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Derivative transactions and other modifications of the Act on Accounting – a range of solutions
Amendments regarding derivative transactions
In the current issue of our Newsletter we mainly review the long-awaited amendments to Act C of 2000 on Accounting (hereinafter: “Act on Accounting”) covering derivative transactions, as promulgated on 25 November 2016. This Act fills in the gaps and answers most of the questions raised in connection with the practical application of the regulations relating to derivative transactions. Our newsletter also presents other amendments to the Act on Accounting, including clarifications of rules for entities preparing their annual reports in accordance with IFRSs as adopted by the EU (hereinafter: IFRSs), or those applying IFRSs for the first time.
Amendments regarding derivative transactions
The aim of the amendments to the Act on Accounting regarding derivative transactions was to incorporate into law the solutions applied so far in practice, making as few substantive changes as possible.
Unlike with previous practices, the reasoning of the law includes useful explanations about the interpretation and practical application of the revised regulations. The amendments regarding derivative transactions will come into force from the financial years starting in 2017, but they may already be applied for financial years starting in 2016. Where not indicated separately, the provisions are applicable both for fair value measurement and measurement not based on fair value.
Substantial changes - definitions
- Various new terms have been introduced:
- intrinsic value [Section 3 (9) 12/a of the Act on Accounting]
- firm commitment [Section 3 (9) 13/a of the Act on Accounting]
- hedged transaction [Section 3 (8) 10/a of the Act on Accounting]
- designated hedging relationship [Section 3 (8) 10/b of the Act on Accounting]
- Clarifications of terms:
- derivative transactions [Sections 3 (9) 11, 59/A (7) f) and 59/D (2) of the Act on Accounting]
- closure of derivative transaction [Section 3 (9) 11/a of the Act on Accounting]
- hedge [Section 3 (8) 10, Section 59/E (1) of the Act on Accounting]
- hedge effectiveness [Section 3 (9) 14 of the Act on Accounting]
Substantial changes – accounting for derivative transactions
Certain rules for the measurement of and accounting for derivative transactions have changed [Sections 3 (8) 10, 10/a, 10/b, Sections 32 (5), (6), Sections 44 (5), (6), Section 47 (11), Section 59/A (6), Sections 59/E (1), (1a), (11), (12) of the Act on Accounting]
- The cost and consideration of derivative transactions should be recognised as accruals and deferrals even if fair value measurement is not applied.
- Derivative transactions are measured as at the reporting date. Derivative transactions can be measured either at fair value or at intrinsic value (this rule already existed previously in Government Decree 250/2000 on the special provisions regarding the annual reporting and bookkeeping obligations of credit institutions and financial enterprises; it was adopted from this decree).
- The criteria for applying hedge accounting are the same both for those who use fair value measurement and for those who do not.
- A derivative transaction can be designated as a hedge not only when entering into the transaction but also subsequently.
- For entities not applying fair value measurement, the hedge of firm commitments not recognised in the balance sheet is a cash-flow hedge; in the case of fair value measurement, the hedge of the risk of firm commitments (due to changes in foreign currency rates) can be designated either as a fair value hedge or as a cash-flow hedge, and in all other cases any transaction used to hedge the risk related to firm commitments not recognised in the balance sheet may only be designated as a fair-value hedge.
- The rules regarding the termination of hedge accounting have been drawn up both for entities applying fair value measurements and also for those who do not.
- In the case of a cash-flow hedge hedging a transaction involving the future recognition or origination of an asset or a liability, the gain or loss on the hedge realised upon closing has to be accounted for as an item adjusting the cost of the asset or liability, even if fair value measurement is not applied. If, as a result of this, there is a difference between the amount of the liability to be repaid and the amount of its cost, then the difference shall be recognised as an accrual and shall be amortized in proportion to the carrying value upon derecognising the liability.
There are no changes to the following:
- There are only minor clarifications (concerning the designation date of hedges) or amendments (due to rules for hedges of firm commitments and the termination of hedge accounting) regarding the accounting rules when fair value measurement is applied.
- If fair value measurement is not applied, the unrealised losses of derivative transactions are recognised, except for cash-flow hedges; while the unrealised gains of derivative transactions may only be recognised in the case of fair value hedges [Sections 84 (5) f), (7) j), k), Sections 85 (2) c), (3) j), k)].
Other amendments to the Act on Accounting
Borrowing costs can be deferred [Section 32 (7) of the Act on Accounting]
Current practice is reflected in the amendment according to which costs directly related to loans and borrowings can be recognised as deferred expenses if they are not capitalised as part of the cost of an asset. The deferred amount shall be amortized during the term of the loan on a straight- line basis, but no later than upon the repayment of the full loan amount. The amendment shall be applied for financial years starting in 2017, but can already be applied for financial years starting in 2016.
Notification obligation for transitioning to IFRSs [Section 114/C (4), (5) of the Act on Accounting]
The deadline for notifications to be sent to the tax authority and the National Bank of Hungary about the transition to IFRSs will now change from 90 days to 30 days. There is no obligation to notify the Hungarian Central Statistical Office about the transition to IFRSs. This amendment has been in force since 26 November 2016.
Some final words
Our newsletter focuses on the long-awaited amendments to the Act on Accounting regarding derivative transactions. Due to space constraints we did not present the amendments and new rules in full; knowledge of the legal regulations would be required for interested parties to fully understand these. Should you have any questions relating to the content of this newsletter, please contact your tax or accounting adviser, or get in touch with us.
