What changes can we expect in the new Accounting Act in the Czech Republic by 2025?

Amendments to the Czech Republic’s Accounting Act are expected to come into effect in 2025. In addition to modernizing accounting, the law aims to change some established accounting methods, reduce administrative burdens, and ensure compatibility with international accounting standards.

At the beginning of 2023, the Czech Ministry of Finance published the long-discussed draft of the Accounting Act. Compared to the current Accounting Act, which has been in effect since 1991, accounting will be modernized, particularly in the area of financial reporting in the Czech Republic.

What purpose do the Czech Republic’s accounting legislation modifications serve?

The law is premised on the need to modernize financial reporting. The modernization will have an impact on financial reporting, which is required by law to present a true and fair view of the company’s financial status, not only the accounting itself.

As a result, the law is projected to minimize administrative burdens while also improving legislative clarity. Furthermore, the improvements seek to assure compliance with European Union regulations and conceptual foundations, as well as to improve the descriptive value of financial reporting for users. Finally, and critically, the proposed legislation aims to digitize accounting.

The adjustments are scheduled for 2025. As a result, the law’s intended effective date is January 1, 2025. During the commenting procedure, about 1,000 remarks were provided, approximately half of which were deemed noteworthy.

Reduction of Administrative Burden and IFRS

The amended law is also aimed at reducing the administrative burden on accountants, for example, by limiting the range of entities required to maintain accounting records. Individuals will now be able to keep accounting records voluntarily. Non-profit organizations, whose annual income and total assets do not exceed 3,000,000 Czech crowns per year and who are not VAT payers, will also be able to take advantage of this exemption.

However, the amendment also expands the range of entities for which the use of International Financial Reporting Standards (IFRS) will be mandatory. Accounting according to international standards is applied, for example, by entities whose parent companies are foreign or connected with foreign states, or those that conduct business activities in regulated sectors.

Reduction in Administrative Burden and IFRS

The new law also aims to reduce accountants’ administrative burden, for example, by limiting the types of companies needed to keep accounting records. Individuals will now be able to maintain accounting records voluntarily. Non-profit organizations with an annual income and total assets of less than 3,000,000 Czech crowns and who do not pay VAT will also be eligible for this exemption.

However, the modification broadens the scope of businesses for which International Financial Reporting Standards (IFRS) will be mandatory. Accounting according to international standards is used, for example, by firms whose parent corporations are overseas or have relations to foreign countries, as well as those who operate in regulated industries.

Changes in Accounting and Reporting in the Czech Republic

Other substantial changes to the legislation will have an impact on accounting itself and, as a result, how accounting information is represented in financial statements. The changes will have an impact on how grants, goodwill, and leases are accounted for. The ability to use the present value method will be an exciting addition. Changes will also affect accounting periods, reserves, and cost accounting.

Changes will also affect organizations that prepare consolidated financial statements. The new law should not only govern the creation of consolidated financial accounts, but also explain some key issues.

However, the Accounting Act is not the only legal legislation governing accounting and financial reporting in the Czech Republic. In addition to the Accounting Act, other legislative documents include decrees, orders, and Czech accounting standards. As a result, it is required to alter the decrees governing the Act’s application, in which accounting procedures, financial reporting formats, and so on may be adjusted (or enlarged). Thus, the effectiveness of the Act is determined not only by the adoption of revisions to the Act itself, but also by the execution of amendments in linked legislative documents.

Present Value Method

A very interesting innovation is being introduced in the valuation area, where currently an organization can only assess its debts and accounts receivable at their nominal value. The nominal value should now be used primarily to assess cash equivalents (depending on the kind of firm). Accounts receivable and payable should be assessed to reflect the amount of cash that the company will or is required to receive over time.

Long-term liabilities and accounts receivable will be assessed at their present value, which, according to the explanatory note, will take into account “what the organization will actually receive (in the case of accounts receivable) or how much it will actually need to pay (in the case of debts).” However, not all enterprises should be required to conduct a present value evaluation.

The present value assessment method involves calculating the future value of cash that the organization will need to spend or receive in the future over a certain useful life span (the term of repayment of liabilities and accounts receivable).

Increase in Threshold for Mandatory Audit

A welcome change could be the increase in threshold values for mandatory financial statement audits. Thus, from the moment the law comes into effect, the audit obligation will apply to large and medium-sized enterprises exceeding two of the established criteria, namely: assets exceeding 120 million crowns; turnover exceeding 240 million crowns; and an average number of employees greater than 50 people.

Changes in the Reporting Period

The current (and future) basic rule is that the reporting period consists of twelve consecutive calendar months. However, corporations included in consolidated financial statements will need to determine their accounting period in calendar weeks (52 calendar weeks), following international accounting standards. The accounting period consisting of calendar weeks should align as closely as possible with the definition of a calendar month.

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