Accounting and Financial Reporting in the Czech Republic
1. System and scope of accounting legislation in the Czech Republic
The basic rules and regulations are set out in Act No. 563/1991 Coll., on Accounting, as amended (the “Accounting Act”). The Accounting Act refers to:
• Decrees of the Ministry of Finance of the Czech Republic (“MF CR”) issued for each type of organisation (banks and financial institutions, private enterprises, insurance companies, state-funded organisations, foundations, not-for-profit organisations, and political parties); and
• Czech accounting standards prepared and promulgated by the MF CR, which describe in detail the accounting procedures for each type of organisation (see previous point).
The Accounting Act also defines the basic requirements for preparing and publishing annual reports and the conditions that trigger the need for a mandatory statutory audit of financial statements. Companies whose securities are traded publicly are subject to stricter rules for publication of financial information, especially information that must be included within annual reports and the obligation to present financial information on an ongoing basis to the Czech National Bank, which acts as the common regulator of the financial markets. Yet more extensive requirements on these organisations are stipulated by the Act on Undertaking on the Capital Markets.
The main body regulating accounting and audit continues to be the state, but developments in this area are shared by a number of professional organisations: Chamber of Auditors of the Czech Republic, Union of Accountants, and, in particular, the all encompassing National Accounting Council. The latter first and foremost comments on bills and interpretations of accounting regulations. Although the interpretations of the National Accounting Council are not a component of accounting legislation and subsequently are not binding, their influence on practice is increasing.
2. Obligatory application of IFRS for issuers of public securities
A company whose securities are traded on a regulated public markets in the EU Member States has to compile and present both financial statements and consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union instead of financial statements prepared according to Czech regulations. All other private enterprises in the Czech Republic can use IFRS directly instead of Czech accounting regulations when compiling their consolidated financial statements.
The obligation described above to present financial statements in accordance with IFRS has no effect on the current corporate income tax liability. As tax laws are based on bookkeeping done in accordance with Czech regulations, companies who report in accordance with IFRS must also maintain accounting records sufficient to enable them to ascertain their business result in accordance with Czech accounting regulations. In practice, adjustment of the accounting records kept according to IFRS with the accounting records kept according to Czech accounting regulations is done outside the accounting system, with the reconciliation of the business results and equity being performed subsequently. If technically feasible, it is possible to do bookkeeping according to both IFRS and Czech accounting regulations in the accounting system directly.
Companies that are not issuers of public securities must, however, present financial statements prepared in accordance with Czech accounting legislation (thus voluntary transition to IFRS is not permitted).
3. The main differences between financial reporting according to Czech accounting regulations and IFRS
Financial reporting requirements stem from the fourth and seventh directives of the European Union (EU). Some important terms and principles are taken from IFRS (International Financial Reporting Standards), the most important being the priority that facts be portrayed truly and accurately. Other basic principles – such as the accruals principle, the principle of due care, and the principle of going concern – are also in accordance with internationally recognised financial reporting principles. This applies in particular to banks, financial institutions, and private enterprises. The accounting rules valid for other types of organisation are closer to valid tax regulations and the needs of the state. Despite the fact that Czech accounting principles and IFRS are becoming closer, the financial reporting and accounting system in the Czech Republic is still influenced strongly by tax regulations.
Despite the efforts to harmonise accounting regulations with IFRS in the past couple of years, there exist areas of significant difference between IFRS and Czech financial reporting. Such areas include, for example, financial leasing. Other areas where Czech regulations differ from IFRS are, for example, provisions, reporting of extraordinary items, accounting for revenues including long-term contracts (it is prohibited to use the percentage of completion method to account for revenues) and accounting for business combinations. Czech regulations also require that information in the financial statements be significantly more succinct than required by IFRS.
4. Publication and disclosure obligations
Each year, all subjects must submit electronically their approved financial statements to the commercial register maintained at the pertinent court. Subjects whose financial statements have to be audited by statutory auditors also have the obligation to present annual reports. These must include the audited financial statements as well as the auditor’s report and information about previous and anticipated economic and business developments. Companies controlled by other entities must also include in their annual reports a report on relationships with related parties in accordance with Section 66a of the Commercial Code. This report must also be reviewed by the company’s auditor.
Issuers of public securities are also obliged to disclose on an ongoing basis semi-annual reports to the Czech National Bank. The reports must contain the balance sheet and profit and loss account and some other financial information. These reports do not have to be audited however.
Ministry of Finance of the Czech Republic: www.mfcr.cz
Collection of Laws of the Czech Republic: www.mvcr.cz/sbirka
Czech Accounting Standards: http://business.center.cz/business/finance/ucetnictvi/ceske-ucetni-standardy/podnikatele/001.aspx
Czech National Bank: www.cnb.cz
Prague Stock Exchange: www.pse.cz
Chamber of Auditors of the Czech Republic: www.kacr.cz
Union of Accountants: www.svaz-ucetnich.cz
National Accounting Council: www.nur.cz