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IFRS: Should I Stay or Should I Go?

I was very enthusiastic about the opportunity to apply IFRS in Hungary.

In my consulting engagements I often come across complex or industry-specific business transactions the accounting treatment of which is simply beyond the scope of our far from innovative Act on Accounting.

However, as a consultant, I am also used to my enthusiasm for “neat” accounting solutions unfortunately not being contagious. From a business aspect the only question that really matters when making decisions on matters like transferring to IFRS is: Is it worth it or not? In this first post of my IFRS blog series I would like to give practical guidance for this decision.

Eligibility to apply IFRS

The first fundamental question that we need to clarify from the perspective of IFRS transition is whether the Hungarian Act on Accounting allows the company in question the application of IFRS for stand-alone reporting purposes. At the moment, the companies eligible to prepare stand-alone IFRS statements are basically companies listed on the stock exchanges of the EEA, companies performing activities to which the Act on Concessions applies and subsidiaries having their seat in Hungary the direct or indirect parent company of which prepares its consolidated financial statements according to IFRS. From 1 January 2017, the group of companies having the option (and in certain cases, the obligation) to prepare IFRS statements will be extended to include companies with audit obligation, the Hungarian branch offices of businesses having their seat abroad and companies in the financial sector.

Accounting administration

In my experience, a substantial part of the companies considering transition to IFRS had to report data according to IFRS in some form to the stock exchange, their parent companies or to international creditors. For these companies a clear advantage of adopting IFRS as their primary accounting system could be that the duplication of accounting systems may be eliminated this way. Whether transfer to IFRS will bring a reduction or an increase in administration depends to a large extent on the complexity of the IFRS reporting system the company put in place earlier. In the case of the companies which basically already operated a comprehensive IFRS accounting system parallel with their Hungarian system an improvement of efficiency is guaranteed. However, transition to IFRS may (in the beginning at least) also come with substantial extra administration for companies in the case of which the accounting system has to be rebuilt from scratch, IFRS-compliant accounting policies, procedures and reporting templates have to be prepared, training of the accounting staff has to be organized and preparations have to be made for the necessary changes in business software etc. The costs and time requirement of the transition may also be increased by the statutory requirement that the financial statements prepared according to IFRS must be certified by an accounting expert with IFRS chartered accountant registration or IFRS auditor qualification.

Industry and business environment

The Hungarian accounting regulations hardly contain any industry-specific rules. As a consequence of this, reasonable accounting treatment of unique transactions in certain complex industries or industries with innovative business concepts (such as the oil and gas industry or the real estate industry) is almost impossible under the current Hungarian accounting (and tax) system. In contrast, IFRS includes a number of industry specific standards and guidelines. Furthermore, not only representatives of the regulatory authorities were involved in the development of these standards but also major participants of the given industry and the consulting profession. Therefore, the adoption of IFRS makes the accounting for industry specific transactions much easier.

Taxation

No matter how sophisticated an IFRS based accounting system is or how efficient it is from an administrative perspective, there are no arguments supporting transition if it comes with a higher tax burden for the company than the application of Hungarian accounting rules. I will discuss the relationship of IFRS and the Hungarian tax system in detail in a later post of my blog series. Let me just put two things clear now: No general statement can be made (which is not surprising) regarding the impact of an IFRS transition on tax payment obligations. However, it can unfortunately almost be guaranteed that (in the short run at least) an increase can be expected in tax administration burdens due to the usually long reaction time needed on the regulatory side to adapt to changes in law by revising details of tax administration rules, tax return forms etc., and due to the complex transitional provisions relating to the corporate tax treatment of the IFRS transition.

For whom is it advantageous to adopt IFRS and for whom is it not?

In simple terms, at the moment a transition to IFRS is the most advantageous for those who basically already apply the international financial reporting standards comprehensively. Companies the industry or the business environment of which are so complex that for them Hungarian accounting regulations did not provide a proper quality business information background may also benefit from the transition. In contrast, the initial administrative investments required for a transition to IFRS may be too high relative to expected benefits for companies operating in traditional industries and business environments. However, local preferences may be overridden even in case of these companies by international or by group level efficiency considerations.

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