Categorization of accounting entities was established by an amendment of act no. 563/1991 Coll., on accounting (hereinafter the “act”), as of 1 January 2016. In the stipulation of its article 1b, the act established four categories of accounting entities: micro, small, medium and large accounting entity. At the same time, the criteria for these categories were specified, so that depending on fulfilment/non-fulfilment of these criteria, every accounting entity had to fall into one of them.

We have summarised the individual categories and the related conditions/criteria below:

Assets in total are understood to mean a total of the assets ascertained from the balance sheet (that is net assets).

Net annual turnover is understood to mean the sum of revenues lowered by sale discounts, divided by the number of months commenced, for which the accounting period lasted, multiplied by 12.

The average number of employees is understood to mean the staff number in full-time equivalent units according to the methodology of the Czech Statistical Office.

The first classification of all accounting entities took place as of 1 January 2016, or more precisely according to the achieved figures as of a date preceding the day, on which the accounting period began in the year 2016. If, then, the accounting entity, had the calendar year as the accounting period in the year 2015, it was put into a respective category according to fulfilment/non-fulfilment of the specified conditions according to the results achieved in the financial statement compiled as of 31 December 2015. If the accounting entity had the economic year (for example the period of 10/2015 to 9/2016), then the accounting entity was classified in the respective category according to the results achieved within the financial statement compiled as of 30 September 2016, that its first accounting period under the given category was the period from 1 October 2016.

This category, in which the accounting entity was classified, remained in the following two accounting periods (unless some change occurred – for example a transformation of the accounting entity). In the stipulation of its article 1e paragraph 2, the act stipulates that a potential change of category is possible if, on two subsequent balance sheet dates of regular financial statements, the accounting entity exceeds/does not exceed the specified criteria.

According to the above-mentioned information, now (as part of preparation of financial statements) for the period of the year 2018, we encounter the situation that the accounting entity examines (especially in terms of correctness of compilation of state reports, the obligation of having the financial statement audited etc.), if it still falls into the originally determined category or, beginning from the year 2018, it will need to post the individual data as a different type of accounting entity (category).

Above, we mention an illustrative example of comparing conditions in three subsequent accounting periods for the company Sluníčko a nebe s.r.o.

We can evaluate the above-mentioned results of Sluníčko a nebe s.r.o. as follows. When categorizing the accounting entity according to the financial statement compiled as of 31 December 2015, the company evaluated and classified itself as a MICRO accounting entity, because as of the given date, it only fulfilled the condition of annual total of net turnover. In the following two periods (for the year 2016 and 2017), though, the accounting entity fulfilled the conditions for turnover and newly also for assets, i.e. as of 1 January 2018, the original MICRO accounting entity becomes a SMALL accounting entity, and from the given year, it needs to proceed according to the rules applicable to a small accounting entity.

The individual obligations specified for the given categories of accounting entities have been described in detail in one of our previous articles, and we will therefore not discuss this issue in any greater detail.

In this article, however, we would like to inform the readers that this February, the Information on some accounting and tax connections of a possible change of categorization of accounting entities in the taxable period beginning in the year 2018 was issued. This information describes a summarization of the obligations or exemptions from obligations within the given categories of accounting entities (for example the obligation/non-obligation to have the financial statement audited, the obligation/non-obligation to valuate real assets at real value etc.), but it also deals with the issue within transformations of corporations, and it also states the influence on related compilation of the income tax declaration.

Within transformations of corporations, it is important to be aware that for the individual types of transformations, we must assess all of the parties interested and their correct classification (before and after the transformation).

For example in case of a merger by acquisition, when relevant information exists for categorization of all participating accounting entities for a minimum of two previous accounting periods, it is necessary to use all of this information for correct classification of the acquiring accounting entity. If, therefore, the acquiring micro accounting entity acquired assets of am acquired accounting entity, which was classified as a small accounting entity, for example, the acquiring company (originally a micro accounting entity) takes over this “status” and becomes a small accounting entity as of the reference date of the merger.

In case of a merger by formation, we proceed in the same way when categorizing the entity as in case of a first accounting period of an accounting entity (because a new accounting entity has been created by this transformation), i.e. the category is determined here according to a reasonable assumption as to what conditions will be fulfilled in the first period.

In case of accounting entities being divided, it is necessary to proceed similarly as in the case of a merger.

Among other things, the given classification also has an influence on the deadline for submitting the tax declaration to the tax administrator (if the accounting entity does not have a tax consultant, who compiles the tax declaration and submits it to the tax administrator – here the deadline for submitting the tax declaration is automatically prolonged). If the accounting entity is not obliged to have its financial statement audited, its deadline for submitting the tax declaration is within 3 months from the end of the taxable period at the latest. At the same time, the deadline for submitting the tax declaration brings other consequences with it – for example the period for advance payments, the due date of tax payment and return of tax overpayment etc.

At the same time, beginning with the compilation of the corporate income tax declaration for a taxable period beginning in the year 2018, accounting entities must newly state their category directly in the tax declaration – an abbreviation of the category is used (M = micro, L = small, S = medium, V = large).

What to say to conclude

Correct classification of the accounting entity in the respective category brings individual obligations, which the accounting entity must fulfil, both in the area of accounting and in the related tax area. At the same time, it is necessary to keep in mind that the categorization is not a permanent state, but it changes (now it changes every year), i.e. it is necessary to continually monitor the development of the accounting entity and fulfilment/non-fulfilment of the specified criteria, and thus evaluate the need for change of the category of the accounting entity from the following accounting period.

Did you find this topic interesting? Do you have any questions or are you not certain, what you specifically ought to fill in within the financial statement for the year 2018? Do not hesitate to contact us. We will be happy to help you.

Petra Čechová & Ludmila Malimánková