In the current economic environment exchange rate fluctuations have such significant impact on corporate operations, realised and unrealised exchange differences are often posted in such an extent that was not even calculated during the planning phase. It can be established, in general, that not necessarily the extremely high or low currency rates are the source of problems, but rather the unpredictable changes of the exchange rates. For businesses, where significant part of the transactions is denominated in currencies other than the Hungarian forint, transitioning to foreign currency bookkeeping may be beneficial. We would like to describe this matter in two Newsletters; in the issue of the current month, we discuss the theory of foreign currency bookkeeping, while next month we are going to explain relevant and practical issues of accounting.
Act on Accounting enables any enterprise in Hungary to prepare its Annual Report either in euro or in US dollars. The prerequisite for this is that the decision needs to be confirmed in the Accounting Policy prior to the first day of the business year and the euro or the US dollar should be specified as the foreign currency according to the Articles of Association.
If, in case of an enterprise, currency of the primary economic environment of business activity (functional currency) is other than the euro or the US dollar, the Annual Report may be prepared in other foreign currencies (than the euro or the US dollar) specified in the Articles of Association if the following conditions are met:
- its revenues, costs and expenses, and
- its financial assets and financial liabilities
separately, in the previous and the current business years, arise in more than 25 % in the referred foreign currency (cumulated amount of these conditions should be taken into consideration individually).
Before transitioning takes place, the related legal, taxation related, administrative and other tasks should be considered anyway; sometimes they may result in incremental expenses. Transitioning is only allowed at the end of the business year of the enterprise concerned, at the balance sheet date. Transitioning to bookkeeping in euro or US dollars may only be changed at the earliest with respect to the fifth business year following the decision, which is again accompanied by the modification of the Accounting Policy and the Articles of Association.
In the following we would like to summarise the measures required during the transition period, taking into consideration the related deadlines and regulations:
- The decision on transitioning should be made by the governing body of the corporate. In such a resolution a date later than the date of decision may be defined for the date of transitioning but this date may not be later than the balance sheet date of the business year.
- Modification of the Articles of Association is required until the balance sheet date of the business year where the currency of bookkeeping and reporting, as well as the value of subscribed capital denominated in the selected currency should also be specified. Subscribed capital is determined by the use of a calculated exchange rate and it is calculated without knowing the actual exchange rate at the balance sheet date.
- During the conversion of the subscribed capital an exchange difference arises resulting from the difference between the foreign currency amount of the subscribed capital specified in the Articles of Association and its amount calculated based on the end-of-year exchange rate.
- This exchange difference may be recognised up to the positive value of the capital reserve and beyond that in the retained earnings. (Its accounting will be discussed in more details in our next Newsletter.)
- Decision of the Court of Registry is required for the modification of the Articles of Association.
- Act on Accounting provides the modification of the Accounting Policy when transitioning to foreign currency bookkeeping is implemented. These changes need to be made until the balance sheet date. If the company made a decision to use a foreign currency other than the euro or the US dollar the calculation method of the related limit value should be presented in the Accounting Policy (whether turnover or stock data were taken into account).
- The corporate is required to prepare at the transition date as balance sheet date an Annual Report and a Simplified Annual Report in the currency used prior to transitioning. During preparation of the reports closing of the records takes place at the end-of-year close, in the currency used prior to transitioning.
- The deadline for disclosure and filing of the Annual Report and Simplified Annual Report prepared in the currency prior to transitioning and approved by the authorised body is the last day of the fifth month following the balance sheet date of the business year concerned but from accounting point of view it should be handled as transformation, therefore the available deadline will be shortened to 90 days.
- Concerning the date of transition a separate balance sheet should be prepared in Hungarian forints and in the foreign currency specified in the Articles of Association then the books should be opened on the day following the translation based on this separate balance sheet. During the conversion entries from the General Ledger Extract supporting the balance sheet data of the approved report will be converted using the official exchange rate of the Hungarian National Bank but when converting general ledger entries the revaluation should be made also on an analytical level.
- The opening balance sheet should be audited by a registered auditor. There is no need to disclose it; this will be the supporting document for opening data.
- In the report for the first business year of transition previous year data should be presented as follows:
- as regards balance sheet data for the previous year balances defined in the opening balance should be presented,
- it is recommended to leave the previous year column of the Profit and Loss Statement empty,
- however, due to comparability, it is practical to convert previous year P&L entries in the supplementary annex. There is no requirement for the conversion of Profit and Loss Statement.
Nevertheless, we think it is important to mention that exchange differences should be dealt with during foreign currency bookkeeping as well, which (may) arise due to realised and unrealised revaluation of the assets and liabilities denominated in Hungarian forints and in foreign currencies other than the currency of bookkeeping.
Tax returns must be fulfilled in Hungarian forints even if foreign currency bookkeeping is applied, which should be specifically supported by the proper subledger (maintained in Hungarian forints), therefore prior to transitioning to foreign currency bookkeeping it is primarily important to verify if the bookkeeping software is capable to appropriately prepare and handle it.
At VAT payments or refunds a realised exchange difference will arise in each case, while, as regards tax returns, the employment related taxes and contributions should be converted into the currency of bookkeeping using the exchange rate prevailing on the last day of the month. Their financial settlement will also imply accounting for realised exchange difference. At year end tax and contribution payment obligations or possibly refunds denominated in Hungarian forints will entail the recognition of unrealised exchange difference.
Corporate tax declarations must be prepared also in Hungarian forints. Declaration data should be converted into Hungarian forints based on the official exchange rate, valid on the last day of the tax year, of the Hungarian National Bank. In case of a change of the bookkeeping currency Act LXXXI of 1996 on Corporate Tax and Dividend Tax provides adjustment entries in relation with conversion differences (cumulated transition difference is an item modifying the corporate tax base).