One of the most significant changes in 2024 to the Act on Accounting is the introduction of deferred tax in Hungarian accounting thanks to the global minimum tax harmonisation, meaning this can now be presented in Hungarian financial statements.
Importance of deferred tax
Although deferred tax is a new concept in Hungarian accounting, it is not unfamiliar to experts in international or other national accounting frameworks. The purpose of deferred tax is to recognise future tax positions arising from the temporary effect on the income tax base of the measurement of assets and liabilities recognised in the financial statements.
Who benefits from deferred tax in Hungarian accounting?
Deferred tax in Hungarian accounting is an option, i.e. presenting it is not compulsory. It can already be applied for 2023 financial statements and can be opted for in the future too, but once applied, this decision must be recorded in the accounting policies. Using this option is recommended for companies where the future tax implications of accounting measurements are important for presenting a true and fair view. For entities that are part of a multinational group, this option should be considered simply because deferred tax is common practice internationally, and employing it may reduce the differences between the figures reported under Hungarian GAAP and the figures under IFRS or other accounting frameworks provided for consolidation purposes. It should be added, however, that since IFRS measurement principles differ from Hungarian accounting, it is far from certain that the same deferred tax asset or liability will arise for a given company in both the Hungarian and IFRS accounts.
What does this mean?
In simple terms, a deferred tax asset or liability is the cumulative effect on the income tax base of subsequent tax years as generated by assets and liabilities or specific tax base deduction entitlements (loss carry forwards or tax benefits) in the financial statements of a given year. This effect is calculated using the average income tax rate for the subsequent years. Under deferred tax we are really talking about the future tax impacts of the chosen or applicable measurements of assets and liabilities. A deferred tax asset arises for tax that will be refunded in subsequent fiscal years, and a deferred tax liability arises for tax that will be payable in subsequent fiscal years.
The deferred tax asset or liability must be recalculated as of every reporting date, and the cumulative change from the deferred tax asset or liability recognised in the previous financial year must be recognised in the income statement on a separate Deferred tax differences row under Tax payment liabilities.
Temporary and permanent differences
Only adjustments to the income tax base that have a temporary effect on the tax base, i.e. that are reversed in subsequent years, can be taken into account. Non-recurring, permanent income tax base adjustments, such as “non-business related costs” (e.g. penalties), may not be taken into account when calculating deferred tax.
Measurement options, such as upwards revaluations, which have no effect on either the profit or loss before tax under accounting rules or the income tax base may not be considered.
Conditions for inception of a tax asset
Only deferred tax assets that are temporary differences and are expected to be realised in the income tax base in future financial years can be taken into account. This means deferred tax assets can only be considered for loss carryforwards or tax allowances that are expected to be recovered and usable against future positive tax bases.
Calculating deferred tax
There are various calculation methods. Assets, provisions, liabilities and unused loss carryforwards and tax allowances that will have an impact on the tax base in future years can be taken into account individually too. The deferred tax asset or liability will be the amount of the cumulative differences at the expected income tax rate.
Please note that this is generally not adjustments to the income tax base for a given year. It is best illustrated by juxtaposing the accounting balance sheet with the tax balance sheet, whereby each item in the accounts is presented in an accounting column and a tax balance sheet column. Thus, the accounting book value and the tax carrying value of each asset and liability are placed side by side, and a deferred tax asset or liability is calculated for these cumulative accounting and tax differences with the expected income tax rate.
Presentation of deferred tax in the financial statements
As with other tax types, it is important to emphasise that tax assets and liabilities vis-a-vis the same tax authority should be consolidated, i.e. deferred tax assets and liabilities should be presented net on the balance sheet, either under assets or under liabilities.
Thanks to the introduction of deferred tax in Hungarian accounting, both the balance sheet and income statement frameworks under the Hungarian Act on Accounting are expanded. Consolidated deferred tax assets should be presented in a separate row under Fixed assets, while consolidated deferred tax liabilities should be presented in a new row under Long-term liabilities.
Application in first financial year
Deferred tax in Hungarian accounting was introduced with the entry into force of the amendment to the Act on Accounting on 31 December 2023, and is applicable for the first time with 2023 financial statements. It should be applied in the first financial year as if the company had always applied deferred tax. In this case, the opening deferred tax assets or liabilities that would have existed as of the previous year’s reporting date must be recognised against retained earnings.
If you have any questions on this topic, or need expert help in understanding how deferred tax in Hungarian accounting can be applied, or with accounting for deferred tax at your company, please do not hesitate to contact WTS Klient Hungary’s financial accounting advisers!
