The new accounting law is set to take effect on January 1, 2025, according to the latest plan. It will have a significant impact on accounting rules in the Czech Republic. As of the end of April 2023, what do we know about it?
The new accounting law will impact companies through the following changes:
- More entities will be required to use IFRS, while others will be allowed to adopt IFRS voluntarily.
- Leasing and rentals will be reported differently; the property will appear on the user’s balance sheet, not the owner’s.
- The use of functional currency other than CZK will be permitted.
- Valuation methods such as discounting and the use of market prices will be adopted from IFRS.
- The threshold for mandatory financial statement audits will be raised, reducing the number of companies required to undergo audits.
- Whether IFRS profit will be permitted as a tax base for Corporate Income Tax purposes is under consideration.
Implementation of the new accounting law coincides with the initiative to implement the Corporate Sustainability Reporting Directive (CSRD) into Czech legislation. It is not yet clear how the CSRD will be implemented in the Czech Republic, as several options are currently under discussion. According to EU rules, the CSRD must be implemented even before the new accounting law takes effect. However, it is unlikely that this deadline will be met. We have already presented an introduction to the CSRD in an earlier article – Like It or Not, Corporate Sustainability Reporting Is Coming.
The new accounting law also raises several serious concerns. As of April 2023, the solutions to these problems remain unclear.
The Corporate Income Tax base relies on accounting profit as a starting point for tax base calculation. The new accounting law will change accounting profits, and it is unclear how income tax legislation will be adjusted. It is crucial to successfully link the new accounting law with tax legislation. Failure to do so may lead to further delays in introducing the new accounting law, and in extreme cases, its cancellation to avoid problems with Corporate Income Tax.
It is crucial to successfully link the new accounting law with tax legislation.
It is unclear how accounting entities will handle comparable data in 2025 financial statements. Accounting records for 2025 will follow the new accounting law, while the 2024 figures will be based on the old rules. My estimate is that audited entities will need to restate 2024 figures to make them comparable with 2025, while non-audited entities may keep their 2024 records without updates.
Documents with lower legal force, such as decrees from the Ministry of Finance, will be canceled, and the new wording is unknown. These documents play a crucial role in understanding accounting rules.
The new accounting law aims to bring the Czech accounting system closer to the International Financial Reporting Standards (IFRS). Some concepts are taken directly from IFRS. Accounting experts will appreciate several areas in the new accounting law:
- Introduction of a conceptual framework into Czech accounting law.
- Emphasis on accurate reporting, rather than merely correct bookkeeping.
- A shift towards a principles-based system, departing from the current rigid rules.
The new accounting law will improve accounting rules in the Czech Republic. While its introduction will increase complexity for accountants initially, the long-term benefits of the new law will be appreciated. Let’s hope it successfully navigates the political process.