Accounting treatment of project accounting from 2020

Logic underlying project accounting fundamentally changed

Accounting treatment of project accounting from 2020

Significant changes have taken place in the accounting treatment of project accounting in Hungary from 2020. With this change, the Hungarian Act on Accounting has taken another step towards the approach adopted by the International Financial Reporting Standards (IFRS).

A project

The objective of a project is to create a unique product or service in accordance with the client’s individual and special needs. Accordingly, preparing a specific machine, building a block of apartments or office building tailored to the individual needs of the client as well as carrying out specialised tasks are all considered projects. Accounting treatment is especially tricky with projects lasting several years, or affecting several financial years.

Key stages of project accounting regulations so far

It is safe to say that before this rule amendment, the accounting treatment of project accounting in Hungary was mainly connected to sales revenue, and more precisely to invoiced sales revenue. Project costs were adjusted to sales revenues booked based on the issued invoices pertaining to the milestones defined in the contract.

The specific milestones, i.e. the most important stages of a given project, could be different for each project depending on the common will of the contracting parties and naturally their balance of power. This is why it was possible when closing the planning phases of two separate projects with similar parameters for one to enable the invoicing of 10% of the contracted value and the other 60%-70%.

Costs had to be accounted afterwards according to the matching principle of course, which in practice generally meant adjusting costs to the already invoiced sales revenue based on the expected profit figures of the project.

In cases where costs had already been incurred, but the project did not reach the next milestone, these costs had to be recognised as work in progress in the financial statements, which meant the project results were not presented for the given financial year. What is more, in such cases the profit/loss over the years and pre-tax results may also be distorted.

What changes with the new rules of project accounting?

The new rules of project accounting essentially break from previous Hungarian practice. Moreover they completely disrupt the approach where the actual performance, i.e. the degree of completion, is what matters when accounting projects, irrespective of the invoicing. (Degree of completion means the defined rate of actual performance per accounting unit set forth in the contract, which expresses the ratio of work actually completed to the total amount of work to be completed.)

In practice this means that irrespective of invoicing, but still taking it into consideration, project-related sales revenue must be adjusted to the value defined by the contract value and the degree of completion by increasing or decreasing the sales revenue against accruals and deferrals.

Consequently, completed works not yet invoiced cease to be recognised as inventory, since it is clear that the right amount of sales revenue was recognised for each performance (based on the degree of completion) in the books. Furthermore, it must be ensured that costs and expenses are recognised on a pro rata basis in the company’s books based on the matching principle.

Companies must present the methodology applied for assessing the degree of completion in their accounting policies.

What effect does this have on ongoing projects?

The regulation is effective as of 1 January 2020 and is already applicable for the 2019 financial year. What will be much more important for many, however, is that the new form of project accounting is only mandatory for contracts concluded in 2020. For contracts concluded earlier, companies in Hungary can decide whether to apply the new rules. For companies where the milestones and the degree of completion do not correspond, it might be worth considering closing the project in accordance with the earlier regulation.

Since project accounting entails special accounting tasks it is worth considering involving an expert. Feel free to contact the professionals at WTS Klient Hungary, who, as consultants, will be happy to support you with the special taxation and accounting issues that may arise during project accounting.

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