Tax and accounting changes for 2021: What to look out for before preparing your financial statement
The year 2021 did not see many amendments to tax and accounting regulations. However, some changes made in 2020 will be applied for the first time this year. In this article, we‘ll take you through the changes in more detail:
One of the changes for 2021 brought about by the tax package approved just before the end of 2020 is an increase in the entry price threshold for the classification of fixed assets for the purposes of the Income Tax Act from the original CZK 40,000 to CZK 80,000. This provision applies to all acquired tangible property and all technical improvements completed and brought to a condition suitable for normal use from the 2021 tax year. However, the change could also be applied to property acquired and technical improvements completed from 1 January 2020. The use of this change in 2020 was optional, being left to the taxpayer‘s decision.
This transition is purely a tax and does not automatically give rise to a change in the fixed asset limit in the accounting. If an entity modifies its internal rules for classifying assets (and increases the limit under the Income Tax Act), it is still necessary to assess whether the „small assets“ charged to expense significantly affect the profit or loss and whether the requirement for a true and fair view remains satisfied. Otherwise, the costs need to be accrued.
Furthermore, for the purposes of the Income Tax Act, the intangible assets category is abolished, the term „intangible assets“ having been completely removed from the Act. This change is also purely tax-related; intangible assets remain unchanged in the accounting regulations. The abolition of the intangible assets category does not mean that accounting units can expense any amount. Accounting rules and principles must always be respected. Items that would significantly distort the economic result must therefore be accrued.
According to the transitional provisions, the old wording will continue to apply to intangible assets acquired before the entry into force of this Act, including technical improvements to such assets. As with tangible assets, the provisions on the cancellation of intangible assets could already be applied to assets acquired between 1 January 2020 and 31 December 2020.
Another novelty is extraordinary tax depreciation for assets classified in depreciation groups 1 and 2 (Section 30a). The exceptional depreciation option applies to assets acquired between 1 January 2020 and 31 December 2021. Assets acquired during this period and classified in these categories may be depreciated as follows:
1. OS = equal monthly depreciation over 12 months up to 100% of the entry price;
2. OS = straight monthly depreciation, first 12 months up to 60% of the entry price, next 12 months up to 40% of the entry price.
Depreciation must be determined to the nearest month, not year.
The same length will also apply to the minimum finance lease term (12 or 24 months) for the same defined assets.
Interpretation of the National Accounting Council
We would like to draw your attention to the interpretation of SIC I-42 regarding exchange differences on foreign currency receivables covered by an allowance. This interpretation was already approved in autumn 2020, but it is still a point of debate among experts. I-42 states that the exchange difference on a foreign currency receivable arises only from the value of the receivable less the related valuation allowance (expressed in the foreign currency), i.e. the net value of the receivable, which is a representation of the expected future cash flow. In terms of accounting, this transaction does not affect the profit or loss, but in the case of accounting provisions (not tax provisions under the Provisions Act), the application of this interpretation will affect the tax base.
A similar conclusion is reached in Interpretation I-43, which deals with foreign currency advances. According to this Interpretation, advances made in a foreign currency should not be recalculated at the balance sheet date at all, because the amount is already spent. The purpose of foreign exchange translation is that an entity is exposed to foreign exchange risk in respect of foreign currency transactions when the accounting for the foreign currency transaction involves a future cash payment. In the case of prepaid advances, the funds are already paid and have been issued, so there is no point in remeasuring them. The interpretations of the National Accounting Council are not legally binding; they are only recommendations of a group of experts. The tax administration does not fully agree with the wording of the interpretation and states that if a taxpayer wants to follow it, it must properly justify this procedure by referring to a true and fair view of the financial statements.
If you want to use the procedure recommended by the interpretations in practice, you need to justify it well and, above all, as accounting methods change, you need to do so systematically for all items and consistently in the future.
As noted above, the interpretations have not met with the full approval of the state administration, which has taken a reserved approach. On the other hand, representatives of the accounting profession and auditors in particular agree with the texts of the interpretations and recommend their use. However, if an entity follows the „old way“ and continues to convert all items in foreign currency, there is no risk of tax overstatement.