Changes in Czech Accounting Legislation for Entrepreneurs

As at 1 January 2018, there are some changes that need to be mentioned hereto.

Changes that impact the primary financial statements

  • There is an obligation to present comparative figures in all the primary financial statements, and therefore also in the cash-flow statement that was subject to an exemption from 1 January 2016.
  • The company can decide whether to present Prepayments and accrued income and Accruals and deferred income in a separate section of the financial statements as until now, or whether these items will be transferred in the category of Receivables and Payables, respectively. The company is obliged to decide on such treatment on the balance sheet date at the latest. A combination of both methods is not allowed.
  • In case the company has retained earnings and accumulated losses, its net final balance is to be recognised on one balance sheet row called Retained earnings or accumulated losses (+/-).

Criteria for the recognition, measurement and presentation of information relating to derivatives presented in the notes to the financial statements are directly linked in decree no. 500/2002 Col. for entrepreneurs to decree no. 501/2012 Col., that is dedicated to banks and other financial institutions, valid as at 31 December 2017. The exemption not to recognise the embedded derivatives separately is no longer valid.

If the period of the useful life of goodwill or other developments cannot be estimated, the company decides on the length of such a period as being between 60 and 120 months. The estimated useful life together with its reasoning is then described in the notes to the financial statements.

The most significant change for the accounting period starting on 1 January 2017 was the new requirement of the Act on Accounting concerning the disclosure of a fairly detailed description of non-financial information in annual reports, consolidated annual reports or in separate reports. This requirement only applies to large companies that are subject to public interest and only if their average number of employees as at the balance sheet date exceeds 500 employees through the period. The same criteria applies to an accounting unit consolidating a large group of accounting units. The fact of whether a company prepared and disclosed non-financial information in the annual report, consolidated annual report or a separate report is subject to the auditor’s verification.

However, completely radical changes became effective from 1 January 2016, so the year 2016 has been quite crucial.

Changes in Act on Accounting:

  • Introduction of the definition of public interest entities to include entities listed on a regulated market, banks, credit institutions, insurance undertakings and pension funds.
  • Introduction of new categorisation of accounting units, depending on whether the entity has as of its balance sheet date exceeded at least 2 of the following criteria of total assets, net revenue and average number of employees:
    • Micro accounting unit (< CZK 9,000,000; < CZK 18,000,000; < 10);
    • Small accounting unit (< CZK 100,000,000; < CZK 200,000,000; < 50);
    • Medium-sized accounting unit (< CZK 500,000,000; < CZK 1,000,000,000; < 250);
    • Large accounting unit (exceeds values for medium-sized companies or is a public interest entity or is a selected accounting unit).

Where, in the first accounting period following its inception, an entity applies the legal framework for a unit category that can reasonably be expected to meet its terms and conditions as at the balance sheet date of the first financial year. Moving to a different unit category occurs when the entity exceeds or ceases to exceed the criteria in two consecutive balance sheet dates of regular financial statements. This transfer is effective from the beginning of the immediately following accounting period. The same time test also applies to determining the unit category of groups of entities, see below.

  • Introduction of new categorisation of groups of accounting units (i.e. groups comprising the consolidating and consolidated entities), depending on whether the group has as of its balance sheet date exceeded at least 2 of the following criteria of total assets, net revenue and average number of employees (calculated on consolidated basis):
    • Small group (< CZK 100,000,000; < CZK 200,000,000; < 50);
    • Medium-sized group (< CZK 500,000,000; < CZK 1,000,000,000; < 250);
    • Large group (exceeds values for medium sized groups).
  • The financial statements of all entities, other than micro and small entities, newly have to include a separate statement of cash flows and statement of changes in equity.
  • Small and micro entities, whose financial statements are not required to be audited, do not have to publish a statement of profit or loss, if not required by another regulation.
  • Accounting for events after the balance sheet date has been clarified so that events that have occurred before the balance sheet date but became known to the company only after this date have to be adjusted in the financial statements. Events that have occurred subsequent to the balance sheet date have to be disclosed in the financial statements, if material.
  • Introduction of the definition of material information, the omission or incorrect presentation of which is likely to influence the decision of users of the financial statements. Materiality of individual facts is to be considered in conjunction with similar pieces of information.
  • Rules for the mandatory verification of financial statements by an auditor: While the criteria for mandatory audit remain the same, there is a change in their calculation. Total assets category is newly represented by a net instead of a gross amount. In terms of turnover, implicit change was implemented by moving activations items and changes in inventory from own business from revenues to costs. Such calculation used for 2016 will be applied also for the previous period.
  • Medium-sized, small and micro entities have been liberated from the need to include non-financial information as part of their annual reports.
  • Change of the definition of provisions: Provisions are created to settle liabilities or expenses, the nature of which is clearly defined and for which as at balance sheet date it is either probable or certain that they will be incurred, but their amount or timing of their realisation is uncertain. Czech Accounting Standard further allow accounting for provisions based on special legal acts, i.e. Provisions Act. It is for example an accounting for provision for repairs of assets.
  • Fair value definition has been amended to also include values calculated based on valuation models.

Changes in decree on accounting:

  • Information in the notes to the financial statements should be ordered in alignment with the order of individual items in the balance sheet and profit or loss.
  • The structure of the balance sheet and profit or loss have been changed and a new condensed structure has been introduced (§ 3a and Appendix 1 to decree on accounting).
  • The extent of information required to be disclosed in the notes to financial statements has been amended based on new categorisation of accounting units:
    • large entities proceed in line with §39, §39b and §39c;
    • medium sized entities proceed in line with §39 and §39b;
    • small and micro entities, whose financial statements have to be audited, proceed in line with §39 and §39a;
    • small and micro entities, whose financial statements do not have to be audited, proceed in line with §39.
  • Establishment costs can no longer be activated on the balance sheet.
  • Extraordinary income and expenses have been abolished. In this relation a new requirement was introduced based on decree no. 500/2002 Col., which expects the unit to state in the Notes amount and nature of each revenues and costs item, which is extraordinary based on its nature or volume.
  • Definition of expenses eligible for capitalization to inventories has been amended to include all relevant costs incurred in bringing the inventory to its present location, i.e. also proportionate share of relevant indirect fixed costs.
  • Movement of the activation items and changes in inventory from own business from revenues to costs.
  • Introduction of newly required disclosure of items which were compensated in the balance sheet in accordance with the accounting methods.
  • Extension of disclosure requirements in the notes to consolidated financial statements (§ 67).
  • Introduction of following exceptions from the mandatory disclosures:
    • Information about remuneration of board members, controlling and administration bodies, if such information would lead to a disclosure of the remuneration of a specific member of respective body
    • Information about a division of revenues from sale of goods, products, and services by category of activity or market regions (required only from large companies), if a disclosure of such information could significantly harm the accounting entity.
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    Marek Richter – Partner
    PricewaterhouseCoopers
    Audit, s.r.o.
    nám. Svobody 20, 602 00 Brno
    +420 542 520 170
    marek.richter@cz.pwc.com

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    Petr Mališ – Director
    PricewaterhouseCoopers
    Audit, s.r.o.
    nám. Svobody 20, 602 00 Brno
    +420 542 520 210
    p.malis@cz.pwc.com