New Accounting Act
15 November 2022
In this article, we discuss the publication of the paragraph-by-paragraph text of the new draft Accounting Act for comment. We will present three major changes that the law is expected to introduce to the practice of financial accounting and reporting and for which it is essential to prepare in advance.
The long-awaited new Accounting Act is one step closer to becoming effective. At the end of October this year, the Ministry of Finance of the Czech Republic published a paragraph-by-paragraph text of the new law for comment. The law largely maintains the current state of accounting and financial reporting regulation, but also introduces a number of new rules for domestic accounting. The new law is scheduled to come into force on 1 January 2024, although it may not be adopted until 2023, meaning the time for implementing the new requirements may be relatively short. We should therefore address them now, although the approved form of the law may undergo some changes compared to the current text. We have selected three changes that may be time-consuming for some entities to implement, and at the same time are changes that, in our view, are highly likely to remain in the proposed text of the Act. While the current Accounting Act has 40 sections, the proposed new Act contains 172 sections. The Explanatory Memorandum to the new bill is 283 pages long. We can therefore strongly recommend that financial managers and chief accountants start familiarising themselves with the current wording of the new law and continue to follow closely the progress of its approval.
The first change we have selected is the work with exchange rate risk in accounting. The proposed amendment essentially codifies what the National Accounting Council has been gradually putting into practice in its interpretations. The new law will require entities to distinguish between monetary and nonmonetary receivables and debts. While monetary receivables will be further converted at the "closing" exchange rate at the balance sheet date, giving rise to exchange differences (in costs or income), non-monetary receivables will not be converted. We discussed this issue in more detail in the June issue of our newsletter using the example of advances, but we will now treat all foreign currency receivables and debts in the same way. We anticipate that the introduction of this "new feature" will require adjustments to the accounting software commonly used. While some developers have already reacted to the aforementioned interpretations of the National Accounting Council and prepared their software for this change, others have not yet addressed this issue. We therefore recommend that you check whether the accounting software you use supports the new way of working with foreign currency receivables and debts.
The second selected change will probably also require an intervention in the settings of the accounting programs, so we should start to deal with this change in due course. This is the obligation to appraise long-term receivables and debts at present value (rather than nominal value). Entities will thus have to appraise their long-term receivables and debts as the sum of the future cash flows arising from the receivable or debt discounted to the date of initial appraisal (recognition) in the accounts. This approach is also applied to provisions. The new draft Accounting Act includes a simplification for small and micro entities, which are allowed to opt out of the present appraisal if they so choose (this does not apply to public sector entities).
Finally, the third change we have selected will probably require intervention in accounting software. This is the introduction of the concept of a functional currency. However, unlike the first two changes described above, the use of a functional currency should be a voluntary option for entities, not an obligation. Accounting in a functional currency can be used, for example, by entities that realise most of their revenues in a foreign currency (e.g. EUR) and likewise have the majority of their expenses in that foreign currency. As the current legislation requires accounting in Czech currency units, these entities incur "unnecessary" accounting exchange gains and losses. By switching to the "functional currency accounting" regime, the entity avoids these exchange differences. This option is not available to public sector entities.