We would like to inform you in this article that two fundamental new interpretations have been issued, which are available for compiling financial statements for the year 2020 already:

• I–42 Foreign currency receivables with allowances
• I–43 Provided foreign currency prepayments

They handle the question: When does the accounting entity bear the foreign exchange risk? Answering: Only if foreign currency cash flow is expected in the future the accounting entity is open to currency risk and exchange differences arise from its.

The accounting solution of the issue of exchange differences is fully taken over into the income tax.

The Accounting Act lays down the obligation for accounting entities to keep accounting in Czech currency units, and at the same time in foreign currency in case of assets and debts expressed in foreign currency. It was the term “expressed” that the National Accounting Council sought an unambiguous interpretation for. Practice is inconsistent and different attitudes to solving identical accounting cases arise from it.

Foreign currency receivables with an allowance

This interpretation discusses the capturing of a foreign currency receivable in the accounting, allowances for this receivable and revaluation as of balance sheet date. In connection with this issue, questions arise as to how to approach revaluation of the receivable as of balance sheet date as well as the allowances created for it.

Since 2005, accounting entities were able to follow the advice of the coordinating committee[1], which enabled and justified with arguments that the gross value of a receivable and the created allowances can be revaluated. A company could enter a change in the koruna expression of an allowance as an exchange difference, or adjustment of an allowance including division into statutory and other. The condition was that the accounting entity should be consistent with all similar cases.

The interpretation brings arguments that with regard to the fact that the cash flow only arises for the part of the receivable, the payment of which can be expected, only the part of the receivable, for which the company has not created a tax or accounting allowance (the net value of the receivable) needs to be revaluated. Two solutions describe how to achieve this: revaluation of only the net value of the receivable or revaluation of the gross value of the receivable while creating allowances for the given receivable, all with effect on the profit/loss. The final result of both above-mentioned solutions is eventually the same.

Provided foreign currency prepayments

The second interpretation focuses on provided prepayments in connection with buying stock or noncurrent assets. These are prepayments, where the company expects the purchased asset to be supplied, and not the money to be credited back to its bank account.

The provided prepayment in foreign currency already represents a separate part of the total purchase price, and the accounting entity is obliged to enter the latter in the accounting in Czech currency already. Prepayment represents a separate part of the purchase price and will not be revaluated as of balance sheet date or as of the date of the asset being supplied, either. No exchange differences arise when entering this prepayment in the books either.

If you are handling accounting cases in foreign currency, planning on adopting an interpretation into you accounting guidelines, or it represents a change in your current attitude and you would like to consult us on this, please, do not hesitate to contact us.

Coordinating Committee no. 79/12.10.05 - Allowances for foreign currency receivables.