Accounting in Foreign Currency

2. November 2023 | Reading Time: 3 Min

Dear readers,

Currently, the tax and accounting system in the Czech Republic is experiencing the largest changes since years, as the so called Consolidation Package has been introduced by the Czech government. The main goal of the therein suggested set of changes is to increase tax collection of the Czech government and to consolidate the public finances. At the moment, the Consolidation Package is on its way through the Czech legislation process. The Chamber of Deputies has approved the Package which is  currently being discussed by the Senate.

We would like to inform you about the most important changes, with some more details to be introduced in our follow up newsletters.

Accounting in Foreign Currency

The consolidation package includes a new amendment to the Accounting Act, which aims, among other things, to introduce the possibility of accounting in another currency than the Czech currency from 1 January 2024. It will be also possible to calculate and pay income tax in this foreign currency.

The amendment to the Accounting Act defines the term “accounting currency”, which can be the Czech crown, the euro, the US dollar, or the British pound if it is the entity’s functional currency.

According to the Accounting Act, the use of the functional currency will be the right of the entity; however, the default currency remains the Czech currency.

An entity that meets the requirements for the use of a foreign currency as a functional currency does not necessarily have to use that currency and may choose to retain the Czech Crown for accounting purposes.

Accounting entities may use in its accounting a currency other than the Czech currency if two conditions are fulfilled at the same time:

  1. the other currency must be a functional currency of the entity and at the same time
  2. it has to be one of the listed currencies, i.e. euro, US dollar or British pound.

The conditions for functional currency are linked to the conditions presented in IAS 21. The following indicators may be relevant for the assessment of the foreign currency which the entity has decided to use as its functional currency:

  • the functional currency mainly influences sales prices for goods and services,
  • the level at which a particular currency affects the prices of the entity’s cost including goods, services and labor,
  • the currency of a country whose competitive environment forces and regulations mainly determine the sales prices of its goods and services,
  • the currency in which funds for from financing activities are generated.

The change of accounting currency is only permitted on the first day of the accounting period. A change back from functional currency to the Czech currency will be possible only after a change in the entity’s primary economic environment, for example, as a consequence of a change in the business area or a merger or spin-off.

The purpose of implementing the institute of functional currency is to enable entities to use for accounting the currency in which the entity operates and in which most of its transactions are performed. This helps to make accounting more efficient by reducing the number of conversions and minimizing exchange rate differences.