Revenue recognition 

Since Czech accounting regulations do not provide a clear definition of revenue, even this seemingly straightforward area can give rise to numerous questions and uncertainties upon closer examination. The legislation does not explicitly specify the timing of revenue recognition. Only CZSO 001, which is not a legally binding regulation, outlines several possible moments for recognising an accounting event. In the case of revenue, relevant factors may include the date of delivery, the issuance of an invoice, the receipt of payment, or a date determined by the entity’s internal circumstances. 

In practice, revenue recognition often follows contractual formalities or agreed invoicing terms rather than reflecting the economic substance of the transaction. Additionally, Czech accounting regulations do not explicitly address the position of agents or intermediaries, where only the commission or margin earned for facilitating a transaction represents the actual revenue. Another gap in the regulations is the treatment of multi-element contracts, such as those involving both the supply of equipment and related servicing. The only guidance in this area comes from NUR I-41, which provides an interpretation for valuing individual benefits in loyalty programs—yet, this remains a non-binding regulation. A further challenge is the progressive recognition of revenue for long-term contracts, such as construction or works contracts. Current regulations also lack clear guidance on performance obligations with a right of return (e.g. for e-commerce and other businesses), often leading to the need to create reserves for returns, the valuation of which can be complex and subjective. 

A common characteristic of the areas mentioned above is that revenue recognition often relies solely on contractual terms, which may not always reflect the true economic substance of the transaction. 

When determining the timing of revenue recognition, we should consider:  

Realisation principle — revenue is recognised at the moment the contractual obligation is fulfilled, regardless of when payment is received. In most cases, this occurs at the point of delivery, when the customer takes control of the goods or services. However, the handover may occur: 

• At a single point in time (one-time transfer); 

• Over time (gradual transfer). 

Accrual principle – revenue is recognised in the period to which it relates in terms of time and substance, in accordance with Section 3(1) of the Accounting Act. 

The challenge to prudent valuation and revenue recognition arises from Section 25(3) of the Accounting Act, which stipulates: “In making a valuation at the balance sheet date, entities shall include only the profits that have been realised by that date and must consider all foreseeable risks and potential losses related to assets and liabilities that are known by the time the financial statements are prepared, as well as any impairments, regardless of whether the financial year results in a profit or a loss”. 

Given the current regulatory ambiguity, guidance must be sought in case law, in addition to non-binding legislation. 

The issue of revenue recognition for long-term contracts is addressed, for example, in the ruling in case 2 Afs 296/2020-64, which examines whether interim payments for construction contracts can be recognised as revenue before the project is fully completed. The Court ruled that, given the specific nature of long-term construction contracts, builders—as both taxable and reporting entities—should be allowed to recognise payments received for ongoing work as revenue. The appropriate accounting approach depends on the economic nature of the contract and various other factors, such as: 

• Verification of completed work through detailed work lists.  

• Assessment of the economic benefit created for the customer (e.g. work that cannot be undone, such as a completed foundation slab).  

Key takeaways: 

• Invoicing does not equal revenue—it serves as a basis and supporting document for financing. If the work has not been performed, the payment is considered an advance. 

• Retention of title or the requirement to deliver the entire project does not prevent revenue recognition. 

• For construction projects where payment is made only upon completion of specific structures, costs incurred during the process are recorded as work in progress rather than revenue. 

The above ruling provides valuable reasoning and references to other case law; here, we have highlighted only a few key insights. 

The following examples illustrate similar considerations: 

• Delivery of a comprehensive software solution with ongoing acceptance.​ 

• Sequential invoicing vs. advance payments (e.g., invoicing upon contract signing without actual delivery is not revenue but an advance payment, as no goods or services have been provided). 

• Delivery of goods with a money-back guarantee.​ 

• Deliveries to a consignment warehouse with a compulsory purchase obligation, where the supplier no longer retains control over the goods. 

• Supply of goods bundled with services (multi-component contracts negotiated as a package should not lead to recognising a gain on one component while incurring a loss on another). 

In this area, the issuance of interpretations by the National Accounting Board is expected due to the delay in adopting the new Accounting Act. Under the new law, invoicing will serve as an important input for accounting; however, it will not determine revenue recognition. Instead, the focus will be on assessing the economic substance of the transaction, analysing its components, and taking a more in-depth approach to revenue recognition, including the valuation of individual elements. 

Expense recharges 

In an entity’s daily operations, we frequently encounter “recharges” of various expenses, including: 

• Reimbursement for private use of company assets such as staff cars, fuel, and telephone calls. 

• Recharges for operational expenses such as freight, rent, leases, insurance premiums, and fines. 

• Recharges of shared expenses for advertising campaigns, customer transport, waste collection, and payments for shared services within a corporate group. 

In practice, the most common case involves services related to rental and sublease agreements, such as the re-invoicing of utilities (electricity, heating, gas, and water). Czech Accounting Standard No. 19 (ČÚS No. 19) outlines three possible approaches to recognition:   

• Balance sheet recognition only – where expenses are recognised in advance, usually in group 3xx accounts. 

• Separate recognition of expenses and revenue (gross approach). 

• Partial offsetting of charges (net approach). 

The first approach may seem appealing in group relationships, where the motivation for not posting to the income statement could be to simplify the preparation of consolidated financial statements —items on the balance sheet are simply eliminated. However, caution is needed: this may not be the correct approach for separate financial statements. 

The procedure you should use depends on the nature of the transaction and several key factors. The decision should be based on the nature of the transaction, how the contractual responsibility is set up, and whether the entity acts as a supplier or an intermediary. An intermediary, in particular, is only entitled to a commission and does not bear the risks associated with the transaction. Another important consideration is whether meters are used (e.g. for energy readings) or if allocation keys are used (e.g. by floor area). Typically, the decision will be between capturing the recharges on the balance sheet or capturing them in a gross manner. 

Conclusion 

In this article, we have focused on revenue recognition in specific cases and expense recharges, aiming to remind the reader of the importance of evaluating transactions comprehensively. It is crucial to focus on the substance, not just the form, of the transaction. As practitioners, we also welcome the forthcoming new legislation, which will provide much-needed clarity in this area.