Preparation of financial statements: key considerations for year-end closing

When is it necessary to prepare financial statements?

Preparing financial statements is an annually recurring task, but by no means a routine one.

Entities required to prepare financial statements must perform this task with the utmost precision and professional diligence. In addition to the annual financial statements, there are numerous other situations that may trigger a reporting requirement.

For example, preparing an interim balance sheet may be required for the purposes of dividend distribution or capital increase. Furthermore, companies undergoing transformation, merger or demerger must prepare closing financial statements for the date of the transformation. Similarly, financial statements must be prepared both at the start and the conclusion of liquidation or voluntary dissolution.

Many of the sub-processes involved in these events are identical to the steps of preparing annual financial statements. The following summary focuses on these key tasks and their technical aspects, with particular emphasis on the accuracy of financial reports, legal compliance and ensuring corporate transparency.

Presentation of non-current assets in the financial statements

During the year-end closing for non-current assets, it is essential to thoroughly verify whether the value of all assets put into use during the given year has been transferred from the GL account for construction in progress to the GL account containing the gross value of the corresponding capitalised asset.

If depreciation has been recorded, it must be shown in the GL account for accumulated depreciation corresponding to the given asset. During closing, it should be checked whether the current-year increase under the accumulated depreciation GL account in account class 1 is equal to the current-year balance of GL account 57 within expenses.

As for the accounting of tangible assets derecognised during the current period, it is important to ensure that, upon the derecognition of the assets, both the gross value of the asset and the related accumulated depreciation are removed from the general ledger accounts. Any gain or loss arising from the derecognition of assets must be recorded in the general ledger account for the relevant expense or income. These steps ensure that the financial statements accurately reflect changes in the balance of assets and the financial position of the company.

When preparing financial statements, entities need to make sure that the amounts of gross, net and accumulated depreciation shown in the subledger of non-current assets are equal to the year-end balances of the corresponding GL accounts. This is important because these relationships form the basis for the statement of changes in tangible assets in the notes to the financial statements. Consistency between the subledger and the general ledger ensures that the financial statements are accurate and reliable.

Try our comprehensive accounting services

Value of inventories

In order to properly support the financial statements, it is essential that the value of inventories is accurately shown in the balance sheet. If the company uses an integrated accounting system configured with appropriate professional expertise, one that records both quantities and values, then the value of inventories is transferred from the inventory management module to the general ledger either automatically or by way of posting. In such cases, a physical inventory count must be performed, which must also be traceable in the software.

If the company does not have an inventory management module linked to the accounting software, the year-end values shown in the inventory management module must be recorded in the general ledger in an identical manner. It is important to note that the value of uninvoiced mediated services must also be recorded in inventories.

Liabilities and their revaluation at the reporting date in the financial statements

Only items accepted and confirmed by the counterparties may be recognised under trade receivables in the balance sheet. During the preparation of the financial statements, receivables denominated in foreign currency must be translated using the exchange rate applicable at the reporting date and shown in the financial statements accordingly. If a partner has an overpayment, such overpayment must be shown in the balance sheet under other liabilities. When recording and reversing impairment losses on trade receivables, the requirements of the company's accounting policy must also be observed.

For cash and cash equivalents, properly documenting the balance at the reporting date is crucial. This can be achieved using a report prepared during a cash inventory count in the case of cash on hand and a bank statement dated for the reporting date in the case of bank balances. In the event of an audit, the auditor will also request a bank confirmation letter issued by the financial institution, and it is advisable to obtain this for the closing. For cash and cash equivalents denominated in foreign currencies, transactions should be recognised in the books using the appropriate exchange rate and should be translated at year-end using the exchange rate applicable at the reporting date. The exchange rate set out in the accounting policy will apply in this case as well.

For financial instruments recognised under both non-current assets and securities, it is important that the year-end balance be properly supported. For loans and borrowings, this means obtaining a balance confirmation from the counterparty, while for shareholdings, the financial statements of the companies owned may be used. For listed securities and shareholdings, the price at the reporting date can be used as the basis.

Equity and registered capital

For equity, comparing the amount of registered capital with the amount shown in the company extract is recommended, especially if the accounting staff is not directly notified of changes in registered capital.

The previous year's after-tax profit must be reclassified to retained earnings in each case.

