Exchange differences on receivables and obligations

Following the preparation of the financial statements, a number of accounting entities have questions about how to correctly manage the calculations of foreign currency receivables and obligations using the current exchange rate of the CNB.

There has recently been a discussion among professionals on whether Czech accounting is in some of its provisions contrary to economic reality and whether it is time to move away from Czech accounting standards and instead use provisions of the law requiring a true presentation of reality.

For example: when a company purchases goods from a foreign supplier in December for the sum of €10,000 and incurs a debt to be paid within 30 days. It is thus exposed to exchange rate risk and it is correct to convert the foreign currency into CZK at the current exchange rate of the CNB and to quantify the exchange rate gain or exchange rate loss. In the IFRS terminology, this debt is a monetary item with which a future outflow of funds will be associated. The situation is different, however, if the company receives a prepayment from a foreign customer in December for the delivery of goods for the sum of €10,000 to be delivered within 30 days. It will also incur a liability, shown in the accounting books as an advance or deferred income received. There is no exchange rate risk associated with this obligation; it is considered a non-monetary item under IFRS. Therefore, it makes no economic sense to account for exchange rate differences as of the balance sheet date or as of the date of offsetting the advance payment for debt or receivables, as stated in Czech Accounting Standard No. 006. When the delivery is completed, i.e. the goods are delivered to the customer, yield without any exchange rate difference will be generated.

However, the distinction between monetary and non-monetary items is missing from the Czech accounting regulations. It is therefore necessary to discuss the economic consequences of incorrect setting of accounting for exchange rate differences in Czech accounting standards and to deviate from these procedures. Our perspective is based purely on the provisions of the Accounting Act in Section 36, which states: “Other accounting entities may deviate from the standards, as long as they provide a true and fair view of the accounting subject. The other entities are required to disclose deviations from the standards and their grounds in the notes to the financial statements.”