Recently, there has been an effort to unify the basic principles of accounting according to Czech legislation with the IFRS (International Financial Reporting Standards).
However, significant differences are still apparent in many areas, which can then have a significant impact on financial statements being prepared.
Application of IFRS in the Czech Republic
The basic legal norm in the Czech Republic for all types of accounting units is Act No 563/1991, on Accounting (the Accounting Act). On the basis of this law, implementing decrees are then issued by the Ministry of Finance (in particular Decree No 500/2002, which implements certain provisions of Act No 563/1991, on Accounting, as amended, for accounting units that are businesses accounting using the double-entry bookkeeping system) and Czech Accounting Standards (CAS) which accounting units are required to comply with. One exception here are trading companies which are issuers of investment securities admitted to trading on a European regulated market, and which are required to keep accounts and draw up financial statements in accordance with IFRS. Accounting entities that are required to submit consolidated financial statements in accordance with IFRS and are a controlled entity or an entity under common control may voluntarily decide to use IFRS for accounting and preparation of their separate financial statements. The accounting units then modify the individual areas with their own internal guidelines.
Financial statements
Financial statements according to Czech accounting legislation always consist of a balance sheet, a profit and loss account and annexes. In some cases, a statement of cash flows and a statement of changes in equity is included. Czech law divides entities into four categories (micro, small, medium and large), each with different requirements and rules regarding the scope and preparation of financial statements. All statements present data for the current and comparison periods, i.e. for two years. Czech legislation pays particular attention to the uniform application of accounting methods and procedures.
Financial statements according to IFRS are based primarily on International Accounting Standard IAS 1, which specifies the required format and content of financial statements. These always include a financial position statement, a statement of profit or loss and other total income for the period, a statement of changes in equity, a statement of cash flows and a commentary on the statements. For all statements, a company is required to provide comparative information for the current and prior periods, including related items in the commentary. If an accounting unit applies new accounting policies retrospectively or makes other retrospective adjustments to its financial statements, it is required to prepare a financial position statement for the beginning of the comparable period, resulting in a total of three financial position statements. IFRS focus mainly on the content structure of the final statements.
IFRS and corporation tax
Thus, accounting units that keep accounts in accordance with IFRS currently when calculating their tax base cannot work from their accounting results using IFRS. The tax base must always be based on the business result according to Czech accounting legislation. Accounting unites may therefore choose from one of the following options:
- keep duplicate accounts – separately according to Czech legislation and separately according to IFRS,
- keep accounts in accordance with IFRS and then adjust business results for the differences between IFRS and Czech accounting legislation,
- keep accounts in accordance with Czech accounting legislation and then when preparing the financial statements in accordance with IFRS only take into account differences through additional adjustments.
During the year, an accounting unit can prepare for these adjustments using, for example, a separate area defined directly for adjustments or by differentiating cost, income and balance sheet items into specific analytical accounts.
Currency
Under Czech law, accounting units are required to keep accounts and prepare financial statements in the monetary units of the Czech currency.
IFRS (specifically IAS 21) stipulates that each entity should choose its functional currency, which is considered to be the currency of the primary business environment in which it operates. The primary objective is to eliminate exchange rate differences using the currency in which the accounting unit primarily generates cash.
An example is an accounting unit operating on the Czech market, which, however, trades primarily in euros, with a significant share of its transactions taking place in euros. According to Czech legislation, this company must keep its accounts in Czech crowns, according to IFRS, the company will choose the euro as its functional currency for bookkeeping purposes.
We will provide you with more detailed information and differences in selected specific areas of accounting in our forthcoming articles.
