Bookkeeping in a foreign currency

26. 4. 2023

According to the new Accounting Act, which should come into force from April 1, 2024, and which is currently under consideration, it will be possible under certain conditions to keep accounting records not only in Czech crowns, but also in any foreign currency.

It will only be possible to change the currency in which an entity keeps its accounts on the first day of the new accounting period, for the first time on April 1, 2024, and from then on if the new Accounting Act comes into force as planned. If a company decides to keep its accounts in a foreign currency, a change back to the Czech currency cannot be made unless the foreign currency ceases to be the functional currency.

The conditions for determining the currency in which accounts can be kept:

  1. The currency must be the functional currency for the entity
  3. The currency must not be hyperinflationary

Functional currency means the currency in which the entity carries out the majority of its business.

The IAS 21 international accounting standards provide indicators by which the term functional currency can be specified in more detail:

  • the currency that mainly influences the sales prices for the entity’s goods and services;
  • the currency of the state whose competitive forces and regulations mainly determine the sales prices of the goods and services offered by the entity;
  • the currency that mainly influences the costs of providing goods and services;
  • the currency in which receipts from the entity’s operating activities are usually retained;
  • the currency that to a certain extent influences the wage and other costs that the entity must incur in the production and sale of goods and provision of services;
  • the currency in which funds from financing activities or income from foreign operations are generated;
  • the currency in which more than 50% of the entity’s transactions are conducted.

If the entity can draw on previous accounting periods, it should draw both on them and also on expected future developments. In the case of a newly formed entity, it must draw only on expected future developments.

Entities will be required to prove that the currency in which they have decided to keep new accounting records meets the above conditions.

According to IAS 29, there is hyperinflation if, in particular:

  • the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested;
  • the general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency, even though prices are set in the local currency;
  • sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short;
  • interest rates, wages and prices are linked to a price index;
  • the cumulative inflation rate over three years is approaching, or exceeds, 100%.

There are still many legislative steps to be taken (such as changes to the Decree or the Income Tax Act) before the first entities can change the currency in which they keep their accounts. The information given here is only preliminary and is based on the draft of the new Accounting Act and the explanatory report.

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