The Hungarian accounting framework is primarily governed by the Act on Accounting, which includes the Hungarian Accounting Standards (HASs). The Act is supplemented by government decrees dealing with special provisions for banks, insurance companies, stockbrokers, investment funds, pension funds, and nonprofit entities. The HASs, according to a 2004 World Bank assessment, differ from the International Financial Reporting Standards (IFRSs), despite significant efforts at harmonization. In accordance with the European Commission (EC) Regulation No. 1606/2002, Hungary requires the application of IFRSs in the preparation of consolidated financial statements of listed companies, but this requirement is not extended to other types of companies. The 2006 EC report on the implementation of the Regulation No. 1606/2002 points out that Hungary permits application of IFRSs in consolidated accounts of all other entities, but not in the annual accounts, which must be prepared following national requirements. The use of IFRSs in the annual accounts is allowed for informal purposes only. The EC report notes that the Hungarian position on annual accounts is unlikely to change until all tax and legal issues arising due to the application of IFRSs are resolved. The 2004 World Bank assessment recommends adoption of IFRSs for all public interest entities, and noted that the Hungarian Accounting Standards Board (HASB) established at the time of the assessment is expected to converge the Hungarian accounting requirements with IFRSs within 6 to 8 years. However, as of March 2008, no information as to the progress made by the HASB is publicly available.

General Overview

In June 2004, the World Bank conducted a review of accounting and auditing practices in Hungary in order to evaluate the weaknesses and strengths of the accounting and auditing requirements and to compare the reporting requirements with actual practices. International Financial Reporting Standards (IFRSs), formerly International Accounting Standards (IASs), and International Standards on Auditing (ISAs) were used as the benchmarks for assessing national standards. The Report on the Observance of Standards and Codes (ROSC) was published the same year, summarizing the results of the assessment and a suggesting a reform agenda. In this report, the World Bank noted that "there has been a substantial effort in Hungary to reduce the differences between Hungarian Accounting Standards (HAS) and IFRSs but some significant differences remain" (p. 8). The ROSC further explained that supporters of HASs contend that the national standards "are based on the same logic, philosophy and concepts as IFRSs and are, therefore, very similar to IFRS" (p. 8). However, others argue that the Hungarian standards are heavily influenced by taxation rules which, in certain cases, are in conflict with the international standards.

The Hungarian accounting framework is governed by the Act on Accounting, which is based on the EU 4th and 7th directives on the harmonization of accounting standards. In line with the European Commission (EC) Regulation No 1606/2002, Hungarian listed companies are required to apply IFRSs as adopted by the European Union (EU), in consolidated accounts beginning January 2005.The 2006 EC report on the implementation of Regulation No. 1606/2002 pointed out that Hungary permits the application of IFRSs in consolidated accounts of all other entities, but not in their annual accounts, which must be prepared following national requirements. The use of IFRSs in the annual accounts is allowed for informal purposes only. The report noted that the Hungarian position on annual accounts is unlikely to change until all tax and legal issues arising due to the application of IFRSs are resolved. Given the limited application of IFRSs, the World Bank in 2004 recommended extending the requirement to use IFRSs to all public interest entities while simplifying the requirements for small and medium-size enterprises which, at the time of the assessment, had to follow HASs.

The Act on Accounting lays down the HASs and, according to the 2006 UHY "Doing Business in Hungary" report, is supplemented by government decrees based on special requirements for banks, insurance companies, stockbrokers, investment funds, pension funds, and various nonprofit institutions. As detailed in the 2004 World Bank report, in addition to the Accounting Act, financial statements of banks must comply with Government Decree 250/2000 on Special Provisions Regarding the Annual Reporting and Bookkeeping Obligations of Credit Institutions and Financial Enterprises. For insurance companies, the Accounting Act is supplemented by the government decree 192/2000 on Reporting and Bookkeeping Requirements of Insurers.

