On Monday, 15 January, the Ministry of Finance published the long-awaited draft law on accounting, which is to replace the existing one from 1991 and which should bring it in line with international practices. The ministry published the draft after incorporating all the comments, of which a total of 991 were submitted. The draft is now ready to be submitted to the Legislative Council of the Government for discussion so that it can be submitted to the Chamber of Deputies. It is provisionally expected to take effect from 1 January 2025.
The draft law places much greater emphasis on financial reporting and its objectives, i.e. to provide external users with accounting information useful for their economic decision-making, forecasting future cash flows and assessing the consequences of the actions of the person responsible for the management of the entity. It also sets out the requirements for the quality of accounting information, which must be relevant, reliable, timely, understandable, verifiable and comparable. Accounting is then to be understood as a necessary means of ensuring a proper and reliable basis for financial reporting.
The proposal redefines the elements of the financial statements, which are assets, debts, equity, income and expenses. It also defines related concepts such as receivables, derivatives and provisions.
The new proposal is conservative in principle for the area of own accounting, i.e. it does not envisage revolutionary changes in this area and rather prefers the path of "evolution". Below are the most important areas where fundamental changes are also being made in the accounting area:
Present value
A new valuation method based on present value, i.e. valuation at the discounted value of future net cash flows, is being implemented.
Provision for liquidation
If the entity knows that it will have to dispose of the asset at the end of its life or useful life, it shall be given the option of including a provision for disposal in the cost of the asset.
The entire process of preparing consolidated financial statements will also undergo significant changes, where the role of the parent company and the obligation to prepare consolidated financial statements will be clarified. The forthcoming decrees should include the method of calculating the values for the size of consolidation units, not only on a consolidated basis, but now also for the simple sum of values. At the same time, they will include the definition of the content of the items of the consolidated financial statements and the method of their preparation.
The bill includes a change in the obligation to audit financial statements. The new obligation to audit regular financial statements and interim financial statements is imposed on large and medium-sized entities. Specifically, these are entities that exceed at least two of these criteria:
The expected effective date of the new Accounting Act is 1 January 2025. The Ministry of Finance itself states in the settlement of comments that the effective date of the Act will depend on the implementation of all related regulations, such as implementing decrees and other changes to related laws.
The draft law places much greater emphasis on financial reporting and its objectives, i.e. to provide external users with accounting information useful for their economic decision-making, forecasting future cash flows and assessing the consequences of the actions of the person responsible for the management of the entity. It also sets out the requirements for the quality of accounting information, which must be relevant, reliable, timely, understandable, verifiable and comparable. Accounting is then to be understood as a necessary means of ensuring a proper and reliable basis for financial reporting.
The proposal redefines the elements of the financial statements, which are assets, debts, equity, income and expenses. It also defines related concepts such as receivables, derivatives and provisions.
The new proposal is conservative in principle for the area of own accounting, i.e. it does not envisage revolutionary changes in this area and rather prefers the path of "evolution". Below are the most important areas where fundamental changes are also being made in the accounting area:
Changes to the accounting for leases and rentals
The proposed lease accounting treatment is based on the principle of substance over form. It is therefore proposed to treat leasing as a way of acquiring a 'right of use' (with de facto substance if it is a right of use over a tangible asset), i.e. to account for this operation in principle in a similar way to a purchase. The specific accounting treatment would then be based on the concept of a lease under international accounting standards. The fundamental change would thus be that the lessee of the asset, if the conditions for recognition are met, would recognise the right of use in its balance sheet under the relevant tangible asset item and depreciate the asset. At the same time, among other things, the application of discounting of individual amounts over time is envisaged.Goodwill
Under the current treatment, the equivalent of goodwill was recognised as a valuation difference to the assets acquired or as a consolidation difference. The difference will now be recognised in intangible assets as goodwill and amortised over a specified period. Negative goodwill will be recognised once in the income of the period to which it materially relates.Subsidies
The entity shall recognise the subsidy received as deferred income. The grant shall subsequently be recognised in income over the period specified in the terms of the grant for which the entity will use the asset for its intended purpose under the terms of the grant.Present value
A new valuation method based on present value, i.e. valuation at the discounted value of future net cash flows, is being implemented.
Provision for liquidation
If the entity knows that it will have to dispose of the asset at the end of its life or useful life, it shall be given the option of including a provision for disposal in the cost of the asset.
Conversion decision day
The effective date of the conversion shall no longer result in the end of the existing accounting period and the beginning of a new one, but the entity that is a party to the conversion and that does not cease to exist on the conversion shall only begin accounting for the change caused by the conversion from the effective date, but its existing accounting period shall continue.More news
In addition, the Ministry of Finance has submitted with the draft law theses of implementing decrees, which will add some accounting methods, the layout and scope of financial statements, the content of some items in the financial statements and the indicative chart of accounts. The draft of these theses for business and non-profit entities includes, for example, proposals concerning the obligation to report assets at their net value, i.e. to report assets after taking into account depreciation and amortisation, the ordering of information in the notes to the financial statements according to the information in the financial statements, the division of provisions into short-term and long-term, and other changes.The entire process of preparing consolidated financial statements will also undergo significant changes, where the role of the parent company and the obligation to prepare consolidated financial statements will be clarified. The forthcoming decrees should include the method of calculating the values for the size of consolidation units, not only on a consolidated basis, but now also for the simple sum of values. At the same time, they will include the definition of the content of the items of the consolidated financial statements and the method of their preparation.
The bill includes a change in the obligation to audit financial statements. The new obligation to audit regular financial statements and interim financial statements is imposed on large and medium-sized entities. Specifically, these are entities that exceed at least two of these criteria:
- assets over 120 mil. CZK,
- turnover over 240 mil. CZK,
- average number of employees over 50.
The expected effective date of the new Accounting Act is 1 January 2025. The Ministry of Finance itself states in the settlement of comments that the effective date of the Act will depend on the implementation of all related regulations, such as implementing decrees and other changes to related laws.