The Act on Provisions provides for the creation of various kinds of legally recognized adjustment items. For most companies, however, the following three types of adjustment items will have by far the greatest relevance allowances for receivables towards debtors in insolvency, allowances for non-lapsed claims payable after 31 December 1994, and allowances for "small" receivables of up to CZK 30,000.
Statutory adjustment items are addressed by a special law: Act No. 593/1992 Coll., on provisions for determining the assessment base for income tax, as amended (the "Provisions Act").
Aside from statutory provisions, the Provisions Act moreover allows for the creation of six kinds of statutory adjustment items ("allowances"):
- Bank allowances – allowances for loan receivables
- Allowances to be created by credit unions and other financial institutions for consumer loans
- Allowances for receivables towards debtors in insolvency (pursuant to Sec. 8 of the Provisions Act)
- Allowances for non-lapsed claims payable after 31 December 1994 (pursuant to Sec. 8a of the Provisions Act)
- Guarantor's allowances – for receivables on grounds of guarantorship assumed for customs liabilities (pursuant to Sec. 8b)
- Allowances for "small" receivables of up to CZK 30,000 (pursuant to Sec. 8c)
However, of these, the following three kinds are most relevant for most companies.
Allowances for receivables towards debtors in insolvency – Sec. 8 of the Provisions Act
Adjustment items may be created for receivables towards debtors in insolvency proceedings, up to the book value of non-lapsed claims which have been registered with the court, and from the moment in which the insolvency procedure was initiated until the lapse of the time period stipulated by the court in its decision on insolvency (or, as the case may be, until the lapse of the relevant time period pursuant to the Insolvency Act). Statutory insolvency allowances shall be created only within that fiscal year in which the corresponding receivables were registered with the insolvency court.
These adjustment items are being reversed depending on the results of the insolvency procedure.
Allowances for non-lapsed claims payable after 31 December 1994 –Sec. 8a of the Provisions Act
These adjustment items have in recent years been subject to various changes in the direction of a simpler, more straightforward regime. The first major change, effective as of 1 January 2014, reduced the number of time brackets from six to two, both for non-lapsed claims within the meaning of Sec. 8a (1) (without limit) and for claims within the meaning of claims within the meaning of Sec. 8a (2) acquired by way of assignment whose value at the time at which they came into existence was more than CZK 200,000.
Since 2014, adjustment items are being created as soon as the following time periods have lapsed since maturity:
- 18 months – the company creates an allowance of up to 50% of the unpaid book value of the claim;
- 36 months – the company creates an allowance of up to 100% of the unpaid book value of the claim.
The second major change, which came into force on 1 January 2015, brings down the time period for which a 100% allowance may be created (and which commences upon the receivable becoming mature) to newly 30 months.
The decisive moment for the amount in which the above "time-dependent" adjustment items may be created is the moment in which the receivable came into existence.
Allowances for "small" receivables of up to CZK 30,000 –Sec. 8c of the Provisions Act
For receivables whose book value (balance sheet value) does not exceed 30,000 CZK, the Provisions Act allows for the creation of allowances even before 18 months have passed, and in the full value of 100%. However, the following conditions must be fulfilled:
- the receivable has not been written off, nor does it represent a claim vis-a-vis members (shareholders) of the company for subscribed equity, or a claim among affiliated entities;
- the book value of the receivable at the moment of its origination did not exceed CZK 30k;
- more than 12 months have passed since the receivable became due;
- the aggregate value of all receivables towards one and the same debtor for which the procedure under this provision is being invoked does not exceed CZK 30,000 (not including fees and interest) for the given time period for which a tax return is being filed.
In closing, we would like to add that the new Civil Code prescribes a three-year limitation period for obligations which have arisen after 1 January 2014. Prior to the year 2014, the statute of limitation was four years.
Source: Act No. 593/1992 Coll., on provisions for determining the assessment base for income tax