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Functional Currency Euro for Real Estate Companies

Functional Currency Euro for Real Estate Companies

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In a separate article of this newsletter, we focus on the implementation of the functional currency concept into the Czech Accounting Act. In this context, we would like to investigate more specifically under which conditions a Czech real estate company can decide to implement euro as its functional currency.

First, the specific situation in each company needs to be evaluated individually based on the criteria of primary economic environment in accordance with IAS 21. The considerations can in this respect be outlined as follows:

  • Currency of rental income: An important factor for implementing euro as functional currency can be seen the fact that euro mainly influences prices for the company’s services. Thus, for example, if all rentals are determined in euro, this would indicate that an important factor for possible switching to euro may be fulfilled.
  • Currency of the country: The currency of the country whose competitive forces and regulations determine the sales prices of its goods and services will be the Czech crown if the property is located in the Czech Republic. This indicator will tend to weaken the argumentation in favor of euro as functional currency.
  • Currency of costs: A further factor which may speak in favor of euro as functional currency would be the fact that the company sustains costs mainly in euro. However, it can be expected that this factor will be unclear in many cases.
  • Currency of financing: The currency in which funds from financing activities are generated can be seen as additional factor. If, for example, a real estate company is financed by loans in euro, and / or the equity of the company has been provided in euro, this can also be seen as a factor in favor of a possible transition to euro as functional currency.
  • Currency of cash: Another supporting factor for euro can be seen the fact that the company retains funds from operating activities in euro. It can be expected that a Czech real estate company will keep cash on its bank accounts in both euro and Czech crowns. If, however, the retained cash in euro considerably outweighs the Czech crown funds, this factor could serve as supportive for the euro as functional currency.

It can be expected that a Czech real estate company will not present a clear picture and the indicators will be mixed. In such cases, the management will have to use its judgement to determine the functional currency that most faithfully represents the economic effects of underlying transactions, events and conditions. When doing so, the management has to give priority to the factors 1)-3), with the factors 4) and 5) providing supporting evidence.

Based on the above considerations, we believe that a transition to euro may be possible for a Czech real estate company if (i) almost all rentals, financing and cash are determined in euro (factors 1, 4 and 5), (ii) a large part of the costs are denominated in euro and (iii) the management determines euro as the company’s functional currency based on the above parameters. Here however, we would like to point out again that the individual situation of each company must be considered. We further recommend discussing this issue up-front with the company’s auditors.

Finally, we would like to note that implementing US dollar and British pound as functional currency can be seen as theoretically possible. However, it is very unlikely with respect to the economic reality of the Czech real estate market.

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