Accounting entity and its categories

The second article on the new Accounting Act focuses on the definition of accounting entities. 

Accounting entity

An accounting entity is now:

1. a legal entity with its registered office in the Czech Republic,
2. an organisational unit of the state,
3. a trust fund under the Civil Code,
4. a fund managed by a pension company,
5. a mutual fund,
6. a sub-fund of an investment fund,
7. funds administered by the Financial Market Guarantee System under the Act on Financial Market Recovery and Crisis Resolution.

This provision changes the view of organisational units of foreign companies, which will no longer be considered accounting entities.  The Act is based on the general principle that if a legal regulation considers it necessary to use certain accounting procedures regulated by the Accounting Act for its own purposes, then this obligation should be enshrined in that legal regulation, i.e. it should not be contained in the Accounting Act and these entities should not be subject to the obligation of full “global” accounting, but, for example, for the purposes of determining the tax base, the obligation to use accounting procedures only in relation to activities carried out in the Czech Republic.

An accounting entity need not be a person that qualifies for the use of cash accounting if its instrument of incorporation specifies that it is not an entity in that case.

Another change is how individuals are viewed, who, if they are a business or lessor, will only be an accounting entity by virtue of their decision.  If an individual carries out more than one activity, he/she shall choose in relation to which of these activities he/she is an accounting unit.

Types of accounting entities

The law divides accounting entities into accounting entities that are:

• entrepreneurial
• non-entrepreneurial
• and public sector accounting entities

A non-profit accounting entity is an entity that is neither a public sector entity nor a company whose principal activity is not business.

The list of public sector accounting entities will now be included directly in the Accounting Act.  Compared to the current wording of the decree for selected accounting units, health insurance companies will also be public sector accounting entities.

Categories of accounting entities

The distinction between micro, small, medium and large accounting entities remains, as does the general two accounting period test for change of an accounting entity.  However, the Act redefines the following two situations in which this general test does not apply:

• A business or non-profit accounting entity involved in a conversion, except for a conversion in which there is no transfer of assets to a legal successor, shall, in the accounting period immediately following the accounting period in which the legal effects of the conversion occur, fall into the category of entities the conditions of which it met at the end of the accounting period in which the legal effects of the conversion occurred. Thus, any change in the category of an accounting entity occurs immediately.
• A parent accounting entity that is not a public interest entity determines its category by reference to the values of its consolidated group to determine its category. Therefore, there will be no new situations where holding companies are micro-accounting entities even though they hold shares or securities in medium or large accounting entities.

In the next section we will look at the definition of the accounting period.