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Bookkeeping in foreign currency: how to determine functional currency and make changes to accounting

The Ministry of Finance has published a draft amendment to the decree for entrepreneurs implementing the Act on Accounting. The new wording of the decree is related to the changes introduced by the consolidation package: provisions regulating the method of determining the functional currency and the procedure for changing the currency used for bookkeeping will be added to the decree. The draft decree is now in the comment procedure; its effectiveness will depend on the effective date of the consolidation package.

Functional currency

An entity can keep accounts in euros, US dollars, or British pounds if such a foreign currency is its functional currency. A company’s functional currency is defined in accordance with international accounting standards as the currency of the primary economic environment in which the entity carries out its activities. After switching to one’s functional currency, it is not possible to switch back unless the functional currency changes.

If an entity decides to change its accounting currency, it shall state and justify this decision in the notes to the financial statements, both in the financial statements for the period in which the functional currency changed and for the period immediately preceding it. The financial statements shall be prepared in the currency in which accounts are kept (accounting currency). Individual items of the financial statements continue to be presented in whole thousands, with the exception of companies whose assets exceed 10 billion units of the accounting currency.

Transition to a functional currency

When switching to its functional currency, an entity is obliged to restate the data for the prior accounting period using the general FX rate at the balance sheet date of the prior accounting period.

The data in the prior-period income statement can be translated at the average general FX rate if the use of the general FX rate would lead to significant misstatements. The average general FX rate is determined based on the general FX rates in the accounting period, using a method of calculation to be determined by the entity in an internal regulation. Any translation differences shall be reported as other retained earnings. The draft decree does not deal with any tax implications.