If the company has purchased non-current assets using the development reserve, an itemised reconciliation of the balance of the tied-up reserve is also required. If during the current year the owner resolved to pay dividends upon the approval of the previous year's financial statements, then this must be recorded in the books at the date of such resolution.

Provisions

Provisions may include mandatory provisions required by law and those of the company's choice. For both types of provisions, the availability of appropriate documentation is essential, and whenever provisions are created, their future release should also be considered when preparing financial statements.

Trade payables

The closing tasks involving trade payables are very similar to those described in the section on trade receivables. When preparing the financial statements, supplier overpayments must be reclassified to other receivables in the balance sheet. For both trade receivables and trade payables, it is important to ensure that receivables from and liabilities to related parties are shown in separate line items in the balance sheet of the financial statements.

For loans and borrowings recognised in either assets or liabilities, the instalments due in the year following the current year must be shown in the balance sheet under current items. It is worth remembering that these items must be reclassified from non-current to current items.

Wages and taxes

During the year-end reconciliation of wage accounting, a point to consider is that if the wage for the last month was not paid in the current year, the balance should normally equal the amount of the first wage payment following the current year.

For taxes paid during the year, the balances recorded by the tax authorities and adjusted at the reporting date should be used as the basis during the closing process, and the balances shown in the general ledger should be reconciled to these. If the company records charges and payments on separate GL accounts for each tax type, these should be aggregated during the closing process to facilitate reconciliation.

Before taxes on profit are accounted for, all tasks included in the closing process must be completed, and such taxes must be calculated and recognised based on the final amount of the pre-tax profit. A key point to consider is that the calculation and accounting of local business tax must always precede the calculation and accounting of corporate income tax.

Prepayments and accruals

During the reconciliation of prepayments and accruals, it must be checked if the items recognised in the previous year have been reversed.

It is also crucial that, for prepayments and accruals affecting multiple years, if an item was recognised in a foreign currency, then the unrealised exchange rate difference at the end of the year must also be accounted for, similarly to all receivables and liabilities denominated in foreign currency. This is often neglected during closing.

Recognition of deferred taxes in standalone financial statements

The Accounting Act has been amended to introduce the concept of deferred taxes to be recognised in standalone financial statements, in alignment with the rules of IFRS. The presentation of deferred taxes is optional and not mandatory for companies, and is first applicable for FY 2024.

This means that companies may choose whether to recognise deferred taxes in their standalone financial statements, and this option is already available for FY 2024.

Checking and closing profit and loss accounts

As regards profit and loss accounts, special attention should be paid to items with unusual balances during the closing process. This means that a debit balance on an income account and a credit balance on a cost or expense account should raise a red flag.

When reconciling profit and loss accounts, the following questions should be considered:

• If there is a balance in net sales revenue, are there any related expenses, mediated services or inventory sales recognised?
• If the company has non-current assets, is there a balance on the depreciation expense account? Furthermore, if any tangible or intangible assets were sold, were the related items recorded on the accounts for other income or other expenses? For financial instruments, these should be recognised in financial profit or loss.
• For non-current assets and inventories, is the value of any surplus, deficit or scrap recognised on the corresponding profit and loss accounts?
• If taxable in-kind benefits were incurred by the company during the year, are the related other staff costs also recognised in profit?
• For internally produced or manufactured assets, is the balance of capitalised own performance recognised in profit?
• If there are receivables and liabilities denominated in foreign currency, is the gain or loss arising from their translation at the reporting date presented in an aggregated manner?
• Finally, it is particularly important to ensure that the format of the financial statements complies with the legal requirements. It is often the case that a company is no longer eligible to prepare simplified annual financial statements, but this is only revealed during the audit.

Checkpoints before closing and mandatory audits

Furthermore, during the final touches, it is worth reviewing the basic reconciliations once again, for which the online reporting and form filling (OBR) system provides some guidance and verification options.

In addition, it is necessary to examine whether a statutory audit is required, as governed by Section 155 (3) of the Accounting Act. According to this provision, audits are not mandatory if the average annual net revenue of the entity for the two financial years preceding the financial year did not exceed HUF 300 million (HUF 600 million starting from 1 January 2025),and the average headcount of the entity for the two financial years preceding the financial year did not exceed 50.