Exchange rate differences and subsidies in the financial statements
Proper accounting for grants, state aid and exchange rate differences in financial statements carries significant risks. Accountants, tax advisors and auditors are paying close attention to it right now. New interpretations of I-42 and I-43 on the topic of exchange rate differences for receivables and advances in foreign currency issued by the National Accounting Council have given rise to some controversy in professional circles.
State support provided to businesses in 2020 is relatively broad. Probably the largest group of state aid is direct operating subsidies, which can include the Antivirus programme or compensatory subsidy titles such as COVID-Rent or COVID-Culture. All these programmes (except for the Antivirus C programme, which I will discuss in the following paragraph) ultimately represent the revenue and income of the recipient of the subsidy. It is characteristic of these subsidy titles that the subsidised cost must first be paid by the entity from its own resources and only then will be reimbursed in the form of state aid / subsidy. Especially at the turn of the accounting period, doubts arise about when the income from the subsidy should be reflected in revenues. On the one hand, it is necessary to comply with the factual and temporal connection with the costs for the payment for which the subsidy is provided. On the other hand, there is a basic principle of accounting, namely the principle of prudence. This is supported by the interpretation of the National Accounting Council I-14, according to which the income from the subsidy should be reported in the accounting period when the acquisition of the subsidy becomes unquestionable. If you are unsure about which period to include the revenue from the Antivirus programme that subsidises December wages, ask yourself whether as at 31 December 2020 you had any doubts that the cost of the subsidy would be paid out from this programme. If you apply for a subsidy from this programme repeatedly and know from experience that they have been granted to you without any complications, you can safely account on the proceeds from the subsidy until December 2020. If you still have any doubts, you can refer to another interpretation, namely I-24, which deals with subsequent events. If, after the balance sheet date, but before the preparation of the financial statements for the year 2020, it can be confirmed that you have been granted a subsidy for the December costs, we again recommend recording the revenue from the subsidy until 2020.
The specificity of the Antivirus C programme was that instead of paying subsidies, the state proceeded to a general reduction in social security contributions for employees. Employers thus saved personnel costs on this component. In this case, it is not income from the operating subsidy, but a real reduction in the employer's costs, and we recommend that you also account for this fact in this way.
The second topic now widely discussed is the exchange rate conversions of receivables and payables as at the balance sheet date. The solution to this problem is aided by two recent interpretations of the National Accounting Council, namely I-42 and I-43. While I-42 describes a new approach to accounting for exchange rate differences on foreign currency receivables for which accounting adjustments have been made, I-43 changes the established rules for the so-called overdraft of advances paid due to the acquisition of fixed assets, inventories or services. According to I-42, exchange rate differences at the balance sheet date should be calculated not according to their gross value but according to the net value. Under I-43, advances provided that are not expected to be repaid in cash should not be translated at the closing exchange rate at all at the balance sheet date. I believe that many of you have already come across these new interpretations and formed your own opinion on whether it is appropriate to apply them in practice. Personally, I agree with the conclusions in these interpretations and see them as a step in the right direction. But I draw attention to the need to consider the process/technical impacts, the possibilities of our accounting software, the need to modify them and, finally, the tax implications. To date, we do not know of any official opinion of the Financial Administration on this matter. In my opinion, however, the accounting treatment should be fully respected for the purposes of determining the income tax base, and we recommend a prudent approach to the release of accounting adjustments and not to forget to make an adequate adjustment of the tax base.
If you agree with the idea of a different approach to exchange rate differences on monetary and non-monetary receivables contained in the two above-mentioned interpretations, you may have wondered why I-43 deals only with advances granted and not with advances received when the same principle can be applied to both groups of advances. Unfortunately, I do not have the answer to this question, but I can perhaps reveal that a separate interpretation will most likely be prepared for advances received in the near future and that it will apply the same principles as the already valid I-43.