Advances provided in foreign currencies – statement of the Supreme Administrative Court

Last year, we informed you about a dispute concerning the duty to revaluate advances for the acquisition of assets paid in foreign currencies.

Now, the decision of the Supreme Administrative Court (SAC) is already available, quoting, among other things, the Interpretation of the National Board of Accountants (NBA) I-43 approved in October 2020.

The dispute concerned the revaluation of an advance for acquisition of fixed assets that the payer paid in a foreign currency in the given fiscal year. According to the tax administrator, the payer had a duty to revaluate the advance as at the balance sheet date and report a foreign exchange gain/loss. The payer failed to do so, and the tax administrator assessed additional corporate income tax in this respect.

The payer protested by filing an appeal with the Appellate Financial Headquarters (AFH); however, the appeal was dismissed. Then, the payer filed a suit with the Regional Court. The Regional Court settled the dispute in the payer’s favour and returned the case to the tax administrator for reassessment. In its statement of reasons, the Regional Court held that advances provided for the purpose of acquisition of fixed assets do not represent receivables as the right to claim a financial payment is not directly associated with these advances. The character of advances paid is rather that of a partial performance of debt under a purchase agreement, and the advances are therefore not included among assets and liabilities that are subject to revaluation duty as at the balance sheet date. If the advance were revaluated, it would disturb the true and fair presentation of accounts because it is an amount that the payer will not be returning, unless some other circumstances arise, and thus no foreign exchange risk is associated therewith.

AFH challenged the effective trial decision by an application for annulment of the decision issued by the Regional Court acting as an administrative court and submitted the case to the Supreme Administrative Court to resolve the issue whether advances for acquisition of assets in foreign currencies represent receivables and are subject to revaluation, or whether they are part of fixed assets and should not be revaluated.

SAC agreed with the decision of the Regional Court, stating that there is no reason to revaluate advances paid for the acquisition of fixed assets in foreign currencies. In its judgment, SAC quotes the NBA’s Interpretation I-43 Advances Provided in Foreign Currencies approved in October 2020. The Interpretation states that no foreign exchange risk is associated with assets and liabilities that do not represent a cash flow expected in the future (such as deferred revenues and expenses or advances paid that are not to be returned in the future). Thus, these assets and liabilities should not be recalculated at the closing exchange rate. According to SAC, it would be possible to revaluate the advances provided if it were highly probable in the particular case that the assets would not be supplied and the advance provided would be returned.

Please note that the NBA’s Interpretations express an expert opinion on the practical application of the Czech accounting rules and are not legally binding. Their main objective is to assist accounting units in finding the correct accounting solutions and in reporting specific transactions where the accounting solution is either non-existent in the Czech accounting regulations, or it is being implemented inconsistently or incorrectly in practice.

Also please note that in February 2022, NBA approved Interpretation I-47 Advances Received in Foreign Currencies, which represents a mirror solution of Interpretation I-43.

For the full version of Interpretations, please visit the website of the National Board of Accountants.

Petra Holečková
Junior Accountant

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