It has been eight years since accounting in a currency other than the forint was made considerably easier for companies in Hungary. Except for credit institutions, practically any company can choose to keep its books and prepare accounts in euros, but now, accounting in a foreign currency other than the euro, and changing to this currency is much easier as well. If 25% of the total revenue, costs and expenditures and more than 25% of financial assets and liabilities are in a given foreign currency, there are no obstacles to switching to accounting in this foreign currency. Yet looking at the annual reports of companies, we rarely find financial statements prepared in a currency other than the Hungarian forint. What is the reason for the low ratio of companies accounting using a foreign currency after all these years? Which companies can benefit from the transition, and what are the advantages of accounting in a foreign currency?
For company directors: who benefits from accounting in a foreign currency?
Companies mainly using the Hungarian market for procurements and sales in HUF rarely encounter foreign currency transactions. Making occasional payments to purchase materials from abroad or paying an office rent in a foreign currency do not cause exchange rate differences that are impossible for a company to handle. If such companies were to opt for accounting in a foreign currency, they would quickly experience the uncertainty caused by having to convert all HUF transactions into a foreign currency for their books.
Before accounting in a foreign currency was made possible, companies purchasing goods, manufacturing equipment or raw materials for production, or selling in euros or another foreign currency faced the same insecurity. Accounting in a foreign currency brought genuine relief for them. Their exchange rate risk will be substantially lower, and they will no longer be exposed to the fluctuation of the given exchange rate compared to the HUF to such an extent.
What are the direct benefits of accounting in a foreign currency?
Executives of Hungarian subsidiaries of international companies logically prepare their business plans for the given financial year in the currency used by the parent company, not in HUF. Accounting in HUF was a source of constant anxiety for managing directors throughout the year. Despite the smooth handling of material purchasing, or exceeding sales targets in the foreign currency, fluctuations in the HUF exchange rate meant that the operating profit according to the income statement recorded in HUF, and then converted into the functional currency, could easily fall short of the plan. In this case it took more time and many comparative tables to “explain the results”.
This extra work is largely eliminated by accounting in a foreign (functional) currency. Although exchange rate risk appears in new areas with salaries and public dues paid in HUF, this is negligible compared to the previous situation.
Another advantage is the better coordination among colleagues working in purchasing, logistics and finance. Colleagues working in the first two fields already prepared their statements mainly in the foreign currency, which obviously never corresponded to the amounts accounted in HUF and converted into the foreign currency by the finance staff. Following the transition to accounting in a foreign currency, variations can only occur due to mistakes in data recording.
Similarly, the cooperation between the accountants of the parent company and those of the subsidiary in Hungary will also improve. Thanks to accounting in a foreign currency, the reporting obligations of subsidiaries consolidated by the parent company will be simplified, and instead of the time-consuming calculations to date, only the relevant items of the balance sheet or income statement will be displayed automatically. Most elements of the consolidation can become automatic for groups preparing their accounts in the same ERP system.
It is not a coincidence that we scheduled the topic of accounting in a foreign currency for the beginning of summer. We are convinced that this is the right time to make preparations for transitions in Hungary next year.
The devil is in the details
If you have made the strategic decision to keep your accounts in a foreign currency, the actual work can begin. When preparing for the transition, first of all the tax, legal, financial and accounting issues have to be considered. Reviewing the detailed rules will be crucial for the schedule, and the partners chosen to guarantee a smooth transition. In the related articles my colleagues will give some insight into the details about switching to accounting in a foreign currency, in line with the three aspects mentioned above. They will summarise the know-how of our tax advisers, lawyers and accounting experts. Definitely worth a read.
