Czech Republic: An amendment to the Accounting Act provides new rules for the valuation of product inventory
The major amendment to the Accounting Act which implements Directive 2013/34/EU into Czech law among other things touches upon the valuation of production inventories. Under the previous regime, companies had a choice: either appraise inventories on the level of direct costs, or include also legitimate overhead [Sec. 25 (5) (c) of the Accounting Act]. Such overhead may e.g. include a prorated portion of the foreman’s salary, of the rent, of electricity consumption, of the depreciation of machines that are used to manufacture several types of product, or of the expenses made towards keeping a financial or an engineering design department.
The new rules state that ‘own costs’, in the case of inventories created from own activities, are understood to comprise direct expenses made towards production, but also attributable indirect costs related to the production or other activities. The draft amendment to decree No. 500/2002 Coll., for entrepreneurs stipulates: „Own costs include the direct costs, and that prorated portion of variable and fixed indirect costs which can be attributed to the given product in terms of a causal relationship and in terms of the manufacturing period. Costs of sales are not included among own costs“ (whereas costs of sales refer e.g. to storage and packaging costs).
The new rules bring about greater compatibility with the International Accounting Standard 2 Inventories, according to which all (attributable) costs must be attributed, as opposed to costs cherry-picked by the company. However, it remains to be seen how non-audited micro-enterprises and small enterprises will cope with the decision in terms of methodology, and with the inclusion (or non-inclusion) of overhead that can be brought into a causal relationship with the product. After all, the improper valuation of inventories not only constitutes an administrative offense but also has consequences in the area of corporate income tax.
Source: Parliamentary press 398, amendment to the Accounting Act No. 561/1991 Coll., amendment bill modifying decree No. 500/2002, on the implementation of certain provisions of the Accounting Act (Act No. 563/1991 Coll., as amended), for businesses that qualify as accountable enterprises