From 1 January 2016 significant changes will take place in accounting regulations in Hungary. Firstly, certain articles of the Accounting Act will also significantly be amended, and secondly, with its No. 1387/2015 resolution the Government allowed the application of reports prepared according to the International Financial Reporting Standards (IFRS) for individual accounting purposes in Hungary.
Until now, it has entailed a significant additional burden – as well as additional cost – for companies with international background and for listed companies that they have had to prepare their respective reports in line with the provisions of the Accounting Act and according to the IFRS as well, based on parent company and other rules. However, the legislation published now does not allow all economic operators to use reports compiled according to the IFRS. The intention with this newsletter is to present for whom and under what conditions it is optional or mandatory to choose this form of reporting.
The legislation regulates the introduction of the International Financial Reporting Standards (IFRS) in Hungary in three phases.
From 1 January 2016, with the exception of the institutions supervised by the Magyar Nemzeti Bank (MNB), the following organisations may opt for the application of the IFRS:
– businesses whose securities are traded in the regulated market of any member state of the European Economic Area (EEA),
– based on the parent company's decision, those enterprises whose highest parent company prepares its consolidated accounts on the basis of the IFRS.
From 1 January 2017, the application of the IFRS is mandatory for
– businesses whose securities are traded in the regulated market of any member state of the EEA,
– credit institutions and financial enterprises that are equivalent to credit institutions and comply with prudential regulation, with the exception of cooperative credit institutions and other credit institutions participating in the integration of cooperative credit institutions as well as certain smaller-size credit institutions.
From 1 January 2017, the application of the IFRS is optional for
– insurance companies, with the exception of insurance associations not falling under the Solvency II regulation,
– institutions under the MNB's supervision and not mentioned above, except for funds,
– companies not mentioned above and falling under an auditing obligation.
From 1 January 2018, the application of the IFRS is mandatory for
– cooperative credit institutions and other credit institutions participating in the integration of cooperative credit institutions as well as certain smaller-size credit institutions.
Accordingly, the above regulation means that for those entitled, the report prepared according to the Accounting Act will completely be replaced by the report compiled in line with the IFRS. 2016 is considered as a transitional period as the legislation does not yet compulsorily require the application of the IFRS, with the exception of the companies that have already been reporting in this format. Nevertheless, we would like to call attention to the fact that even the IFRS reports have to indicate the similar data of the previous period, which have to be comparable to the current year, i.e. they have to be prepared according to the same reporting principles. It means that if a company decides to introduce the IFRS on 1 January 2016, they have to convert their 2015 data as well in line with the requirements of the IFRS.
However, the introduction of the IFRS in Hungary does not only entail the changing of the form of reports. Several types of taxes are based on the lines and profit/loss categories of the reports prepared according to the Accounting Act (e.g. corporation tax: pre-tax profit; innovation contribution: business tax: net sales revenue – cost of goods sold, mediated service). Special tax-modifying items may apply to companies that use the IFRS, and special tax assets and tax liabilities may arise (deferred tax) upon the changeover as well. In addition, the statistical and IT systems also have to be prepared for the change in reporting standards. Therefore, the Government called upon the ministers concerned in the form of a resolution that they should ensure the conditions of the introduction of the IFRS by amending the relevant legislation.
Our next newsletters will highlight the amendments to legislation related to the introduction of the IFRS.
If you have any further questions in connection with the changeover to the IFRS, please, do not hesitate to contact the staff of BDO.