As previously mentioned in our articles entitled Challenges during transformation of companies and The transformation process of companies, managing the transformation process of companies involves a lot of accounting tasks. Apart from the company’s accountant and the finance director, anyone authorised to represent the company as well as its owner should all be aware of the accounting and reporting tasks that await companies being transformed, along with their choices in terms of valuation methods. In this article we go into more detail about the accounting tasks during transformation of companies.
What types of accounting documents are required by relevant laws?
The accounting tasks during transformation of companies in Hungary are governed by the Hungarian Civil Code (Act V of 2013), Act CLXXVI of 2013 on the Transformation, Merger and Demerger of Legal Persons, Act C of 2000 on Accounting, and Act V of 2006 on Public Company Information, Company Registration and Winding-up Proceedings.
There is a special reporting obligation in the transformation process. During the transformation, an accounting close has to be performed as of two reporting dates. First, a draft transformation balance sheet and a draft inventory of assets and liabilities have to be prepared to support the decision on the transformation. Companies have to prepare their final transformation balance sheet and final inventory of assets and liabilities as of the date the transformation is registered by the Court of Registration, as the reporting date.
Both the draft and the final transformation balance sheets and inventories of assets and liabilities must be verified by an auditor independent of the registered auditor.
What is the purpose of the transformation balance sheet and the inventory of assets and liabilities?
The draft and the final transformation balance sheets (hereinafter referred to as: “transformation balance sheet”) are designed to present how the surviving company or companies after the transformation will distribute their assets and liabilities, while the draft and the final inventory of assets and liabilities (hereinafter referred to as: “inventory of assets and liabilities”) details the draft transformation balance sheet to support it. The inventory of assets and liabilities contains the company’s assets and liabilities item by item.
Possibility of exemption from accounting close
When preparing transformation balance sheets only a technical close takes place, i.e. the sub-ledger and general ledger records do not have to be closed, they are kept on a continuous basis. An exception here is a company that is discontinued by the transformation, which must prepare financial statements as of the day of the transformation, prior to compiling the final transformation balance sheet, and also close its sub-ledger and general ledger accounts.
During the preparation of the draft and the final transformation balance sheets the company may take advantage of the option provided by the Accounting Act to take into account the last financial statements to support equity, for a period of six months after the balance sheet date. In such a case, no separate accounting close is required, the transformation balance sheet can be compiled based on the data of the financial statements.
What valuation methods can be selected during the transformation process?
The transformation balance sheet can contain assets and liabilities at their carrying or market value. So the law provides an exceptional opportunity during the transformation because the reserves inherent in the value of the assets can be detected and recognised in the books of the surviving companies. If a company takes advantage of the opportunity to revalue assets, a property appraiser has to be involved in order to corroborate the market values.
Assets may not be revalued by the absorbing company in the case of a merger, or by the company continuing to operate in the same corporate form in the case of a spin-off.
What additional settlements are needed when preparing a transformation balance sheet?
The transformation balance sheet of a transforming company has three columns. The balance sheet items are included in the first column at their carrying value. Any revaluations are recorded in a separate column, while the third column indicates the appraised value of assets, liabilities and equity capital.
One important feature of transformations is that equity may only include registered capital, the capital reserve, retained earnings (which may also be negative) and the allocated reserve in the third column of the transformation balance sheet of a transforming company. The amounts of the valuation reserve and the profit after tax have to be transferred.
The receivable and liability items of merging companies with each other have to be eliminated in the “differences” column of the transformation balance sheet for the company created by the transformation, as well as the amounts of participations and registered capital in the case of a merger between a parent company and its subsidiary. Settlements with the exiting member and any changes in assets and equity derived from the capital contributions of the new member and existing members must be resolved in the “differences” column.
If capital is also settled during the transformation, an additional column (“settlement” column) has to be included in the transformation balance sheet for the transformation.
An allocated reserve must be created in the draft transformation balance sheet of the company created by the transformation to cover any losses expected by the date of the transformation.
Final transformation balance sheet and inventory of assets and liabilities
After registration by the Court of Registration, the accounting tasks during transformation of companies are completed upon the preparation of the audited final transformation balance sheet and the final inventory of assets and liabilities as of the transformation date, which must be deposited within 90 days. Thereafter, the final transformation balance sheet and the final inventory of assets and liabilities are used to open the accounting records at the companies starting their operations in Hungary as of the registered transformation date.
