• High year-end exchange rate? An old rule could be the answer!
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High year-end exchange rate? An old rule could be the answer!

02 May 2023

Is your company also affected by the high year-end exchange rate? An old rule could be the answer!

Although foreign exchange rates are now slowly returning to their levels of a year ago, the still very high exchange rates at the end of 2022 could have a negative impact on the annual financial statements of many companies.

While companies using the exchange rate of the Hungarian National Bank based on their accounting policies revalued their euro assets and liabilities to HUF 369 at the end of 2021, they had to do so to HUF 400,25 in 2022, i.e., we had to pay more than HUF 31 more for one euro. For companies with a higher stock of foreign currency liabilities than foreign currency receivables, significant exchange rate losses can be expected on the year-end revaluation, which could turn the result negative.

These companies may benefit from the long-standing rule of the Accounting Act to defer part of the year-end exchange rate revaluation loss.

Who might be interested in this possibility?

In particular, companies whose liabilities in foreign currency exceed their foreign currency receivables, especially - according to the specific rule -these liabilities denominated in foreign currency

  • linked to an investment (the tangible asset resulting from the investment), or
  • relating to the acquisition of a right of property, or
  • a loan related to a current asset (typically an inventory financing loan), or
  • a liability arising from the issue of a foreign currency bond,

provided that the loan or borrowing is not secured by a foreign currency position in a foreign currency account.

How should it be applied in practice?

Firstly, the accounting policy should indicate that the Company has chosen to use this option. If this decision is recorded, the following accounting steps should be taken:

After recording the year-end consolidated foreign exchange difference, the exchange loss on the foreign currency liability that meets the requirements should be accrued against deferred expenses.

The accrual shall be released in proportion to the repayment of the loan, so that the accrual is fully eliminated until the loan is repaid in full. The remaining accrual shall also be reversed on the sale or retirement of the asset or asset purchased with the loan concerned.

Based on the principle of prudence, the company is also required to make a provision against other expenses considering the term of the loan and the period already elapsed, which shall be also adjusted at the end of each year according to the current amounts.

Tied-up reserve:
Since this option improves the company's results through not a real economic performance, but through an accounting procedure, it should be a dividend payment constraint, and therefore the law requires the creation of a tied-up reserve from the retained earnings. Its amount is the difference between the amount of the accrued exchange rate loss and the amount of the provision made for it, which must also be updated in the accounts at the end of each year.

If you would like to take this opportunity or need detailed advice on this topic, our colleagues are gladly at your kind disposal!