Amendments to the Act on Accounting from 2016 – Part I

The version of the Act C of 2000 on Accounting (hereinafter: Accounting Act) that took effect on 4 July 2015 was amended in a number of respects requiring that financial statements are changed both in terms of substance and format. According to transposition obligations set forth in Directive 2013/34/EU of the European Parliament and of the Council, these amendments were inevitable.

Amendments shall first be applied in the business year starting in 2016.In line with Section 177 (45) of the Accounting Act, financial statements prepared about business years starting on or after January 2016 must present the data of financial statements prepared for the balance sheet day of the previous business year (reflecting data in the preceding business year) in line with breakdown conforming to the new layout of the balance sheet and the profit and loss statement, thereby ensuring compliance with the principles of going concern and matching. Therefore, it is recommended to prepare for these changes already during year-end closing in 2015 and break down GL accounts in line with new requirements.

Section 14 (11) of the Accounting Act requires that in case of legislative amendments, changes are also incorporated into the accounting policy.

We are going to summarise major amendments affecting accounts and reports in four newsletters, according to the following breakdown:

• general summary, amendments to definitions, amendments to value limits, amendments to the layout of the balance sheet;
• substantive and format amendments affecting the profit and loss statement, amendments to the layout of the profit and loss statement;
• legislative requirements concerning dividend payment, amendments affecting the notes and the business report;
• the domestic application of IFRS (this is the newsletter that was published in August 2015).

1. Amendments to definitions

Public-interest entity: this was introduced into the Accounting Act as a new term (Section 3(15), the definition of the term is included in Section 2(19) of the Act LXXV of 2007 on the Chamber of Hungarian Auditors, the Activity of Auditors and on the Public Oversight of Auditors.

Participating interest: this was also introduced into the Accounting Act as a new term and provides further details about the breakdown of related parties and other undertakings with which the company is linked by virtue of other than participating interest. Pursuant to definition in Section 3 (2) 9 "significant ownership means rights in the capital of other undertakings, whether or not represented by certificates, which, by creating a durable link with those other undertakings, are intended to contribute to the activities of the undertaking with holds those rights and the rate of which interest exceeds 20%.Balances concerning the undertaking in which the company has a participating interest need to be disclosed in a separate line within the balance sheet of the annual report. Amendments to the layout of the balance sheet are outlined in section 3 of this newsletter.

Undertakings with which the company is linked by virtue of other than participating interests: this term was both used and defined by the Accounting Act earlier, however, the contents of the term were amended; effective from 2016, in line with Sections 3 (2) 2 to 5 and 9, this term shall cover undertakings in which the company does not have a participating interest and that are not regarded as subsidiaries, jointly managed undertakings or related undertakings.

Affiliated undertakings: Effective from 2016, pursuant to Section 3 (2) 7, affiliates shall no longer be regarded as related parties. This term shall only include the parent company, the subsidiary and the jointly managed undertaking. It is important to note that the definition of affiliated undertakings in the Act LXXXI of 1996 on Corporate Tax and Dividend Tax will not follow this amendment, so the amendment does not affect recognitions that emerge in connection with prices applied between affiliated undertakings within the meaning of the act on corporate tax. It is important to note that affiliated undertakings are not the same as related parties. The term related party has a much broader meaning, the definition is included in Directive 2013/34/EU of the European Parliament and of the Council.

Goodwill: both the term and recognition rules were included in the Accounting Act before but effective as of 1 January 2016 these will be amended significantly. These amendments are not going to be detailed in this newsletter. Related detailed provisions are included in the following sections of the Accounting Act: Sections 3 (5) 1 and 2, Section 49 (3), Section 52 (4) and Section 53 (3).

Amendments to the terms of the profit and loss statement: both the layout of the profit and loss statement and the substantive / format requirements concerning individual lines are set to be amended. We will summarize these amendments in our November newsletter.

1. Amendments to value limits affecting the reporting obligation

Pursuant to provisions in Section 9 (1) of the Accounting Act, undertakings using double-entry bookkeeping shall prepare annual financial statements and a business report. If in two successive business years and on the balance sheet day any two of the following three value limits denoting the size of the undertaking remain below the value limits set out in the following table, the affected undertaking shall be exempted from the obligation to prepare annual financial statements and a business reports:

These relaxed provisions cannot be applied by public limited companies, parent companies, public-interest undertakings and businesses the issued securities of which are approved to be traded on the stock exchange or that have already applied for such approval.

Regarding the preparation of consolidated reports by parent companies, amendments to the act also grant concessions. Pursuant to provisions in Section 117 (1) of the Accounting Act, parent companies shall be exempted from the obligation to prepare a consolidation annual report about the affected business year, provided in two successive business years and on the balance sheet day any two of the following three value limits remain below the value limits set out in the table below:

1. Amendments to the layout of the balance sheet

Amendments to the layout of the balance sheet were necessitated primarily by amendments to definitions outlined above. In the course of disclosing assets and liabilities the following lines will be added:

In addition, due to amendments made to dividend payment, the balance sheet profit/loss category ceases to exist so the profit and loss statement will only include net income (profit after tax). Accordingly, regarding the components of own equity, balance sheet profit/loss will also change to net income.