Czech Accounting Set for Major Transformation

The Czech Republic is making a significant shift to “European” accounting. This change will prioritize financial reporting over traditional accounting practices, aiming to eliminate unnecessary formalities and simplify the overall accounting process.

The amendment to the Accounting Act will fundamentally alter the conditions and concepts of accounting in the country. “This amendment is in line with European legislation and international procedures. Accounting practices in the European Union and worldwide are constantly evolving, and legislators must adapt to these changes in the new legal framework, especially considering the growing importance of International Financial Reporting Standards,” explains Ondřej Havránek, Managing Partner of EY Law.

He also notes that the latest version of the amendment reflects important changes, including the transition to a digital economy and advancements in technology.

Currently, experts believe it is unrealistic for the new law to take effect on January 1, 2025, as originally planned. This skepticism stems from procedural delays in the Chamber of Deputies and the extensive nature of the proposed changes.

Changes for Individuals

Among the most significant changes brought by the amendment are those that regulate the reporting obligations for individuals. The goal of the new legislation is to simplify these requirements so that accounting is understandable even to non-professionals.

Previously, individuals were required to maintain accounting records if their business turnover exceeded 25 million Czech Crowns in the preceding calendar year. However, in the new version of the law, individuals are not included in the exhaustive list of accounting entities. As a result, an individual will never be required to maintain accounting records and will only need to keep what is known as tax records.

At the same time, the current rule allowing individuals to voluntarily maintain accounting records at their discretion remains in place.

The categorization of accounting entities is also changing. The threshold for inclusion will be raised, and at least two out of three criteria must be met.

All medium and large accounting organizations will still have audit obligations, and they will now also include their parent organization, which prepares consolidated financial statements.

Mandatory Audit

A notable change in the bill is the increase in the thresholds for mandatory audits of financial statements, which could rise by up to three times. Now, only organizations that meet at least two of the following three criteria will be required to conduct an audit:

• Turnover exceeding CZK 240 million
• Asset value exceeding CZK 120 million
• More than 50 employees

Changes for Non-Profit Organizations

If adopted in its current form, the amendment will also impact some non-governmental non-profit organizations. The new provision will allow these organizations to opt out of record-keeping requirements by documenting this decision in their relevant founding documents.

“However, maintaining records will still be allowed on a voluntary basis. This can occur, for example, at the request of participants, business partners, or credit providers, based on the conditions of subsidized programs and similar requirements,” notes David Hlaváček from EY.

It’s important to clarify that the proposed amendment does not mean non-profit organizations are exempt from keeping any records. They are still subject to relevant provisions of the Civil Code regarding basic management and accounting.

“The changes will affect non-profit organizations that are not VAT payers, have annual cash receipts of no more than three million crowns, and whose assets do not exceed three million crowns,” explains David Hlaváček.

Accounting in Foreign Currencies

The amendment also reflects a change that took effect on January 1, 2024, allowing accounting entities to maintain records in currencies other than the Czech crown, such as the euro, US dollar, or British pound. The amendment aims to expand the functional currency options to include currencies beyond those currently in use, effectively giving accounting entities the flexibility to choose virtually any currency for accounting and reporting.

Why is the Accounting Act Being Changed?

The upcoming version of the Accounting Act introduces several changes that will impact all types and sizes of accounting entities, representing a significant step toward aligning Czech legislation with modern international standards. “The main goal is to simplify the rules and procedures to make accounting easier and more efficient, which should help Czech entrepreneurs compete better in the global market,” says Michal Sladký, a legal expert at EY.

The primary purpose of accounting is to accurately reflect the economic position of an entity and enable an objective assessment of its condition through proper financial statement processing. The focus will shift to financial statements rather than traditional accounting and bookkeeping practices. The aim is to eliminate unnecessary formalities and simplify accounting for smaller companies.

“The changes in the law are also intended to ensure that our accounting rules align more closely with those of other countries, facilitating international trade and investment. It is therefore important for all accounting units to familiarize themselves with these changes as soon as possible,” experts advise.
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