Based on the approval of the consolidation package, which was signed by the President on 22 November 2023, a significant change was added to Act No. 563/1991 Coll., on Accounting, in the form of the possibility of determining the functional currency. This change was described in the last issue of the Newsletter by my colleague Stanislav Stipek (see LINK). Now the final form of the implementing decrees is taking shape, and therefore in this article I add further practical insights on this change.
The basic criteria under IAS 21 for determining the functional currency are:
The functional currency of an entity reflects the underlying transactions, events and conditions that relate to it. Once the functional currency is determined, it cannot be changed again until the underlying transactions, events and conditions change throughout the entity. This includes any reversion to the Czech crown.
For accounting purposes, the fixed rate is the general rate announced for the first day of the selected period of application of the fixed rate. The chosen period for applying the fixed exchange rate will be determined by the entity based on an internal regulation and will end no later than the last day of the accounting period.
According to the Accounting Act, it is important that the information in the financial statements is comparable. For this reason, it is necessary to convert the figures for the previous accounting period into the accounting currency.
The figures for the previous financial year will be converted at the general rate of exchange for the balance sheet date of the previous financial year. The figures for the previous financial year reported in the profit and loss account will be converted at the average general rate of exchange if using the general rate of exchange for the balance sheet date of the previous financial year would result in a substantial deviation from conversion at that rate. If the average general rate is applied to the income statement, the entity will apply the same average general rate to the statement of cash flows and statement of changes in equity, if it prepares them.
The average general rate will be determined based on general rates during the accounting period. The method of calculating the average general rate will be determined by the entity based on an internal regulation, taking into account fluctuations in the general rate during the accounting period.
The item "A.IV.2. Other profit or loss of previous years" includes differences arising from changes in accounting methods and differences arising from changes in the accounting currency.
The following aggregations in monetary units can be performed for the selected functional currency type:
In addition, the entity must disclose in an annex to the accounts the method used to convert foreign currency figures into the functional currency.
If the amount of share capital shown in the public register in which the entity is registered differs from the amount of share capital shown in the balance sheet, the entity must state the reason for the difference in an annex to the financial statements, including a description of the calculation showing the relationship between the two figures.
Jiří Sedláček
Who can change the functional currency?
Entities that make a voluntary election and whose accounting environment meets the criteria for the application of a functional currency can change the functional currency. The change cannot be made by selected entities defined by law and those entities that keep simple accounts. The functional currency of an entity will be determined in accordance with international accounting standards governed by EU law. The functional currency under this standard is the currency of the primary economic environment in which the entity operates.The basic criteria under IAS 21 for determining the functional currency are:
- consideration of the currency that predominantly influences the selling prices of goods and services (often the currency in which the selling prices of goods and services are set and paid) and the country whose competitive forces and laws predominantly determine the selling prices of goods and services;
- an assessment of the currency that primarily affects personnel costs, material costs and other costs incurred in the sale of goods or services (often the currency in which these costs are determined and paid).
- the currency in which resources from financing activities (i.e. debt and equity instruments) are generated; and
- the currency in which income from operating activities is usually accumulated.
The functional currency of an entity reflects the underlying transactions, events and conditions that relate to it. Once the functional currency is determined, it cannot be changed again until the underlying transactions, events and conditions change throughout the entity. This includes any reversion to the Czech crown.
Foreign currency to accounting currency conversion rates
For accounting purposes, the general rate is the rate of exchange for the foreign currency announced by the central bank responsible for the currency of account for the day of conversion if the rate is announced each business day or each week. The rate for the conversion date may also be the rate announced for the preceding day.For accounting purposes, the fixed rate is the general rate announced for the first day of the selected period of application of the fixed rate. The chosen period for applying the fixed exchange rate will be determined by the entity based on an internal regulation and will end no later than the last day of the accounting period.
How do I change THE functional currency?
A change in functional currency can only be made on the first day of the accounting period.According to the Accounting Act, it is important that the information in the financial statements is comparable. For this reason, it is necessary to convert the figures for the previous accounting period into the accounting currency.
The figures for the previous financial year will be converted at the general rate of exchange for the balance sheet date of the previous financial year. The figures for the previous financial year reported in the profit and loss account will be converted at the average general rate of exchange if using the general rate of exchange for the balance sheet date of the previous financial year would result in a substantial deviation from conversion at that rate. If the average general rate is applied to the income statement, the entity will apply the same average general rate to the statement of cash flows and statement of changes in equity, if it prepares them.
The average general rate will be determined based on general rates during the accounting period. The method of calculating the average general rate will be determined by the entity based on an internal regulation, taking into account fluctuations in the general rate during the accounting period.
The item "A.IV.2. Other profit or loss of previous years" includes differences arising from changes in accounting methods and differences arising from changes in the accounting currency.
What will the financial statements look like in THE functional currency?
The financial statements are prepared in monetary units of the functional currency of the accounts. The amendment does not contemplate the introduction of a separate reporting currency from the functional currency as permitted by IAS 21.The following aggregations in monetary units can be performed for the selected functional currency type:
- If the functional currency is Czech crowns, individual items in the financial statements are reported in whole thousands. If total assets (net) amount to at least CZK 10 billion, the entity may present individual items in the financial statements in whole millions.
- If the functional currency is other than Czech crowns, individual items in the financial statements are presented in whole units. If total assets (net) amount to at least 10 million units of the currency of account, the entity may report individual items in the financial statements in whole thousands. If total assets (net) exceed at least 10 billion units of currency, an entity may report individual items in the financial statements in whole millions.
In addition, the entity must disclose in an annex to the accounts the method used to convert foreign currency figures into the functional currency.
If the amount of share capital shown in the public register in which the entity is registered differs from the amount of share capital shown in the balance sheet, the entity must state the reason for the difference in an annex to the financial statements, including a description of the calculation showing the relationship between the two figures.
Recalculation of existing limits
Accounting criteria stated in Czech currency, e.g. categorisation of the CU or limits for statutory audit, are converted into the accounting currency of the entity if the accounting currency is not the Czech currency at the foreign exchange market rate announced by the Czech National Bank for the last day of the immediately preceding accounting period.Jiří Sedláček