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Mandatory components of the notes to the accounts

01 June 2015

 

31 May is a key date for many businesses from an accounting perspective, at least for those whose record date is 31 December, because the deadline for filing their reports is 31 May. Besides having to comply with the disclosure obligation, the businesses concerned also have to present the mandatory components of the accounts under the Accounting Act. This newsletter sums up the mandatory content components of the notes to the annual accounts, providing assistance for the accounting staff of the businesses having to meet a deadline closing in.

Sections 88—94/A of the Accounting Act stipulates the mandatory components of the notes; in addition, some of the remaining sections also set forth mandatory components in respect of the balance sheet and the profit and loss accounts or in reference to some general sections. Focusing on the individual parts of the annual accounts, we sum up the necessary components, thereby providing a check list for the readers of this newsletter.

Section 88—90 of the Accounting Act lists, among others, the following general content components:

  • Presentation of data on specific activities
  • Assessment of financial, equity and income position
  • Key components of the accounting policy
  • Rules applied to the compilation of the accounts
  • Valuation methods adopted
  • Impact of identified material errors in a breakdown by year
  • Recommendations for the utilisation of the after-tax profit if different from the one approved by the members' meeting/general meeting
  • Reference to statutory auditing
  • Fees charged for auditing and services other than auditing providing assurance
  • Data of the person in charge of accounting
  • Names and addresses of the persons authorised to represent the business undertaking and required to sign the annual accounts
  • Principal place of business
  • Website if the business discloses the accounts over the Internet as well
  • Profit/Loss of closed forward/futures transactions, options, swaps and their impact on cash flow
  • Value of subordinated assets in a breakdown by legal code
  • In the case of profit and loss accounts prepared with the COGS method value of own performance capitalised and costs by cost type in accordance with Version A presented in a comprehensive manner with operating profit or loss as the last item on the list
  • Data of branches abroad by branch

In addition to the foregoing, further components must also be included in the accounts respect of a few general topics, such as:

  • Reference to the business undertaking's intention to switch to the simplified tax scheme, the small taxpayers' itemised lump sum tax scheme or small business tax scheme from the following year
  • Reference to the business undertaking's first preparing accounts under the simplified tax scheme, the small taxpayers' itemised lump sum tax scheme or small business tax scheme from the following year (Section 2/A(5))
  • Further information must be provided if the proper application of accounting principles prove to be inadequate. (Section 4(3))
  • Deviation from the applicable statutory regulations with the approval of the auditor (Section 4(4))
  • The usability of the information disclosed is commensurate with the costs of producing that information. (Section 16(5))
  • The annual accounts are composed of the balance sheet, the profit and loss account and the notes on the accounts. A business report must also be prepared concurrently with the annual accounts. (Section 19(1))
  • In the case of figures that are not comparable, this lack of comparability must be explained. (Section 19(3))
  • If an asset or liability can be entered under several items of the balance sheet, the solution applied must be defined. (Section 19(4))
  • Figures in the annual report shall be provided in HUF 1,000. If the balance sheet total in the annual accounts of an undertaking is more than one hundred billion HUF, the figures must be provided in HUF million. (Section 20(2))
  • Indication of the place and the date, and a signature must be furnished with the finalised accounts (Section 20(6))
  • Explanation for and the impact of a change in valuation principles and the impact (Section 46(2))
  • When determining the HUF value of assets and liabilities denominated in foreign currencies, all assets and liabilities denominated in foreign currencies may be uniformly valued at buying and at selling rates. (Section 60(6))

Specific provisions governing the balance sheet are contained in Section 22:

  • Reasons for switching from one balance sheet version to the other; (Section 22(1))
  • If new items are added, they must be elaborately presented with the reasons also stated (Section 22(2)).
  • A description and an explanation for the items indicated by Arabic numerals merged within the same category (Section 22(3))
  • Presentation of the assets under asset management (Section 23(2))

Regarding tangible assets, several sections of the Act set forth the items that companies are required to disclose:

