Proper accounting for grants, state aid and exchange rate differences in the financial statements carries significant risks. Accountants, tax advisors and auditors are paying close attention to it at this time. New interpretations of I-42 and I-43 on the topic of exchange rate differences for receivables and advances in foreign currency issued by the National Accounting Council have aroused some controversy in professional circles.
State support provided to entrepreneurs in 2020 is relatively broad. Probably the largest group of state aid is direct operating subsidies, which can include, for example, the Antivirus program or compensatory subsidy titles such as COVID-Rent or COVID-Culture. All these programs (with the exception of the Antivirus C program, which I will mention in the following paragraph) ultimately represent the revenue and income of the recipient of the subsidy. It is characteristic of these subsidy titles that the subsidized cost must first be paid by the entity from its own resources and only then it will be reimbursed in the form of state aid / subsidy. Especially at the turn of the accounting period, we get into doubts when the revenue from the subsidy should be reflected in revenues. On the one hand, there is a rule that requires us to comply with the factual and temporal connection with the costs for the payment for which the subsidy is provided. On the other hand, there is one of the basic principles of accounting, namely the principle of prudence. The support is the interpretation of the National Accounting Council I-14, according to which we should report the income from the subsidy in the accounting period when the acquisition of the subsidy becomes unquestionable. If we hesitate over which period to capture the revenue from the Antivirus program, which subsidises December wages, let us ask ourselves whether, as of December 31, 2020, we had any doubts that the cost subsidy would be paid to us from this program? If we apply for a subsidy from this program repeatedly and we know from our own experience that they have been granted to us without any complications, we can safely account for the proceeds from the subsidy until December 2020. If we still have any doubts, let's help with another interpretation namely I-24, which deals with subsequent events. If, after the balance sheet date, but before the preparation of the financial statements for the year 2020, we can confirm that we have been granted a subsidy for the December costs, we again recommend recording the revenue from the subsidy until 2020.
The specificity of the Antivirus C program was that instead of paying subsidies, the state proceeded to a general reduction in social security contributions for employees. Employers thus saved personnel costs on this component. In this case, it is not income from the operating subsidy, but a real reduction in the employer's costs, and in this way we recommend that you also account for this fact.
The second topic now widely discussed is the exchange rate conversions of receivables and payables as at the balance sheet date. The solution to this problem is aided by two recent interpretations of the NÚR, namely I-42 and I-43. While I-42 describes a new approach to accounting for exchange differences on foreign currency receivables for which accounting adjustments have been made, I-43 changes the established rules for the so-called overdraft of advances paid as a result of the acquisition of fixed assets, inventories or services. According to I-42, exchange differences at the balance sheet date should be calculated not on their gross value but on the net value. Under I-43, advances provided that are not expected to be repaid in cash should not be translated at the closing exchange rate at all at the balance sheet date. I believe that many of you have already had the opportunity to meet these new interpretations and form your own opinion on whether it is appropriate to apply them in practice or not. Personally, I agree with the conclusions in these interpretations, I consider them a step in the right direction. However, I draw attention to the need to consider well the process / technical impacts, the possibilities of our accounting software, the need to modify them and, last but not least, the tax impacts. To date, we do not know of any official opinion of the Financial Administration on this matter. In our opinion, however, the accounting treatment should be fully respected for the purposes of determining the income tax base, and we recommend a prudent approach to the release of accounting adjustments and not forget to make an adequate adjustment of the tax base.
If you have agreed with the idea of a different approach to exchange differences on monetary and non-monetary receivables contained in the two interpretations mentioned, you may have wondered why I-43 deals only with advances granted and does not deal with advances received when the same principle can be applied to both groups of advances. Unfortunately, I do not have the answer to this question, but I can perhaps reveal that a separate interpretation will most likely be prepared for advances received in the near future and that it will apply the same principles as the already valid I-43.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
