New rules for preparation of 2020 annual financial statements

Project accounting and recording provisions are among the amended elements

By Szabolcs Szeles, Audit Partner of HLB Hungary

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The preparation period for 2020 annual financial statements is fast approaching. During the preparation for the annual close, Hungarian companies need to familiarise themselves with a number of new accounting definitions and rules. In this article we want to offer help to our readers in these tasks related to the 2020 annual financial statements. 

Accounting sales revenue of project companies

One of the most radical amendments to accounting in Hungary in recent years was the income accounting of projects spanning several financial years, which is first applicable when preparing 2020 annual financial statements. The amended rule which took effect on 1 January 2020, and could already be applied for the 2019 financial year, is significantly closer to the international regulation. The gist of this milestone change is that the Act on Accounting breaks away from the tradition of income accounting tied to invoicing and of recognising expenses as inventory, and enables sales revenue to be accounted based on costs incurred and the degree of completion for multi-year projects.

For the new rule to be applicable when preparing the 2020 annual financial statements, new definitions had to be introduced. Contract accounting units must be identified, for which the principle of matching will be applicable in the future. The degree of completion defines the rate of technical completion, which will form the basis for appropriate income accounting. There are two ways of calculating the degree of completion, and this has to be specified in the accounting policies. Accordingly, the degree of completion is either determined as a ratio of the cost of work performed compared to the entire expected cost, or it is based on the completion of a physical part of the contractual task. The sales revenue invoiced according to the technical completion of the project is then adjusted by accruals and deferrals.

It is important to note that for projects spanning several years the accounting of previous years does not have to be changed in the event of an interim contract amendment. The expected total cost must only be recalculated from the date of the contract amendment and for the financial year comprising the date of the contract amendment. This change has an impact on a number of positions in the affected companies’ financial statements. As a result, the data on inventories, accruals and deferrals, provisions and sales revenue will change in the 2020 annual financial statements. 

Recording provisions when preparing the 2020 annual financial statements

An equally new approach is that the Act on Accounting does away with the custom that provisions may only be allocated for expected liabilities, expected costs or in other specifically named cases. In accordance with the new rule applicable for the preparation of the 2020 annual financial statements, Hungarian businesses may record provisions for anticipated losses too, in the case of unfavourable contracts. This will only be possible for contracts that cannot be terminated. Provisions may be allocated for the previously mentioned contract accounting units, but in such cases you must note that any reporting-year losses may already have been recognised with the accounting of costs and sales revenue in line with technical completion. So with this method, only future losses stemming from contracts covering several years can be carried forward. 

Registration date of change requests 

As a result of the amendment to the Hungarian Act on Public Company Information, Company Registration and Winding-up Proceedings, the Court of Registration no longer registers changes as of the date of the General Meeting / Members’ Meeting adopting the change, companies may specify a date in the registration request for the change to take effect. Naturally, this date may only fall after the date the change decision was made.

One exception to this rule is decreasing registered capital, because in such cases the decision is effective from the date of registration.

As a result of the above changes, the Act on Accounting was also amended and based on this the increase in capital is booked on the date it becomes effective. However, the recognition of the increase of a capital reserve made simultaneously with registered capital increase remained unchanged i.e. an increase of the capital reserve  still has to be accounted for on the registration date. This way, the accounting date for the payment into the capital reserve that involved an increase in registered capital may differ, and may even appear in financial statements for a different year. 

Waiver of additional capital contribution 

From 2020 it is possible for the owner to waive an additional capital contribution previously paid to cover losses. If the owner so decides, the amount of the capital contribution must be transferred from the tied-up reserve to retained earnings on the day it is waived.

Audit of transformations

One significant change with regard to auditing company transformations is that while the draft transformation balance sheet and the final transformation balance sheet of each company participating in the transformation have so far been subject to an audit, now, as a result of the change, the draft transformation balance sheet and the draft inventory of assets and liabilities must only be audited if the companies participating in the transformation are subject to an audit themselves. This change does not affect the final transformation balance sheets and the final inventories of assets and liabilities.

Write-off of low-value tangible assets

Furthermore, when preparing 2020 annual financial statements Hungarian businesses must also consider the fact that as of 1 January 2020, tangible assets, rights and concessions and intellectual property with an acquisition cost of less than HUF 200,000 (roughly EUR 55) may be written off in one lump sum.  This rule is applicable from 2020 for assets acquired before 2020 but not yet commissioned.

Different impairment accounting due to VAT of irrecoverable debts

As a result of the amendments of the VAT Act, the options for reclaiming VAT on irrecoverable debts have changed too. Now, whenever they have an irrecoverable debt in the future, affected businesses must assess whether to define the impairment based on the net trade receivable or with VAT included. Since there are various conditions to reclaiming the amount at hand, during the preparation of 2020 annual financial statements care must be taken when accounting impairment.

Several new and interesting definitions and approaches have been entered into the Act on Accounting with the amendments effective from 2020. If you have any questions on preparing 2020 annual financial statements, feel free to contact the experts at HLB Hungary, who will happily advise you on issues of financial statement preparation.

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