At the end of last year, we informed you in our newsletter about a new possibility of bookkeeping in a functional currency, i.e. euro, US dollar or British pound (link HERE). Currently, we would like to present some practical experience.
Entities can keep their accounting in a currency that reflects their actual economic environment and in which most of their transactions take place. The functional currency is therefore becoming an effective tool in Czech accounting regulations for minimizing exchange rate differences, which have until now significantly influenced some positions in the financial statements. Thus, hedge accounting instruments lose their significance in bookkeeping as a result of the changeover to a new currency as they are being released over time.
From our first months experience, companies that are part of multinational holdings see the advantage of a functional currency in the preparation of consolidated data as part of reporting or the preparation of consolidated financial statements if the parent company and the subsidiary have the same accounting currency. Mutual cooperation with audit companies on regular reports has also resulted in positive feedback. Within the review, it was easier to identify the reasons for the differences as exchange rate differences no longer played any role.
The changeover to a new currency has no impact on the P/L or on the income tax base of the previous period. However, the Notes to the Financial Statement have to include specific comments on the currency changeover, including reasons. Specifically, the entity must define the exchange rates used for the transfer of the data when changing the accounting currency and explain the impact of the change on the financial statements. The same information is also to be provided in the notes to the financial statements in the first period when the new currency is used.
When compiling the financial statements for the first period in the new currency, the previous period in the profit and loss account must be transferred using the same exchange rate which was applied to the transfer of balance sheet accounts. However, if a significant distortion occurs, it is necessary to use the average exchange rate for the given period and report the resulting difference in the “Other P/L of previous years” account.
Therefore, high-quality accounting software takes a very important role in the changeover to a different accounting currency. The opening balances of the accounts on the first day of the accounting period starting from which the accounting currency was changed must be determined by recalculating the final balances of the accounts using the exchange rate of the Czech National Bank for the balance sheet date of the previous accounting period. Furthermore, the accounting program should enable it to keep VAT records in Czech currency, even if the accounting currency is different, as the settlement of VAT towards the tax authority is still made in Czech crowns. However, most accounting software should already have been programmed for this fact, as it is common practice to prepare outputs for VAT in different currencies (e.g. under the OSS regime, when registering in another Member State, etc.).
In general, our first months’ experience with functional currency is good and we still see it as an important option, especially for real estate companies. If you are interested in the possibility of switching to a functional currency, please contact your TPA advisor, we will be pleased to assist you with a professional assessment of the specific situation.