sheet date, and thus no foreign exchange gain or loss arises.
- The received prepayment is reported as deferred income in the balance sheet.
- At the time of the asset delivery or service provision, the amount of the received prepayment is not simultaneously translated at the current exchange rate.
- If multiple prepayments are received prior to the asset delivery or service provision, each prepayment is translated at the historical exchange rate (as of the date of the provision of funds).
The reasoning of the Interpretation states that these received prepayments are, in their economic substance, identical to the definition of deferred income whose accounting treatment is described in Interpretation I-37 Accruals and Deferrals and Foreign Currency. According to I-37 “deferred expenses and deferred income are assets and liabilities that are the result of a cash flow that has already taken place; they do not bear any exchange rate risk, and therefore, even though they are the result of a foreign currency transaction, entities are not entitled to convert their value into the national currency”.
Interpretation I-47 mentions another accounting treatment in the case of “payments for continuous supplies occurring at the same time (e.g. energy sales) with subsequent billing (e.g. annually)”, where the received payments should be continuously recognised as income. As of the balance sheet date at the latest, the entity estimates the amount of the expected or final settlement and reports the receivable or payable denominated in foreign currency correlatively to the adjustment of income.
The sales transaction is unlikely to be completed
If the seller’s transaction to which the receipt of the prepayment relates is in a state where it is likely that the received money will be paid back and the sales transaction will not be carried out, the Interpretation classifies the received prepayment as a payable denominated in foreign currency and the accounting treatment is as follows:
- The balance of the received prepayment is translated at the exchange rate as of the balance sheet date and the foreign exchange loss is reported in the financial profit or loss.
- The received prepayment is recognised in payables in the balance sheet.
Refundable security deposits for rental or services may serve as examples.
The full text of Interpretation I-47 is available on the website of the National Accounting Board.
What does the Interpretation bring for entities?
The implementation of the Interpretation is fully within the responsibility of each entity – the Interpretation does not address the practical transition to the proposed conceptual solutions, i.e. whether to apply them retrospectively (as a change of accounting method or as a correction of a misstatement – and under what conditions), prospectively, or alternatively as some kind of combination of the two. This also entails tax risks.
We therefore recommend carefully considering the circumstances in each case, their significance, potential risks and tax consequences.
Feel free to contact us should you need assistance.