In some companies, the cyclicality of business may justify preparing the annual financial statements presenting the activities and operations of the business for a financial year that differs from the normal financial year. Determining the financial year and subsequently modifying it can raise a number of questions. What financial year should a business choose? What kind of companies can choose a different financial year and under what conditions? How can this decision subsequently be changed? In our article we answer these and similar questions.
What does a financial year and a different financial year mean?
A financial year is the period for which a business must prepare its financial statements. As a general rule, the financial year corresponds to the calendar year (1 January – 31 December). A different financial year means that the company decides to apply a financial year that differs from the calendar year. At international level, 31 March and 30 September are the most frequently used balance sheet dates. Hungarian companies founded without a legal predecessor may decide when established to use a different financial year, while businesses already in operation may switch to a different financial year by changing the balance sheet date of the defined financial year.
The financial year and the different financial year both last for 12 months; companies may deviate from this in the following cases:
- for companies established without legal predecessors, the period from the date of foundation (date when the articles of association are signed and notarised) until registered in the company register or until the application for company registration is rejected or the company registration procedure is terminated (as the balance sheet date), irrespective of the duration involved (pre-company period);
- in the year following the pre-company period;
- switching from a financial year based on the calendar year to a financial year differing from the calendar year or from a previous (different) financial year to a new (different) financial year;
- for a new company established by transformation, merger or division the financial year lasts from the day after the day of transformation, merger or division until the day designated by the company as the end of the financial year (as the balance sheet date);
- for data presented in the financial statements, when switching from Hungarian forints to a foreign currency, from a foreign currency to Hungarian forints, and from one foreign currency to another;
- for a company under liquidation or voluntary liquidation or undergoing involuntary deregistration the financial year shall commence on the day after the balance sheet date of the previous financial year and shall end on the day preceding the date when the liquidation, voluntary liquidation or the involuntary deregistration procedure begins (as the balance sheet date);
- during the period of liquidation or involuntary deregistration (this is construed as a financial year, regardless of its duration);
- during the period of voluntary liquidation (generally one financial year). If the voluntary liquidation procedure is not concluded within 12 calendar months, the length of the financial year(s) under the voluntary liquidation shall be 12 months, while the last financial year may be less than 12 calendar months.
Who may choose a different financial year?
In Hungary almost any company may choose a different financial year where this is justified by the characteristics of the business activity (such as the cyclicality of business operations, or the parent company’s need for information in the case of consolidated companies). However, companies qualifying as credit institutions, financial enterprises or insurance companies as well as foreign higher education institutions operating in Hungary with a licence and businesses preparing micro-enterprise simplified annual financial statements may not choose a different financial year.
When can you choose to switch to a different financial year?
A company may decide to change its balance sheet date for the financial year
- after three financial years closed by financial statements, or
- upon its consolidation, or
- if the parent company changes
with an appropriate modification of the articles of association.
When changing the balance sheet date of the financial year – i.e. when switching from a financial year based on the calendar year or changing the balance sheet date of an already different financial year – the financial statements of the transition year are not prepared for 12 calendar months, so its comparison to both previous and subsequent periods may cause difficulties. The supplementary notes of the annual financial statements prepared with the new balance sheet date must present, besides the figures of the balance sheet and the income statement for the given period, a balance sheet and income statement including base data (from the previous financial year) for comparison.
Notifications necessary when changing the balance sheet date for the financial year
Following a resolution including the owner’s decision, the duly modified articles of association must be submitted to the Court of Registration together with a change request. After the registration, the company must notify the Hungarian national tax authority and the local tax authority about the balance sheet date of the different financial year that deviates from the calendar year.
Advantages and disadvantages of choosing a different financial year
Since parent companies have various information needs, not only for the sake of consolidation, it may be worth for companies not included in the consolidation to consider switching to the balance sheet date of the parent company as well. This may save the company time and human resources.
Another benefit of having a different financial year is that annual deadlines (such as the submission deadline for annual corporate tax and local business tax returns, or the publication deadline of the financial statements by the last day of the 5th month after the balance sheet date) are adjusted to the balance sheet date. This can help companies since they do not have to conduct their audit or annual close at the “busiest time” of the normal financial year.
This timing advantage could also be a drawback because a balance sheet date of 31 March means a return-filing and financial statement publication deadline of 31 August, which could cause problems because of the summer holidays.
All in all, the best way for a company to define its financial year is by adjusting it to the business operations of the company, to serve the information needs of the parent company best. Based on the above, Hungarian companies can adjust the balance sheet date of their financial year so they can present a true and fair view of the company’s financial position, cash flows and financial performance in the year-end financial statements (considering, for instance, the year-end amount of receivables and liabilities or inventories).
The highly experienced accounting professionals at WTS Klient Hungary will be happy to advise you on how to choose the most optimal financial year for your business, on switching from a normal financial year to a different financial year, or on changing the balance sheet date of an already different financial year. Feel free to contact us.