Financial statements of 2021

An accounting entity that keeps accounting books is required to prepare financial statements. However, they must be prepared in different scope and extent, depending on the size of the company. The financial statements in full scope is obligatory for medium-sized and large accounting units as well as for small and micro accounting units subject to the statutory audit. Other entities are allowed to prepare financial statements in limited scope.

Each financial statements are an integral whole and must consist of at least a balance sheet, a profit and loss statement and an appendix 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, understandable and shall be judged from the point of view of materiality.

What are the impacts of covid-19 on the financial statements?

The company should, either in the attachment or in the annual report for 2021, describe in detail the impact of the covid-19 pandemic on its economic situation, even if there have been no significant impacts on the company's operations and continuity.

The most common negative impacts of a pandemic, 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;
• accounting for subsidies and so-called antivirus programs;
• creation of provisions, estimates, accruals, reserves;
• performing analyses of overdue receivables and payables, planning and evaluating cash flow, checking the creditworthiness of clients;
• reimbursement of costs incurred by employees on home-office;
• impact and response to current events at the moment of preparation of financial statements as these are considered to be significant events subsequent to the balance sheet date.

How to prepare financial statements correctly?

An important vanguard of the financial statements preparation is the 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 not earlier than four months before the balance sheet date and complete the inventory no later than two months after the balance sheet date.

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.

Confirmation letters are an important tool for reconciling the state of receivables and payables at the balance sheet date. According to Section 29 (3) of Act 563/1991 Coll., on accounting, accounting entities are required to prove that an inventory of all assets and liabilities has been performed for a period of 5 following years after; failure to comply with the law may result in penalty up to 3 or even 6% of the sum of the balance sheet at gross value. Inventory reports must be signed by the responsible persons.

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 fulfils 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 unfavourable contracts and for 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 is the deadline for preparation, approval and publication of financial statements?

The financial statements are usually prepared in the form of the so-called ordinary financial statements, i.e. processed once per 12 months, when their processing closes the annual accounting period.

The final version of the financial statements is presented and approved at the annual general assembly, which, according to the law, must be convened once a year by the statutory body of the company. The statutory body (the managing director and the board of directors) is generally responsible for the accounting books and the resulting financial statements, including the results presented therein.

The approval of the financial statements must take place no later than six months after the last day of the relevant financial period. Therefore, if the financial statements are drawn up as of 31 December 2021, an annual general assembly should be convened and the financial statements should be approved latest by 30 June 2022.

The financial statements must be published no later than 12 months after the balance sheet date (i.e. the financial statement for 2021 latest by 31 December 2022). Audited companies must comply with the statutory obligation even a few months earlier, i.e. no later than 30 days after the approval of the financial statements, eventually after their verification by the auditor, i.e. by 31 July 2022.

Publication means the deposit of the financial statements in the collection of documents of the Court of Registration where the relevant entity is registered, i.e. in the Czech Commercial register. Accounting units submit the financial statements to the relevant Court of Registration via their official databox with a request for their disclosure in the collection of documents. From 1 January 2021, the obligation to publish the financial statements can be fulfilled also through the tax authority by filing an electronic corporate income tax return with this attachment. The tax administrator is obliged to transmit the financial statements to the Court of Registration in electronic form without unnecessary delay.

Please note that if you fail to have your 2021 financial statements approved and published in the Commercial Register by 31 December 2022, a fine up to 3% of the gross asset value may be imposed by the tax authority.

Within preparation of the financial statements, it is also advisable to check the status and balances of so-called personal tax accounts, i.e. an overview of tax obligations of the entity, maintained by the Financial Administration of the Czech Republic. A suitable way to do this is through the tax information box (daňová informační schránka in Czech, hereinafter referred to as "DIS"). In this way, taxpayers can not only check whether a tax underpayment or a tax overpayment has incurred to them at a given time, but also how the tax administrator has dealt with any tax overpayment that might already exist, or how much they have been charged for particular tax accessories, i.e. late payment interests, penalties, fines or proceedings costs. The DIS also allows access to the public part of the electronic tax files, e.g. the aforementioned personal tax accounts, the personal tax calendar or the summary of documents (i.e. an overview of communication with the tax administrator; however, without the possibility to see its specific content). In addition, the DIS+ extension, replacing the "old" DIS (functionality of which will cease on 28 February 2022), brings additional possibilities, such as communication with the tax administrator, submission of forms, etc. Last but not least, the new version makes it easier to grant access to other persons, which was previously only possible on the basis of a power of attorney and an application form. Now it will be possible to do so without the tax administrator's involvement, including setting up the different authorization levels.

Should you require assistance in this respect, please do not hesitate to contact us.