Advances provided in foreign currency - current court statement

June 29, 2021 Czech Republic

The Regional Court in Ústí nad Labem recently ruled in a dispute concerning the obligation to revalue an advance for the acquisition of assets paid in a foreign currency.

The subject of the dispute was the issue of the revaluation of an advance for the acquisition of fixed assets, which the taxpayer paid in a foreign currency in the tax period in question. According to the tax administrator, the taxpayer was under the obligation to revalue this advance as of the balance sheet date and thus report the exchange rate difference. However, the taxpayer did not do so and the tax administrator assessed the related corporation tax.

The taxpayer defended himself by filing an appeal with the Appellate Financial Directorate (OFŘ), which, however, was rejected. He subsequently decided to file an action against the decision of the OFŘ with the Regional Court. The taxpayer's main argument was the fact that the advance provided did not, by its nature, constitute a receivable, as claimed by the tax administrator, and was the fulfillment of a future or existing liability. He further objected that fixed assets are valued based on acquisition prices, which do not include exchange rate differences, while advances paid for the acquisition of fixed assets are part of an asset valuation.

The Regional Court agreed with the taxpayer's argument and annulled the contested decision of the OFŘ and returned the case for further proceedings. It stated in its just that if the aforementioned advance payment were revalued, it would lead to a breach of a true and fair view of the subject matter of the accounts. Advances provided represent the settlement of future or, according to the conclusion of a contract, existing debt, when the amount of the advance is not to be returned to the entity in the future, and thus expands its assets.

The OFŘ challenged the judgment by cassation appeal and submitted the case to the Supreme Administrative Court for assessment. The conclusion of the Regional Court matches the recently issued Interpretation of the National Accounting Council I-43, which dealt with the same issue. We will here briefly summarise the main points of this interpretation.

Interpretations of the National Accounting Council

The interpretations express the expert opinion of the National Accounting Council on the practical application of Czech accounting rules. These interpretations are not legally binding. Their main purpose is to help accounting entities find the right solution for the accounting and reporting of specific transactions, an accounting solution for which does not exist in the Czech accounting regulations or is carried out inconsistently or incorrectly in practice.

Interpretation I-43: Advances provided in foreign currency

Interpretation I-43 (the "Interpretation") was approved on 19 October 2020 and is available here. Its main objective is to establish the accounting treatment for the reporting in the financial statements of advances provided in a foreign currency.

If we were to summarize very briefly the approach proposed in this Interpretation, then "exchange rate risk occurs only for foreign currency assets and liabilities where any change in the exchange rate affects the value of future cash flows." Therefore, if the return of the provided advance is not likely, then the advance provided as a separate (component) part of the total acquisition price of the purchased asset or service does not represent a foreign currency receivable and there is no exchange rate risk associated with it.

What is the opinion of the financial administration on this Interpretation?

The Financial Administration emphasizes in particular that the interpretations of the National Accounting Council represent the opinion of a certain group of experts and have no legal binding force. In general, the financial administration does not contradict the Interpretation and admits it as a supporting argument where there is no direct legal regulation. However, if such regulation exists in Czech legal regulations, then from its point of view the taxpayer may deviate from such a binding procedure only in exceptional cases precisely defined in the Accounting Act, and only regarding the principle of a true and fair view of the subject of the accounting.

We will continue to monitor the situation and keep you informed of further developments.

Petra Holečková
Petra Holečková Junior Accountant
ASB Czech Republic