Foreign currency advances on fixed assets: I-43 upheld by Supreme Administrative Court

13 April 2022

Michal Proks, Manager |

In the fall of 2020, the National Accounting Standards Board issued Interpretations I-42 and I-43 regarding foreign currency receivables with an allowance and advances denominated in foreign currency. These interpretations resonated significantly, particularly during the financial statement period last spring. The procedures contained in them brought a breakthrough to the existing practice, led to significant tax implications and it was not clear whether they would be accepted by the Tax Administration. In January 2022, the topic of foreign currency advances was supplemented by Interpretation I-47, dealing with advances received. Now, a year later, some interpretations can be used. The recently issued case law of the Supreme Administrative Court 4 Afs 170/2021 has made a significant contribution to this.

In this case, the Tax Office assessed income tax on the company because during a tax audit it found that the company had not revalued advances for the acquisition of fixed assets that were provided in foreign currency, and thus no exchange rate gain was recognised in the financial statements. Although the tax assessment related to 2013, the case did not reach the administrative courts until the aforementioned interpretation of I-43 was in place.

Both the Regional Court and the Supreme Administrative Court rejected the argumentation of the Tax Administration that advances for the acquisition of fixed assets are a priori receivables, as there is no certainty that the purchase of the assets will be realised and, therefore, they must be overestimated as of the balance sheet date.

According to the SAC, the essence of an advance payment for the acquisition of assets is the payment of part of the purchase price. However, exchange rate risk and the associated obligation to revalue advances arise only if the entity expects a future cash flow. That is to say, only if, in the particular circumstances of the case, it is probable that the advance will be repaid. Indicators may include a delay in delivery, a dispute with a supplier, etc.

It can therefore be concluded that the advances provided – in our opinion not only for the acquisition of fixed assets, but also for inventories or services – are not subject to revaluation, with the exceptions mentioned above, and the interpretation of I-43 is accepted by the SAC. We reckon that a similar conclusion applies to advances received (I-47), where the situation is mirrored.

Slightly to the side are foreign currency receivables covered by an allowance. The reasons why only the net amount of the receivable (i.e. the amount of the receivable after the allowance) should be subject to remeasurement are described in Interpretation I-42. Although these reasons are in principle the same as those in I-43, i.e. the exchange difference should be accounted for only for receivables that are expected to be settled in the future, the Tax Administration's attitude has been very reserved on this matter, especially in situations where only an accounting allowance is created for the receivable (typically for foreign currency loans). According to the Tax Administration, it will always be up to the taxpayer to prove credible reasons why the exchange rate difference was not charged to the full gross value of the receivable.