Based on the statements issued by the representatives of the Czech National Bank, the CNB has stopped its monetary market interventions. It seems likely that the foreign exchange rate of the Czech Crown will change in the near future as a result; it is widely expected that the Czech Crown will appreciate.
The situation described above could then give rise to foreign exchange gains or losses, depending on the particular situation of each taxpayer and their foreign exchange risk exposure. The FX gains or losses could then also have accounting and tax consequences.
More specifically, material FX gains can be expected for taxpayers having loan financing in a foreign currency, and, conversely, FX losses can be expected in case of those with significant receivables denominated in a foreign currency. Standardly, these FX impacts would be booked into P/L accounts, affecting the accounting profit of the current period and, importantly, also the taxpayer’s tax base.
To eliminate the potentially negative impacts of the above for accounting and tax purposes, it may be possible to implement hedge accounting. Hedge accounting is merely an accounting method which can be considered in cases where natural hedging occurs (e.g. in a case of a real estate company with a long-term bank loan in EUR and regular rent income in EUR as well).
If hedge accounting is implemented, unrealized FX changes with respect to unpaid liabilities and receivables are not booked against P/L accounts, but against special equity funds. This method therefore reflects the accounting profit of the current period more accurately as it is not affected by the revaluation of balance sheet positions due to the fluctuations of the FX rate. Consequently, taxation of such gains or losses can be also avoided.
For the use of the hedge accounting method, comprehensive documentation needs to be prepared, describing the hedged risks, hedging strategies and chosen instruments. Moreover, the efficiency of the hedging needs to be tested both prospectively and retrospectively. We have successfully implemented hedge accounting for many of our clients – should you be interested as well, we will gladly advise you on the matter.
Should you have any questions regarding the issues above, please do not hesitate to contact Radek Stein, e-mail: email@example.com.Download Newsletter May 2017