23 July 2019
The Act C of 2000 on accounting orders the parent companies to draw up a consolidated annual report, which poses a great administrative burden to such enterprises. But what exactly is a consolidated annual account? And what are the conditions of exemptions? Find out from the following article.
The Act C. of 2000 on accounting (hereinafter: “Accounting Act”) orders enterprises who use the double entry method to draw up an annual account and to disclose it in due time. The aim of this obligation is to ensure the transparency of the enterprises’ financial position and economic performance, for the defense of the creditors and investors. The comparability of such annual accounts is also important for the creditors’ defense. Comparability in this sense means that the annual accounts should be comparable with the enterprise’s former annual accounts, and with annual accounts drawn up by other enterprises. As per Section 19 of the Accounting Act, the comparability of the annual accounts of consecutive financial years shall be provided for by the structure, division and contents of the balance sheet and the profit and loss account, as well as by the consistency of the valuation principles and procedures of balance sheet items.
For the sake of transparency and comparability the Accounting Act prescribes an additional obligation to enterprises, which qualify as parent companies. This obligation is prescribed, because it is necessary to be able to examine the parent companies’ investment portfolio’s assets, as it was one company’s. Moreover, with this rule the legislator wants to react to the tendency that many times entities within a group are not economically independent from their parent, thus not making decisions based on market rationales. Therefor one can only get a real image from their financial position and economic performance, if one accounts and examines such groups jointly, in a consolidated annual account. The consolidated annual accounts also help to filter the differences between groups that have similar activities and size, arising from the different company structures.
The consolidated annual account, similar to standard annual accounts, is comprised of balance sheet, the profit and loss account, the notes on the account and of the annual report. The obligation to draw up a consolidated annual account does not exempt the enterprises within the group from their obligation to draw their own “individual” annual accounts separately, in fact, the consolidated annual account is drawn up based on these individual annual accounts. This also means that the parent company is the one that is obliged to make the consolidated annual account.
The Accounting Act however contains rules that exempt certain parent companies from their obligation to draw up a consolidated annual account, if certain criteria that is prescribed by law is met.
These exemption rules can be put into two main categories, one is when (i) the accounting indexes prescribed in law do not exceed a limit that is prescribed, and when (ii) when a parent company is a subsidiary of a parent company itself.
The scenario is a de facto de minimis rule, which is applicable to groups that do not exceed the limits set by the legislator. Such entities are considered small on a group level, and are therefore exempt, since due to their size the difference between the reality and the amounts in the books cannot be too large. One should not forget however that the amounts prescribed in the Accounting Act are to be considered on a group level, not individually. Also, the parent company is only exempt, if in the former two financial years it met with the conditions of exemption, meaning that it is not enough for the exemption if the group only meets the criteria in one year.
In the second case parent companies that are subsidiaries to a superior parent companies are exempt of the obligation to draw up a consolidated annual account, if the superior parent company draw up a consolidated annual account, in which the parent company and its subsidiaries are indicated, can be exempt from the consolidated annual account updrawing obligation, if other criteria prescribed by law are met.
Such a criterion is governed by Section 116. Subsection (1) of the Accounting Act, which states that if the superior parent company is established in any Member State of the EEA, and prepares and discloses consolidated annual accounts and a consolidated annual report according to the Accounting Act or according to the EU directives prescribed in the Accounting Act, then it shall be exempt of the obligation to prepare a consolidated annual account. This section exempts parent companies of such obligation, because a consolidated annual account is prepared about them and their subsidiaries by the superior parent company, whose seat is in the EEA, therefore they are under the effect of the EU accounting regulations. This fulfills the consolidated annual account’s original aim, which is to ensure the transparency of the subsidiaries, without a large, unnecessary administrative burden.
Section 116. Subsection (2) of the Accounting Act is another similar exemption rule, which exempts the parent companies from the obligation to prepare a consolidated annual account, if the parent company itself is a subsidiary to a superior parent company. In this case however the superior parent company is not seated in a member state of the EEA, but it prepares its annual accounts according to the EU directives (IFRS), or according to standards equivalent to them. This section is a result of the globalization of the companies both in the EU, the US, and other parts of the world, which arose the need for the harmonization of the accounting standards. Due to this overwhelming need a co-ordinational work had started, due to which the European Commission in the 2008/961/EC Commission Decision announced that the Generally Accepted Accounting Principals of Japan, Generally Accepted Accounting Principals of the US, and some International Financial Reporting Standards shall be considered equivalent to IFRS.
However as per the provisions of Section 116. Subsection (3) of the Accounting Act, the exempt parent company is not free from all obligations in connection with the consolidated annual account. The exempt parent company shall mark in its’ notes on the accounts the name and the seat of the superior parent company preparing the consolidated annual account, and also shall indicate the provision, under which it is exempt from the obligation to prepare the consolidated annual account. Moreover the exempt parent company has to indicate information about its’ assets, revenues, profit, etc. in its notes on the account. The exempt parent company also has to disclose the superior parent company’s consolidated annual account in Hungarian language, within 60 days of its’ approval.
Per the above it is possible to be exempt from the obligation to prepare and disclose a consolidated annual account, however in rare cases, meeting strict criteria. In every case one has to examine the governing acts and the company’s structures carefully. If you have any question regarding the consolidated annual accounts, feel free to contact BekesPartners.