According to the description of the regulatory framework provided in the 2005 Chamber of Hungarian Auditors (Magyar Könyvvizsgálói Kamara, or CHA) self-assessment, the securities market, banks, and insurance companies are regulated by the Hungarian Financial Supervisory Authority (Pénzügyi Szervezetek Állami Felügyelete, or PSZAF). All listed companies, banks, and insurance companies are required to prepare and publish quarterly financial statements, which are reviewed by the PSZAF. Sanctions for noncompliance include delisting from the stock exchange. With regard to banks and insurance companies, the PSZAF can also perform an on-site inspection when irregularities are observed. Further action can include the recall of the auditor and management. In addition to quarterly reporting, banks are also required to tender an overall supervisory report every two years. The 2004 World Bank assessment observed that although the PSZAF reviews the financial statements of listed companies, it does not check compliance with the accounting and auditing standards, thus "its procedure fall short of the requirements of Standard 1 of the Committee of European Securities Regulators... [which] requires national regulators to, among other things, review a sample of financial statements of listed companies for compliance with IFRS and require the restatements of errors in those financial statements" (pp. 7-8). Overall, the World Bank recommended that the HSAF enhance its monitoring and enforcement arrangements in accordance with EU requirements on the use of IFRSs.

In 2004, empowered by the Accounting Act, the HASB was established to take over the standard-setting responsibilities from the Ministry of Finance. According to the 2007 CHA self-assessment, "delegates of CHA take part in the work of the Hungarian Accounting Standard Board, in the modification of the law, and in the process of creating the standards. There is a continuous effort toward using IFRS" (p. 73). At the time of the 2007 CHA self-assessment, the International Federation of Accountants (IFAC) Code of Ethics was being translated into Hungarian. The CHA is listed as a member on the IFAC website.

The Principles

IFRS 1: First-time Adoption of International Financial Reporting Standards (effective 2006)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IFRS 2: Share-based Payment (effective 2005)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IFRS 3: Business Combinations (effective 2004)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IFRS 4: Insurance Contracts (effective 2006)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IFRS 5: Non-current Assets Held for Sale and Discontinued Operations (effective 2005)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IFRS 6: Exploration for and Evaluation of Mineral Resources (effective 2006)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IFRS 7: Financial Instruments: Disclosures (effective 2007)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IAS 1: Presentation of Financial Statements (effective 2007)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IAS 2: Inventories (effective 2005)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IAS 7: Cash Flow Statements (effective 1994)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors (effective 2005)

NC

According to the 2004 World Bank report, the HAS 17 definition of extraordinary items is broader that the definition provided by IFRSs. According to the World Bank, "HAS specifically require the classification of specific gains and losses as extraordinary items; whereas International Accounting Standards (IAS) 8, Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies, requires those items to be classified as ordinary items" (p. 11).

IAS 10: Events after the Reporting Period (effective 2005)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IAS 11: Construction Contracts (effective 1995)

NC

According to the 2004 World Bank report, "while IAS 11International Accounting Standards (IAS) 11, Construction Contracts, and IAS 18, Revenue, require that revenue and costs on service and construction contracts should be recorded based on the stage or percentage of completion. Under this stage-of-completion method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit, which can be attributed to the proportion or percentage of work completed. The IFRS method provides useful information on the extent of contract activity and performance during a period, which is not available in HAS financial statements" (p. 9).

IAS 12: Income Taxes (effective 2001)

NC

According to the 2004 World Bank report, "HAS do not mention deferred tax accounting; whereas International Accounting Standards (IAS) 12, Income Taxes, requires that an enterprise recognize the amount of current and future tax related to events that have been recognized in financial accounting income"(p. 9).

IAS 14: Segment Reporting (effective 1998)

NC

According to the 2004 World Bank report, "HAS do not require that information be reported for business segments and geographical segments" (p. 9).

IAS 16: Property, Plant and Equipment (effective 2005)

II

According to the 2004 KPMG report, "if assets are revalued upwards, the revaluation surplus must be recognized directly in equity and presented separately as a revaluation reserve. Subsequent adjustments in the revaluation surplus are charged directly against the revaluation reserve; the depreciation charge recognized in the profit and loss account is based on the historical cost" (p. 27). However, no comprehensive comparison of Hungarian standards with IFRSs exists to assess the level of compliance with IAS 16.

IAS 17: Leases (effective 2005)

NC

According to the 2004 KPMG report, "assets purchased under finance leases must be capitalized. However the definition of a finance lease is much more restricted under HAL [Hungarian Accounting Law] than under International Financial Reporting Standards, and most lease agreements in Hungary are structured as operating leases for HAL purposes" (p. 27).

