Today, the global harmonisation of accounting standards is becoming increasingly common, with more and more countries announcing that they are adopting or aligning their national accounting rules with IFRS. There has been a growing need for the investors and creditors of businesses to have access to information about entities based on rules that are uniform across countries. As a result, the adoption of IFRS is becoming optional or mandatory in an increasing number of jurisdictions. All listed companies in the European Union are required to apply IFRS rules when preparing their consolidated financial statements. As a Member State of the European Union, Hungary is required to adopt the Accounting Directive and to implement the Regulation requiring the application of IFRS in the EU.
Who should transition to IFRS?
Financial reporting in accordance with IFRS (International Financial Reporting Standards) primarily benefits companies with foreign partners or interests, as well as companies planning international expansion in the future.
What companies can transition to IFRS reporting?
Two broad categories of companies affected by the transition to IFRS as the primary accounting basis are distinguished based on whether preparing financial statements in accordance with IFRS is optional or mandatory for them.
Transition to Annual Accounts prepared in accordance with IFRSs
Preparing annual financial statements in accordance with IFRS has been possible for certain types of businesses since 2017.
Entities required to prepare their financial statements in accordance with IFRS include businesses whose securities are traded on a regulated market in any country of the European Economic Area, as well as credit institutions and financial enterprises equivalent to credit institutions.
Entities that may prepare their financial statements in accordance with IFRS include:
- businesses whose direct or indirect parent company prepares its consolidated financial statements in accordance with IFRS,
- insurance companies,
- financial enterprises, payment institutions, electronic money institutions and investment firms which are supervised by the National Bank of Hungary acting as a supervisor of the financial intermediation system, central securities depositories, central counterparties, stock exchanges, occupational pension providers, money market intermediaries and insurance intermediaries included in the IFRS consolidated financial statements on the basis of a parent company decision, as well as funds and fund managers subject to the Act on Collective Investment Trusts and Their Managers and on the Amendment of Financial Regulations,
- entities subject to a mandatory audit,
- the Hungarian branches of companies registered abroad
Government or municipal asset management companies, not-for-profit organisations, mutual insurance companies subject to the Act on the Business of Insurance, pension funds, health funds, and mutual funds may not prepare their annual financial statements in accordance with IFRS.
When is it possible to transition to Annual Accounts prepared in accordance with IFRSs?
The transition to IFRS reporting can only take place at the balance sheet date of a financial year. Transition is not possible during the year.
The first step in the process of transitioning to IFRS is deciding on the financial year from which the company intends to apply IFRS. When preparing the first IFRS financial statements, the IFRS data for the previous financial year must be presented as comparative information alongside the IFRS data for the current year.
What are the reporting obligations for first-time adopters of IFRS?
Entities must notify the state tax authority of their decision to transition to IFRS no later than 30 days before the date of transition. The notification must be accompanied by the auditor's report.
What is considered to be the date of transition? The date of transition to IFRS reporting is the first day of the financial year for which the first IFRS annual financial statements are prepared.
If the reporting date of the first IFRS financial statements is 31 December 2025, then the opening figures for the previous year, i.e. 2024, must also be restated for 1 January 2024 in accordance with IFRS. In this case, the date of transition to IFRS will be 1 January 2024. Therefore, companies planning to adopt IFRS should start their preparations for the transition to IFRS in due time with these milestones in mind.
Before transitioning to IFRS, entities must apply the general rules when preparing their financial statements for the last financial year closed under the Hungarian Accounting Act, and must then open the new IFRS financial year under IFRS rules. The IFRS framework specifically addresses the special accounting responsibilities of companies transitioning from other regulatory environments.
Entities incorporated without a predecessor that prepare their annual financial statements in accordance with IFRS (either by choice or under the mandatory rules they are subject to) must comply with the relevant notification obligation no later than 90 days after incorporation. To prepare annual financial statements under IFRSs, the conditions listed above must also be met by such entities incorporated without a predecessor, except for the requirement to have an opening balance sheet for the first day of the preceding financial year.
If a public limited company transitions to IFRS financial reporting because its securities were admitted to trading on a regulated market in any member state of the European Economic Area during the financial year, then it must prepare annual financial statements in accordance with IFRS starting from the financial year following the date of admission to trading. This notification obligation must be complied with before the 30th day after the date of admission or the 30th day before the date of transition, whichever is later.
Rules for transition to IFRS reporting
The rules for transition to IFRS are complex.
One of the prerequisites for the first-time adoption of IFRS is that the company must have an auditor's report confirming that the company is ready to transition to IFRS and apply IFRS accounting. Such a report may only be issued by an auditor or audit firm that is a member of the Chamber of Auditors and is IFRS-certified.
In assessing an entity's readiness, the auditor or audit firm that is a member of the Chamber of Auditors and is IFRS-certified must verify that the entity
- employs an IFRS-certified accountant to prepare its annual financial statements under IFRS who is authorised to prepare IFRS financial statements,
- has accounting policies in place which were prepared and approved in accordance with IFRS,
- has an opening IFRS balance sheet for the first day of the financial year preceding the year of transition.
The opening balance sheet must be prepared as if the financial statements had always been prepared under IFRS, and the same principle must be applied for the purposes of recognition and measurement as well.
Entities preparing their financial statements or consolidated annual financial statements under IFRS must ensure that their IFRS annual financial statements are prepared by an IFRS chartered accountant or by an IFRS certified auditor who is a member of the chamber of auditors.