Financial statements of 2022

An accounting entity that keeps accounting books is required to prepare financial statements. However, they must be prepared in different scopes and extents, depending on the size of the company, and we say that a company prepares full or condensed financial statements. Unless the Accounting Act states otherwise, only those entities that are not required to have their accounts audited may prepare condensed financial statements.

Each financial statements are an integral whole and must consist of at least a balance sheet, a profit and loss statement, and an annex that explains and supplements the information contained in the previous two statements. In order to comply with the full scope requirement, the cash flow statement, the statement of changes in equity, and the annual report are also required.

What is the purpose of the financial statements?

The financial statements are one of the essential and comprehensive information about the company, which are available to a wide range of users from banks, investors to the tax administrator. Their aim is to provide information not only on the economic results for the relevant accounting period but also on the state of assets and liabilities of the company. As stipulated by the law, the information in the financial statements must be reliable, comparable, and understandable and shall be judged from the point of view of materiality.

What might be the impacts of war on the financial statements?

In case the company is affected by the consequences of the war, it should describe in detail the impact of the war on its economic situation in an annex or in the annual report, even if there were no significant effects on the company's operations and continuity.

The most common negative impacts of war, which must be described in the attachment, include:

• production outages;
• supply chain interruptions;
• lack of personnel staff;
• reduced sales, profits, or productivity;
• closures of facilities and shops;
• delays in planned business expansions;
• inability to obtain the necessary funds;
• increased volatility in the value of financial instruments;
• reduced tourism, limiting non-essential travel, as well as sporting, cultural and other leisure activities.

Affected areas in accounting:

• write-downs of non-financial assets, including goodwill;
• inventory valuation, inventory depreciation;
• provisions for expected credit losses;
• reserves for unfavorable contracts;
• restructuring plans;
• the entity's ability to continue its economic activities.

How to prepare financial statements correctly?

The first step of the financial statements is an inventory. It ascertains the actual balances of assets and liabilities and records them in the inventory reports. All components of assets and liabilities are subject to inventory. Accounting units may commence the inventory no earlier than four months before the balance sheet date, and complete the inventory no later than two months after the balance sheet date. Accounting units are obliged to prove the inventory for a period of 5 years after the inventory has been carried out in accordance with Section 29(3) of Act 563/1991 Coll. on Accounting.

Inventory can be physical – determining the actual balance of assets by counting, measuring, and weighing (i.e. stocks and cash in the till). Based on the findings is prepared the physical inventory list. Identified inventory differences, i.e. surpluses and shortages, are recorded by the accounting entities to the accounting period for which the inventory verifies the state of the assets.

Further, the documentary inventory is used to find out the actual state of assets and liabilities for which physical inventory cannot be performed, such as receivables and payables. The actual state shall be ascertained on the basis of primary documents and by preparing schedules of the individual components of assets and liabilities.

The financial statements also include a final review of accounting books and recording of specific cases as of the balance sheet date. The most common closing operations are:

• Depreciation of fixed assets - the value of the asset is not reflected in the costs as a one-off acquisition and is gradually reflected in the form of depreciation.
• Provisions - temporary decrease in the value of assets is expressed through provisions whose creation is based on the principle of precaution. Provisions may also be made for expected credit losses.
• Accruals, estimates, reserves - accounting for these items fulfill the accrual principle of accounting. Thus, it is necessary to account for costs and incomes in the period to which they are materially and temporally related. Consideration should be given to making reserves for unfavorable contracts and restructuring the company if it is at risk of bankruptcy.
• Exchange rate differences - assets and liabilities denominated in foreign currency are converted into Czech currency at the balance sheet date at the exchange rate of the Czech National Bank.
• Economic result under approval procedure - at the balance sheet date, this account must be settled into retained profits or unrelieved losses of the previous years. The annual general assembly shall decide how to dispose of it during the current accounting period.
• Deferred tax - an accounting instrument used to capture the principle of true and fair view in accounting. The obligation to account for deferred tax arises for entities that form a consolidating unit and for entities that prepare full-scope financial statements. Other entities report and account for it solely on a voluntary basis.
• Tax payable - entities account for tax payable as of the balance sheet date. The amount should correspond to the tax liability in the corporate income tax return. If the actual amount is not known as of the balance sheet date, the entity is allowed to record a reserve for income tax, which is in the balance sheet - similarly as the actual tax liability (tax payable) – offset against income tax advances paid during the accounting period.

What should not be forgotten in the annex to the financial statements

According to §39, the annex to the financial statements should provide additional information:

• about the entity;
• the accounting principles and methods used and the valuation techniques applied;
• additional information about receivables and payables, costs and revenues;
• small and micro entities without statutory audit shall disclose information on the acquisition of own shares or own shareholdings;
• on long-term assets (opening and closing balances, additions and disposals, etc.);
• the nature and business purpose of the entity's transactions that are not included in the balance sheet;
• related party transactions;
• additional information on shares issued;
• the average number of employees;
• the amount of remuneration awarded to members of the administrative, management and supervisory boards for the financial year;
• the proposed allocation of profit or settlement of losses;
• on deferred tax;
• a breakdown of sales of services by category of activity and by geographical market if those categories and markets differ significantly from each other in terms of the way in which the sale of goods and products and the provision of services included in the entity's ordinary activities are organised. This information may be omitted if its disclosure would be seriously prejudicial to the entity; information about the omission shall always be disclosed in the financial statements;
• the entity shall disclose in the annex to the financial statements the total fees charged by the auditor for the statutory audit of the annual financial statements and the total fees charged by the auditor for other assurance services, tax advisory services, and other non-audit services. The entity is not required to provide this information if the entity is included in consolidated financial statements and the specified information is presented in an annex to those consolidated financial statements;
• with regard to significance, the entity also presents in the annex to the financial statements summary disclosures of the types of accounting events listed in paragraph 58(2) of the accounting policies for entrepreneurs, which list items that are not considered to be offsetting in the financial statements, such as foreign exchange differences, gains and losses on the revaluation of assets and liabilities at fair value, recognition of reserves and advances for income taxes, and other post-judgment day events.

The accounting for the current financial year shall take into account, at the balance sheet date, the effect of events that occurred to the entity between the balance sheet date and the time the financial statements are prepared. Such information shall be disclosed that could affect the judgment of the reader.

Entities shall present comparative information in the current financial statements that is derived from previous financial statements but shall adjust that comparative information if the change contributes to the comparability of the current and comparative information over time. If adjustments are made to the comparative figures and, therefore, the comparative figures in the current financial statements differ from the original figures in the previous financial statements, the entity shall provide a schedule of all significant changes in the annex. That schedule shall include, as a minimum, the before-change, after-change, and commentary.

We would like to remind you that small and micro-accounting entities that are not required to have their financial statements audited are not required to publish a profit and loss statement unless a specific legal regulation imposes this obligation on them. If an entity presents selected data from its financial statements, it shall indicate that these are only selected data from the financial statements and information on where the financial statements are available. Other entities are required to disclose all of the balance sheet, the profit and loss account, the annex and, if audited, the annual report and the auditor's report.

As described above, there are many closing transactions and the requirements for the annex to the financial statements and nothing should be forgotten otherwise there are significant penalties. Should you need our assistance and help in these areas, we are fully at your disposal.

Updated on 13 January 2023