The Accounting Act allows businesses to keep their accounts in euros or US dollars. In addition, in certain cases, companies may choose other currencies* if the functional currency in their economic environment is that currency.
Although the legal framework is given and the current significant exchange rate fluctuations have had a negative impact on the profitability of many companies, currently less than half a percent of domestic companies keep their books in foreign currency. 80% of the 1,700 or so companies with a turnover of at least EUR 1 million and an export share of at least 50%, keep their books in euros, while 17% keep their books in US dollars, according to Opten*. The Czech koruna, the British pound, the South Korean won, the Swiss franc, the Canadian dollar, the Croatian kuna and the Danish krone also feature in the top list of foreign currency accounting.
Based on our experience as an accounting service provider, transition is definitely something to consider for certain companies, and an experienced expert can help you identify the steps to take before making the decision and implement the process. Let's see what aspects you need to consider and take into account before making the change.
Which companies should switch to foreign currency accounting?
In the context of a currency switch – which may involve a change from HUF to FX, from FX to HUF or from FX to another currency – the foreign currency exposure of the enterprise on the asset or liability side should be considered.
Export-import companies and subsidiaries should typically make use of the option of foreign currency accounting. In the case of the latter, the foreign parent company often requires the subsidiary to keep its books in the appropriate foreign currency, as this speeds up and simplifies the accounting work.
Enterprises that choose to make the changeover with regard to the functional currency can only do so at the end of the financial year, at the balance sheet date of the financial year.
What should companies consider before switching to foreign currency accounting?
- Before the decision to change is taken, it is necessary to check that the accounting system used is suitable for keeping accounts in foreign currency. Does the accounting software meet all the requirements, is the system able to keep the records supporting the VAT return data in HUF, and does it correctly account for exchange differences between financial settlements and periodic (month-end) or year-end revaluations?
- It is also important to know that the chosen currency is for a minimum of three years, the earliest date after which a currency denomination can be changed.
- Even when keeping accounts in euros or dollars, it is not possible to completely eliminate the effect of exchange rate changes. HUF-based supplier invoices (e.g. utility bills) as well as tax and contribution liabilities and tax filings relating to wages should also be denominated in HUF, regardless of whether they are booked in foreign currency. Accordingly, the value of invoices issued in HUF must be converted into the chosen currency.
- In addition, the company may have long-term liabilities or receivables from the period before the currency conversion which are still recorded in HUF, and the issue of conversion arises for these as well.
Corporate income tax and local business tax now also in foreign currency
Although companies have so far only been able to pay their tax obligations in HUF, for the tax year starting after 30 September 2022, Government Decree 298/2022 now allows companies to pay corporate income tax not only in HUF, but also in euros or US dollars, regardless of the currency in which they keep their books.
Calendar year taxpayers will not yet be able to make use of this option in 2022, but may opt for paying tax in foreign currency in 2023.
However, if the company opts for foreign currency taxation from 2023, it must declare this to the tax authority by 1 December 2022, using a special form.
As with CIT, from 1 January 2023, according to Government Decree 366/2022, companies may pay the local business tax advance and local business tax in euros or US dollars to a dedicated account of the Hungarian State Treasury.
It should be noted that if a company already keeps its books in foreign currency, its tax liability must still currently be declared in HUF. Corporate income tax must be calculated on the basis of the balance sheet and income statement in HUF, using the MNB exchange rate at the end of the tax year. From 2023 companies may pay their CIT and LBT liabilities in EUR and USD.
When converting the amount of local business tax paid in EUR or USD into HUF, the exchange rate at the time of receipt by the National Bank of Hungary – as the main bank of the Hungarian State Treasury – will be used, similarly to the payment of corporate income tax in foreign currency. If the exchange rate published by the National Bank of Hungary for that day is not available on the day of debiting, the HUF amount converted at the latest published exchange rate valid on that day will be credited to the taxpayer's tax account.
In the case of corporate income tax, the foreign currency account numbers are now available on the Hungarian Tax Authority’s website, but for local business tax, none of the municipalities, including Budapest, have made the new account numbers known yet, and in the case of special economic zones, the LBT foreign currency account number is not available on the tax authority’s website.
In summary, the companies that will benefit most from this option are those that keep their accounts in euros or US dollars, and it is worth paying corporate income tax and local business tax in foreign currency, when a larger part of the company’s revenues is realised in euros or US dollars. This will save the administration and costs of conversion, which, given the current status of the forint, could represent a significant saving for these companies.
Currency switch – but at what exchange rate?
If a company has already decided to switch to a foreign currency, the next question to be answered is at which exchange rate will it account for business events? The changeover should always be made at the MNB exchange rate on the date of the changeover. The exchange rate for accounting of economic events is optional only after the changeover.
The same applies to companies that keep their accounts in HUF, they have to value each foreign currency item at the time of accounting. When liabilities, receivables, assets or supplier invoices are incurred, the exchange rate at which the item will be recognised in the books must be determined. Although the Accounting Act provides for a relatively wide range of options in this respect, the vast majority of companies choose the official exchange rate of the MNB as the easiest and simplest solution.
However, there are also other exchange rate options:
- For example, you can use the average exchange rate (the average of the buy and sell rates) of a financial institution of your choice.
- •From 2020, you can also choose the exchange rate of the European Central Bank.
- •In addition to these, there is the option - if, for example, in the case of an importer or exporter company, this provides a true and reliable view - for the company to use only a foreign exchange selling or buying rate. However, the prerequisite here is that the difference should have a significant impact on the books.
Foreign currency changeover and reporting date
There is also an interesting adjustment to be expected in relation to foreign exchange. In the year when the company converts from one currency to another, the company translates all assets and liabilities in its balance sheet on the last day of the year of the conversion. This results in a consolidated difference (profit or loss). If this difference is positive, it is recorded in the capital reserve, if negative, it is recorded in the profit reserve.
Under the CIT Act, this difference is treated as a tax base adjustment item. If there is a profit, it will be taxed in the tax year following the conversion, if there is a loss from the conversion, a deduction is allowed against the following year's profits. By way of derogation, if the amount of the registered capital differs from the amount registered with the registry court after the conversion, the capital reserve must always be adjusted in the first place, both in the case of a profit and a loss, and only if the amount of the capital does not allow it, shall the profit and loss reserve be reduced.
Presenting the exchange rate in the accounting policy
Whatever exchange rate the company opts for, it must be laid down in its accounting policy in advance of the changeover and must also be recorded in the articles of association. And this decision will affect the life of the company for several years. If a different exchange rate is chosen at a later date, the effects and sensitivity of this choice must be presented in the supplementary notes, precisely because the company is normally committed to such exchange rate for a long period of time.
Legal obligations in relation to forex accounting
According to the above-mentioned provision of the Accounting Act, the conversion to foreign currency can only take place at the end of the financial year, on the balance sheet date. If the company decides to prepare its annual financial statements in a currency other than HUF – typically in euros or dollars – from 2023, it will have to meet another fundamental legal obligation in the current financial year.
The currency to be used must also be specified in the company's articles of association, the registered capital must be shown in this currency; the change must be registered with the registry court and the resolution on conversion must be adopted before the balance sheet date. Therefore, if the company wishes to change its accounting currency at the end of the financial year, it must make the necessary amendments to its articles of association as soon as possible, before the end of the financial year.
* Source: Opten data, October 2022