As we highlighted when discussing the strategic aspects of a transition of accounting to a foreign currency, there are a number of issues to consider before a company decides to change the currency used for bookkeeping purposes.
If the needs of the owners and management dovetail with the opportunities provided by law, and the decision is made in principle to change the bookkeeping currency to a foreign currency, several key accounting issues should be considered thoroughly before starting the transition.
When can the transition of accounting to a foreign currency be made?
Act C of 2000 on Accounting permits any business entity to prepare their annual financial statements in USD or in EUR if they record such a decision in their accounting policies prior to the first day of the financial year, and specify the US dollar or the euro as the currency according to their articles of association. It is important to note that the earliest this decision can be changed is for the 5th financial year after the decision is made.
According to the Accounting Act, changing to a foreign currency is only possible on the balance sheet date of the financial year. The company has to prepare regular annual financial statements as of the balance sheet date for the transition in the currency used before the transition, then a separate opening balance sheet needs to be prepared as of the transition date in the currency specified in the articles of association.
When should we start preparing for the transition?
Given that entities can only change the bookkeeping currency on the balance sheet date of the financial year, the decision in principal has to be made at least 3-4 months beforehand because the actual preparations have to start several months in advance to have time for assessing the suitability of the ERP system and for the necessary IT developments.
Is our ERP system suitable for the transition or are further IT developments required?
In many cases, a transition of accounting to a foreign currency means a change of ERP system because the current one is not fit for purpose, and this only extends the preparation time even more. If the transition to a foreign currency is made using existing software, the system needs to be able to handle the following new scenarios:
- Liabilities to employees and tax payment liabilities will occur in a foreign currency after the transition, and so the system needs to be able to account their realised and unrealised exchange rate differences. Our experience shows that the biggest challenge for companies changing to accounting in a foreign currency is accounting value added tax as well as the exchange rate differences of financial settlements and year-end
- Data is converted during the data migration, but before this happens, the data for conversion is normally reviewed since the whole conversion process can falter if invoices are not converted in an optimal manner.
What are the accounting tasks?
Since one of the transition requirements is updating accounting policies, it is best to start the preparations with this. First, the transition of accounting to a foreign currency needs to be stated in the accounting policies.
Then, the HUF thresholds in the accounting policies need to be converted. The thresholds defined in HUF according to certain provisions of the Accounting Act need to be managed based on the currency exchange rate defined by the National Bank of Hungary (MNB) for the given date.
Preparing and auditing an opening balance sheet in the foreign currency
Based on the financial statements prepared for the balance sheet date, an opening balance sheet must be compiled in the currency defined in the certificate of incorporation. This entails the following valuation tasks:
- The company decides on the exchange rate for registered capital, and indicates the new amount of registered capital defined in the foreign currency in the new articles of association.
- All other balance sheet items shall be revalued using the MNB exchange rate.
- Receivables, liquid assets and liabilities denominated in a foreign currency need to be reported at their original FX amount; the aggregate translation difference must be accounted against retained earnings in the case of a loss, and against the capital reserve in the case of a profit.
The opening balance sheet in the foreign currency must be compiled within 5 months, and filed together with the financial statements certified by an auditor. The books need to be opened in the foreign currency based on the opening balance sheet on the date following the transition.