IAS 18: Revenue (effective 1995)

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There is insufficient publicly available information as to Hungary's compliance with this principle.

IAS 19: Employee Benefits (effective 2006)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IAS 20: Accounting for Government Grants and Disclosure of Government Assistance (effective 1984)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IAS 21: The Effects of Changes in Foreign Exchange Rates (effective 2005)

NC

According to the 2004 World Bank report, HASs "require that foreign exchange differences arising in reporting an enterprise's long-term liabilities at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognized as an asset (rather than as an expense) when the debt is associated with the acquisition of fixed assets. Such capitalization could result in overstated fixed assets, and the deferral of foreign exchange losses (or gains) may not comply with International Accounting Standard (IAS) 21, The Effects of Changes in Foreign Exchange Rates" (pp. 8-9).

IAS 23: Borrowing Costs (effective 1995)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IAS 24: Related Party Disclosures (effective 2005)

NC

According to the 2004 World Bank report, the definition of related parties under HAS and IFRS differ thereby leading to differences in disclosure practices. For instance, "HAS require disclosures of the name of subsidiaries, associates, jointly-managed companies, other enterprises with a share ownership relationship, and loans and advances to directors, management and the supervisory board" (p. 10), the report noted.

IAS 26: Accounting and Reporting by Retirement Benefit Plans (effective 1998)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IAS 27: Consolidated and Separate Financial Statements (effective 2005)

II

According to the 2003 PWC report, "the basis of consolidation is the parent company's accounting policy, and adjustments should be made to the subsidiaries' accounts if their accounting policy is materially different" (p. 48). However, no comprehensive comparison of Hungarian standards with IFRSs exists to exactly assess the level of compliance with IAS 27.

IAS 28: Investments in Associates (effective 2005)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IAS 29: Financial Reporting in Hyperinflationary Economies (effective 1990)

NC

According to the 2004 KPMG report, "under Hungarian Accounting Standards (HASs), inflation accounting is not permitted" (p. 32).

IAS 31: Interests in Joint Ventures (effective 2005)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IAS 32: Financial Instruments: Disclosure and Presentation (effective 2005)

II

According to the 2004 KPMG report, "fair valuation of financial instruments and hedge accounting may be applied optionally from 2003. If fair valuation is applied, the classification of financial instruments and the recognition and measurement requirements are similar to that of International Accounting Standards 32 and IAS 39" (p. 30). However, there is no further information on exactly how this standard complies with the requirements of IAS 32.

IAS 33: Earnings per Share (effective 2005)

NC

According to the 2004 KPMG report, "the disclosure requirements in Hungary are less extensive than under International Financial Reporting Standards. Under Hungarian Accounting Standards, there is no requirement to disclose earnings per share" (p. 22).

IAS 34: Interim Financial Reporting (effective 1999)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IAS 36: Impairment of Assets (effective 2004)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.

IAS 37: Provisions, Contingent Liabilities and Contingent Assets (effective 1999)

NC

According to the 2004 World Bank report, "HAS require provisions to be recorded based on criteria that may not comply with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and International Accounting Standards 39," and the report added that "generally, because of the influence of taxation on HAS, provisions are likely to be understated as compared to IFRS" (p. 9).

IAS 38: Intangible Assets (effective 2004)

NC

According to the 2004 World Bank report, "HAS permit/require that intangible assets and start-up costs should be capitalized (rather than expensed) in circumstances that may not be permitted by International Accounting Standards 38, Intangible Assets" (p. 9).

IAS 39: Financial Instruments: Recognition and Measurement (effective 2006)

NC

According to the 2004 World Bank report, "HAS require provisions to be recorded based on criteria that may not comply with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and International Accounting Standard 39," adding that "generally, because of the influence of taxation on HAS, provisions are likely to be understated as compared to IFRS" (p. 9).

IAS 40: Investment Property (effective 2005)

II

There is insufficient publicly available information as to Hungary's compliance with the principle.

IAS 41: Agriculture (effective 2003)

II

There is insufficient publicly available information as to Hungary's compliance with this principle.