  • Reasons for and the presentation of the impact of changes in depreciation, useful life and residual value (Section 53(4))
  • The opening value, increases, decreases and closing value of value adjustments; the principles and methods of valuation at market value (Section 59(1))
  • Method and frequency of accounting for depreciation (Section 88(4))
  • Opening gross value of tangible assets (Section 92(1))

Section 90(4) governs disclosure of information about invested financial assets:

  • The book value and fair value of invested financial assets if their book value is substantially higher than the market value, and an explanation for not recognising impairment

The following content components apply to equity:

  • Trends in equity and liabilities (Section 88(2))
  • Committed reserves in a breakdown by legal code (Section 90(3))
  • Changes in equity; the percentages of subscribed capital held by the parent company, by subsidiary company/companies, joint undertakings and by affiliated undertaking(s) (Section 90(6))
  • Data on acquisition of own shares and own partnership shares repurchased (Section 90(7))
  • Number of the shares issued (Section 91(b))
  • Number and face value of the convertible bonds issued (Section 91(b))

Section 41(8) of the Accounting Act stipulates the information to be disclosed on provisions:

  • Provisions as created and utilised shall be itemised in a breakdown by legal code. If the amount of any particular provision substantially differs from that of the previous year, the reasons therefore shall be presented.

Regarding liabilities, the following five items must be presented in the accounts:

  • Liabilities whose repayable amount is higher than the amount received (Section 68(1))
  • The full amount of the liabilities, the remaining maturity of which is longer than five years (Section 90(3))
  • The full amount of liabilities which are secured by a lien, mortgage or similar rights (Section 90(3))
  • Off-balance sheet liabilities (Section 90(3))
  • Contingent liabilities and commitments (Section 90(4))

Businesses with long-term liabilities must include the following information in their annual accounts

  • From long-term liabilities, instalments repayable within one financial year (Section 42(3))

If the company also has related parties, and entered into business transactions with them in the reporting business year, they must provide a considerable amount of information in accordance with Sections 89 and 90:

  • The names and registered offices of all business associations which are subsidiaries, jointly managed by the undertaking or which are associated with the undertaking to which the notes pertain; separately illustrating the equity and the subscribed capital of such undertakings, their reserves, the percentage of shareholdings, their profit or loss figure for the last financial year (Section 89(1))
  • The names and registered offices of all business associations which are in other share ownership relationship with the undertaking to which the notes pertain (Section 89(1))
  • The name, registered address and voting percentage of the members (shareholders) with substantial influence, majority control influence or direct control influence (Section 89(2))
  • The name, registered address, the amount of subscribed capital and voting percentage of all business associations where the undertaking has majority control influence or direct control influence (Section 89(3))
  • Related-party transactions if conducted under terms and conditions other than arm's length (Section 89(6))
  • The name and registered office of the company that draws up the consolidated accounts of the largest body of companies of which the company forms part as a subsidiary company (Section 89/A (a))
  • The name and registered office of the company that draws up the consolidated accounts of the smallest body of companies of which the company forms part as a subsidiary company and which is also included in the body of companies referred to in Paragraph a) above (Section 89/A (b))
  • The place where copies of the consolidated accounts are available (Section 89/A (c))
  • The amounts of receivables and liabilities separately for the parent company and for the subsidiary company (companies) under the headings Long-term loans to affiliated undertakings, Liabilities to affiliated undertakings, Subordinated liabilities to affiliated undertakings, Long-term liabilities to affiliated undertakings, and Short-term liabilities to affiliated undertakings (Section 90(2))
  • The amount of the provisions created for liabilities to affiliated companies and the appropriation of such provisions broken down according to titles, in particular the amount of provisions set aside for guarantee commitments made to affiliated companies (Section 90(8))
  • The amounts accounted with affiliated undertakings, broken down as parent company/subsidiary company, from accrued income as shown in the profit and loss account under Total sales revenues and Other income ‒ in this order ‒ and under Extraordinary income (Section 93(6))

Several sections stipulate the mandatory components of accruals and deferrals:

