Probably everybody has by now heard about the amendment of Act no.563/1991 Coll. On Accounting which entered into force January 1^st 2016. Compared to the legislature operating until December 31^st 2015 there have been some substantial changes made, namely in the categorization of accounting entities into particular categories and, inter alia, defining their obligation concerning bookkeeping and preparation of financial statements.

You may be asking why we are discussing this topic at this time when the amendment came into force in January already. But let us be honest, how many of you who have already spent time deciding the correct category for your business company know which requirements you must meet, what documents must be prepared for the financial statements, and whether you are under the obligation to have an auditor carry out a verification of the financial statements. We are of the opinion, that this autumn is the perfect time for a recapitulation of the principal novelties implemented in the area of bookkeeping, so that every accounting entity is well informed and prepared and can observe the changed laws.

This article aims to give an overview of the categorization of accounting entities and give information about how to categorize a given entity and whether there are some other obligation arising in connection to that.

Categorization – Know How

As the introduction states, in the two previous years, the amendment of Act on accounting brought a great – one may say even revolutionary – change, that being the introduction of categorization of accounting entities. Until these provisions were adopted there had been no regulation for division of accounting entities. In § 1b this amendment on Act on accounting defines individual categories of accounting entities and at the same time establishes the criteria for their categorization. The table below offers an overview of individual categories and includes the conditions for categorization.

As concerns the above presented table we would like to provide an important comment: as according to the amendment, assets are not defined as gross asset value but as net asset value as presented in the balance sheet.

Every accounting entity is obliged to determine which category it belongs to based on financial statements of the immediately previous financial year, i.e. ended December 31^st 2015 in the case where its financial year is the calendar year. In the case of entities with a marketing year the category shall be determined based on accounts of an accounting period starting in 2015 and ending in 2016.

In connection to that you must be asking yourselves, what is the procedure in case of an entity which came into existence in 2016, or still is to come into existence. Which category does this entity belong to? The lawmakers remembered to include this situation also and said that in such case the entity shall follow regulations for an entity who’s conditions it will most probably meet come the balance sheet day of the first financial year.

At the same time it is necessary to point out to the reader that an entity does not need to stay in its category (the category is falls in based on meeting/not meeting the conditions) for the entire time of its existence. The Act directly says that where an entity exceeds or fails to exceed two limits on to subsequent balance sheet dates of financial statements it will change its category starting from the immediately following financial year. To make understanding of such change easier let us provide an illustration of such case.

The table can be explained as follows: When categorized based on financial statements at December 31^st 2015 the entity was assessed as falling into the MICRO category because on that date it met only the condition of annual amount of net turnover. In the following two financial years (years 2016 and 2017) however, the entity met conditions both for the turnover and newly also for total assets, i.e. from January 1^st 2018 the originally MICRO entity becomes a SMALL entity and from this year on must follow the directions effective for small accounting entities.

What are individual entities obliged to based on category

We have already said what categories of accounting entities there are. Now we would like to quickly mention some main (not detailed) information concerning bookkeeping, preparation of financial statements and documents associated with that, and the obligation to have or not to have financial statements verified by an auditor.

• Breakdown of Cash-Flow  and Breakdown of changes in equity

Only medium and large accounting entities are subject to these obligations. Other accounting entities (micro and small) may prepare these statements if they so wish.

• Obligation to have an auditor carry out a verification of financial statements

Medium and large entities are obliged to this without having to fulfill other criteria. Small entities are obliged to this in case they fulfill criteria lain down by Act on accounting and therefore it is necessary to test these entities. Under this Act this obligation does not arise for micro entities.

• Drawing up of the annual accounts

Only entities which must obtain a verification of final accounts from an auditor are obliged to draw up the annual accounts.

• Annex to the financial statements

In connection to this we would like to point out that this amendment brings a substantial change as regards the annex to the financial statements, or more precisely its contents. The new regulation lays down rules for each category of accounting entities, meaning that it lists everything that the annex to the financial statements should contain.

To conclude

The amendment of Act on accounting brought significant changes to the accounting world. The basis of these changes is introduction of categories of accounting entities which are micro, small, medium and large entity. Every entity must therefore determine into which category it falls and make sure to fulfil obligations connected with that. Above we have aimed to describe individual categories, their criteria and list the basic obligations that arise in connection to all that.

Has this topic caught your attention? Do you have any questions or are you perhaps not sure if you have ascribed the correct category to your entity? Don’t hesitate to contact us. We are more than happy to help.