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Accounting and Audit

Accounting requirements
Changes in Czech accounting rules over the last few years have moved Czech accounting closer to International Financial Reporting Standards (IFRS).

The Act on Accounting serves as the main framework, while detailed guidance is provided in the Decrees on Double-Entry Accounting and Czech National Accounting Standards. The Decrees specify the rules and standards for the various types of accounting unit e.g. entrepreneurs, banks, insurance companies, non-profit organisations, as well as the municipalities and institutions financed by the state budget.

The main features of the accounting regulations are as follows:

  • All accounting records must be in Czech.
  • Standard rules and accounting principles must be observed.
  • The general structure of the accounts must be in accordance with a standard chart of accounts, although the specific details may vary according to individual organizational needs.
  • All businesses registered in the Commercial Register are obliged to use double entry bookkeeping. Single-entry accounting can no longer be used. Since 1 January 2016, accounting directives and the Accounting Act newly regulate not only double-entry bookkeeping, but also simplified accounting for certain small entities:
    • Associations
    • Trade unions
    • Employers 'organizations
    • Churches and religious societies
    • Hunting fellowships
    • Non-profit organizations
    • Endowments
    • Institutes
    • The community of unit owners, or
    • Housing and social co-operatives.
  • The depreciation of assets for accounting purposes is determined by the individual accounting unit based on the estimated useful life of the assets.
  • A physical count of inventory and fixed assets is required annually.
  • There are specific procedural and reporting requirements at the year end and a prescribed reporting format.
  • Annual financial statements must consist of a balance sheet, income statement and notes to the financial statements. A statement of cash flows and statement of changes in equity are mandatory for companies that have obligatorily audited financial statements.
  • Annual financial statements are published in the Commercial Register, and must be filed together with the company tax return at the relevant local tax office.
  • The Act requires that consolidated financial statements must be prepared for an accounting unit that is a managing or controlling entity. Subsidiaries and accounting units over which significant influence (20% of the voting rights) is exercised are deemed to be consolidated accounting units. For the purpose of consolidation all group entities are divided into 3 groups according to following criteria:

 

Type of entity

At balance sheet date and on a consolidated basis

Combined assets

Combined net turnover

Average number of employees during the accounting period

Obligation to prepare consolidated FS?

Small group entities

shall not exceed at least two of these limit values

CZK 100 mil.

CZK 200 mil.

50

NO (with the exception of public-interest entities)

Medium group entities

shall not exceed at least two of these limit values

CZK 500 mil.

CZK 1 000 mil.

250

YES

Large group entities

exceed at least two of these limit values

CZK 500 mil.

CZK 1 000 mil.

250

YES

 

Accounting principles and policies
The going concern principle, materiality, prudence, matching and consistency must all be observed during the preparation of Czech statutory financial statements. The true and fair view concept has also been introduced and the "fair value" accounting concept has been implemented in recent years. Legal form, however, frequently overrides substance.

Common accounting policies followed in the Czech Republic include:

  • Fixed assets are stated at acquisition cost and are depreciated over their expected useful lives. Tangible assets costing less than CZK 40,000 and intangible assets costing less than CZK 60,000 may be expensed in the year in which they are put into service.
  • Most investments are stated initially at acquisition cost and revalued to fair value at the balance sheet date.
  • Inventories may be accounted for using standard, average, or first-in, first-out principles. The last-in, first-out method is not permitted.
  • The entity may decide to amortize goodwill for longer than 5 years (max. 120 months).
  • Both realised and unrealised exchange gains and losses arising from monetary assets and liabilities denominated in foreign currency are recognised in the profit and loss account.

Under Czech accounting legislation, leased assets are generally treated as fixed assets by the owner, not by the lessee. Deferred income tax should be provided on all timing differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. A deferred tax asset is recognised only to the extent that there are no doubts that there will be future taxable profits available against which it can be utilised.

Auditing requirements
Audits are compulsory for:

  • all banks and mutual funds
  • foundations and certain other non-profit organisations
  • joint-stock companies which in both the current and the previous accounting period meet at least one on the following criteria:
    • turnover exceeds CZK 80 million
    • total assets exceed CZK 40 million
    • average number of employees exceeds 50
  • other accounting units that meet at least two of the above criteria.


The current Act on Auditors has been effective since March 2009. The authorisation of auditors is the responsibility of the Chamber of Auditors, which is also responsible for setting the standards for audits. Currently, there are around 1,300 registered auditors.

To add, the Chamber of Auditors has issued a number of auditing guidelines. These are based on the International Standards on Auditing as issued by IFAC, adjusted to take into account the local environment and local legislation, in particular the Act on Accounting and relevant Czech accounting legislation.

 

Source: CzechInvest