  • Explanation for negative goodwill written off over a period of five years (Section 45(4))
  • Explanation for the deferred income written off over a period of five years (Section 45(5))
  • Amounts of import of receipts shown under accrued income, deferred expenses,
    expenses and costs shown under accrued liabilities, accrued income, and the trend of such over time
    (Section 90(1))

Several sections address the special features of the profit and loss accounts:

  • The presentation of Section 90(9) in the case of fair value valuation (Section 59(2))
  • When switching from one method (version) of profit and loss accounts to another, an explanation must be offered (Section 71(2))
  • A description and an explanation for items merged in the profit and loss accounts (Section 71(5))

 

The following must be disclosed in connection with Sales

  • The amount of external sales in a breakdown of goods and services exported, showing separately the markets of the European Union and non-Community markets, further broken down according to geographical location (Section 93(1))
  • The total sales revenues broken down per the principal activities specified in the deed of foundation (Section 93(1))

Section 93(2) and (3) provide information on Other income

  • If any export subsidies apply, the direct prime costs directly related to the revenues from external sales.
  • The amounts of any non-repayable support or aid ‒ received, disbursed or accounted ‒ within the framework of any aid scheme shall be illustrated in the supplement in detail, to include the amount received, the amount used and the amount available (broken down by title and year).

Section 95(a) sets forth the information on Wages to be disclosed:

  • The average statistical number and wage costs of employees, other employee benefits, in a breakdown of groups of staff

Section 53(5) sets forth the following in connection with depreciation:

  • Description of the impact of any material change in depreciation on profit/loss

The following information on all kinds of impairment must be disclosed by businesses preparing annual accounts:

  • The original amounts of receivables, impairment accounted for, reversed or accounted as accumulated as broken down by headings (Section 55(4))
  • The opening value of impairment of, increase and decrease inand closing value of financial investments (Section 92(3))
  • The opening value of impairment of, increase and decrease inand closing value of inventories (Section 92(3))
  • The opening value of impairment of, increase and decrease inand closing value of securities recognised as current assets (Section 92(3))
  • Section 86(8) stipulates that extraordinary profit/loss be detailed by legal code if its impact is material.
  •  
  • Section 91 sets forth the mandatory presentation of corporate income tax adjustments and the effect of extraordinary income and extraordinary expenses on the corporate income tax basis, expressed in numbers (Section 91(c) and (d))

The following must be disclosed in the notes by companies engaged in import activities:

  • the amount of import purchases in a breakdown of goods and services imported, showing separately the markets of the European Union and non-Community markets, further broken down according to geographical location (Section 93(1))

Pursuant to Section 93(4), the costs of research and experimental development in the subject year must be presented in the notes to the accounts.

Pursuant to Section 154(3) of the Accounting Act, if the annual accounts of the undertaking were not audited, or, in the case of a compulsory audit, the auditor has refused its seal of approval, the undertaking shall place the following text on all copies of the balance sheet, profit and loss account and notes to annual accounts "The data published have not been reviewed by an auditor.

 

Section 94 stipulates the information to be mandatorily provided in connection with environment protection:

  • Tangible assets directly serving environmental protection purposes (Section 94(1))
  • Opening and closing amount and value and any increase and decrease in the quantity and value of hazardous waste (Section 94(2))
  • The amount of provisions formed in the subject year and in the previous financial year for the purpose of covering liabilities of environmental protection and future expenses related to environmental protection, separated by titles, the amounts accounted for in the subject year and in the previous financial year for environmental protection costs, as well as the expected amount of environmental damages and liabilities not included in the balance sheet must be presented in the notes (Section 94(3))

 

 

In the case of office holders the following items must be disclosed under Section 89(4):

  • The remuneration payable for the activities of executive employees, members of the Board of Directors
  • Loans to and guarantees granted by executive employees, members of the Board of Directors
  • The full amounts of pension obligations to former executive employees, members of the Board of Directors and members of the Supervisory Board

 

The notes to the annual accounts must also contain a cash flow statement under Section 88(6) of the Accounting Act.

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