New Accounting Act has clear outlines
The law promises to reduce the administrative burden and move accounting towards international standards. Together with implementing decrees, accounting standards, and a law amending related legislation including the Income Tax Act, the act should come into effect on 1 January 2024. Its draft has already gone through an external comment procedure, but the text of the accompanying regulations has not yet been made public.
Main objectives
One of the objectives of the new regulation is to align the national concept with the globally accepted accounting frameworks so as not to conflict with the requirements of EU law. One example is a change in finance leases where their accounting treatment shall be similar to the acquisition of assets by purchase. The new regulation should reduce the administrative burden while enhancing the quality and transparency of financial statements. The law primarily puts emphasis on financial reporting rather than on how individual accounting transactions are kept and accounted for.
Extended applicability of international accounting standards
The new law extends the obligation or possibility to use international accounting standards. These should be mandatory for corporations whose investment securities are traded on an EU regulated market as well as for most financial institutions including investment funds. International accounting standards could then voluntarily be used by taxable entities subject to the Specialised Tax Authority or by entities that expect to be included in the consolidated financial statements prepared in accordance with international accounting standards. In connection with this, it will be important from a tax perspective to see whether an expected change in the Income Tax Act allowing the use of the financial statements prepared in accordance with international accounting standards to determine the tax base will be implemented.
Functional currency concept, changes applicable to audits, and simplifications for non-profit organisations and foreign companies
As a new concept, the law introduces the application of the functional currency, i.e., the currency in which the entity carries out the majority of its activities. The currency used for accounting may be the Czech crown or a foreign currency if it is the functional currency and if the entity has opted for it. This change would therefore eliminate foreign exchange differences relating to the functional currency.
Changes to the criteria for mandatory audits are also being considered. The new rules should apply to large entities, medium-sized entities, and parent entities fulfilling the consolidation obligation. An alternative proposal is to increase current limits (total assets of CZK 65 million, annual net turnover of CZK 130 million, average number of employees of 50 per accounting period).
The new law should considerably simplify the administration of non-profit organisations, natural persons, and branches of foreign entities: these should not be treated as accounting units. Consequently, under this law they will not be required to keep accounting records.
The new law also implements an EU directive that imposes an obligation on selected companies to publish an income tax report.
Effectiveness from 2024
Considering the ongoing legislative process and the extensive number of comments (e.g., from the Czech Chamber of Tax Advisors, the Czech Chamber of Commerce or the CNB), we can expect numerous changes and amendments. The final draft submitted to the deputies may therefore undergo significant changes. It will also be important to monitor subsequent changes in secondary regulations and related laws, expected to be published in the first months of 2023.
Although the set of these regulations is not expected to take effect in most cases until 2024, given the significance of the planned changes, we recommend assessing their impact now.