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Bookkeeping in foreign currency

The new Accounting Act went into the comment procedure in October 2022. We would like to keep you up to date with some of the changes that await us in this context. In this article, we will deal with one of the most discussed changes - the possibility to keep accounts in a currency other than Czech.

The new law leaves room for this currency to be any foreign currency (not just USD or EUR) as long as it is a functional currency for the company and is not hyperinflationary. The functional currency is the currency in which the entity conducts the majority of its activities. The Act does not further specify this. However, some guidance on how a functional currency can be assessed can already be found in the explanatory memorandum. With reference to the International Financial Reporting Standards IAS 21, it sets out the facts that can be considered as indicators for the choice of an appropriate functional currency:

• The currency that most influences the prices of the entity's goods and services.
• The currency of the country whose competitive environment and legal regulations predominantly determine the selling price of goods and services offered by the entity or the currency that most significantly affects the cost of goods and services.
• The currency in which income from the entity's operating activities is normally derived.
• The rate at which a currency omits the labour and other costs that an entity must incur in producing and selling goods and services.
• The currency in which resources are generated from financing activities or income is derived from foreign operations.
• The proportion of an entity's transactions denominated in that currency is greater than 50%.

In assessing whether a currency is a functional currency, an entity should consider the above criteria both in the context of past accounting periods and in the context of the entity's expected future development. In the case of a newly formed entity, it should be sufficient if it has a realistic and demonstrable expectation arising from the planned development of its business. The entity will be required to demonstrate that it meets the conditions for using a foreign currency.

A change of currency will only be possible on the first day of the accounting period. A change from Czech to foreign currency is a right. Thus, an entity may keep its accounts in the Czech currency even if the foreign currency meets the definition of a functional currency. However, if the entity chooses a foreign currency, the change back to the Czech currency cannot be made unless the foreign currency ceases to be the functional currency.

The above is so far based only on the draft new Accounting Act and the related explanatory memorandum. At the same time, the Ministry of Finance is working on a related decree which should, among other things, determine the method of converting accounting when the currency changes. In this context, the Income Taxes Act also needs to be amended, which should determine how the change in currency will affect the tax base.

The calculation of the corporate income tax base is linked to the accounting result. If a company uses the option of keeping its accounts in a foreign currency, it is not yet clear how it will proceed in calculating its tax liability. According to the available information, one of the options under consideration is that the entire tax base will be calculated in the foreign currency and the resulting tax liability will be converted into Czech currency at a specified exchange rate.  However, we will have to wait for some time for the exact wording included in the Income Taxes Act.

We will continue to monitor this area for you. If you have any questions or comments, please contact the author of this article or the EY client team you are working with.

Author:

Hana Cicvárková