HAR, IFRS and US GAAP Similarities and differences October 2014

HAR, IFRS and US GAAP
Similarities and differences
October 2014
HAR, IFRS and US GAAP
Similarities and differences
About this publication
This publication is designed to alert companies to the major differences that currently exist between the Hungarian
GAAP.
The study consists of the following areas:
An executive summary on the most important differences between the accounting frameworks with references to
the different parts of the study and an assessment on the significance of the differences;
A summary of current HAR, IFRS and US GAAP differences and the potential implications thereof on each major
topic;
A more detailed analysis of current differences between the frameworks including an assessment of the impact
embodied within the differences.
In addition, as there are special topics that are only relevant under Hungarian Accounting Regulations, this
publication also includes an overview of these other special considerations.
This publication is not all-encompassing. It focuses on those differences that we generally consider to be the most
significant or most common. When applying the individual accounting frameworks, companies should consult all of
the relevant accounting standards and, where applicable, national law.
Guidance date
This publication considers authoritative pronouncements and other developments under IFRS and US GAAP through
September 1, 2014. Future editions will be released to keep pace with significant developments. Since significance
changes in HAR occurred on 1 January 2015, the publication takes into account amendments in Hungarian
regulations until this date.
Table of contents
1. Executive summary .......................................................................................................................................... 4
2. First-time adoption .........................................................................................................................................16
3. Revenue recognition .......................................................................................................................................19
4. Expense recognition share-based payments.................................................................................................41
5. Expense recognition employee benefits ..................................................................................................... 52
6. Assets nonfinancial assets........................................................................................................................... 65
7. Assets financial assets.................................................................................................................................. 89
8. Liabilities taxes .......................................................................................................................................... 106
9. Liabilities other........................................................................................................................................... 119
10. Financial liabilities and equity .................................................................................................................. 128
11. Derivatives and hedging ............................................................................................................................. 139
12. Consolidation...............................................................................................................................................154
13. Business combinations................................................................................................................................172
14. Other accounting and reporting topics ......................................................................................................179
15. Other special topics under Hungarian Accounting Regulations ............................................................. 201
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1. Executive summary
This executive summary aims to demonstrate the most common, most significant differences between the Hungarian
Accounting Regulation, IFRS and US GAAP in the table below. The regulation is explained in more details in the
specific sections of the study.
Significant difference
Moderate difference
Minor or no difference
Topic
Structure, format
of the primary
statements
Description of the matter
Under HAR, pre-determined balance sheet and income statement
templates are provided in the appendix of the Act on Accounting that
should be applied. Under IFRS and US GAAP companies have
significant freedom in determining the structure and the format of the
primary statements based on their accounting policies.
Other
comprehensive
income statement
Under HAR, the concept of other comprehensive income statement
does not exist (as opposed to US GAAP and IFRS). Transactions that
are recorded in the OCI in US GAAP or IFRS are recorded for in the
income statement or directly in equity under HAR.
Discontinued
operation
The concept of discontinued operations does not exist under HAR,
therefore the related effects are not presented neither on the face of
the income statement nor in the notes in contrast with US GAAP and
IFRS.
Extraordinary
items
Statement of
changes in equity
IFRS explicitly prohibits the usage of extraordinary items, while under
US GAAP the infrequent and unusual items are presented as such,
therefore it is rare in practice. HAR provides a detailed list of items
that should be recorded as extraordinary items, therefore there might
be significant amounts presented as extraordinary in the primary
statements.
Statement of changes in equity is not a separate primary statement
under HAR, and the preparation of that is not explicitly required by
the Act on Accounting. But the changes of the equity should be
disclosed. Most of the companies present the statement in the notes.
Under IFRS statement of changes in equity is a primary statement,
which should be prepared by all entities.US GAAP requires the
a primary statement or within the notes to the financial statements.
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Chapter
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Topic
Description of the matter
Chapter
Statement of cash flows is not a primary statement under HAR but
generally it is presented in the notes to the financial statements.
(Certain entities that are allowed to prepare simplified financial
statements are not required to present the statement of cash flows in
the notes). The statement is compiled based on template provided in
the Act on Accounting, where the cash flows are classified as
operating, investing and financing activities.
Statement of cash
flows
Even though the statements look similar under HAR, IFRS and US
GAAP, there are many significant differences in the details of the
items presented on each line item.
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Under HAR entities have less flexibility in determining the structure
of the statement of cash flows, but it enables easier comparability
between entities.
Under IFRS cash and cash equivalents may also include bank
overdrafts repayable on demand that form an integral part of an
GAAP. HAR does not have the concept of cash and cash equivalent,
therefore the related line in the balance sheet and in the statement of
cash flows only contains cash and bank balances.
Accounting error
Prior period accounting error (if material) results in restatement of
comparative figures in the financial statements under IFRS and US
GAAP. The concept of materiality exists also under HAR, however
material error is not defined. HAR uses significant misstatements with
predefined threshold.
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Under HAR the effect of significant misstatements are disclosed in a
separate column of the primary statements and prior year figures are
not restated.
Change in
accounting policy
Changes in
accounting
estimates
Regarding voluntary change in accounting policy as per main rule
both IFRS and US GAAP requires retrospective adjustment of the
balances presented in the financial statements. Under HAR the
comparative figures are not restated in case of a change in accounting
policy (accounted for prospectively), but the effect of the change
should be disclosed in the notes to the financial statements.
Changes in accounting estimates are accounted for prospectively
under all the three frameworks analyzed in the study. In practice
certain events under HAR are classified as change in accounting policy
(e.g. changing of the depreciation method) that is classified under US
GAAP and IFRS as change in accounting estimates. Since under HAR
the change in accounting policy is also accounted for prospectively,
therefore no difference exists between the GAAPs in respect of this
matter.
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N/A
Topic
Description of the matter
Chapter
HAR introduces the concept of balance sheet preparation date and
(mainly for valuation purposes) considers certain conditions existing
as of that date and not as of the end of the financial period.
Events after the
balance sheet
date
Presentation of
dividend payable
The concept under HAR is significantly different from US GAAP and
IFRS that mainly focuses on the conditions existing as of the end of
the reporting period. Events between the end of the reporting period
and the date when the financial statements are authorized for issue (or
available to be issued under US GAAP) are assessed, whether they
provide evidence of conditions that existed at the end of the reporting
period (adjusting events) or they are indicative of conditions that
arose after the reporting period (non-adjusting events). This causes
significant difference for example for the valuation of certain
derivatives.
According to the Civil Code, dividend decision should be made on the
same annual general meeting, when financial statements are approved
by the owners. Under HAR dividends are adjusting items, therefore
financial statements are to be adjusted by such dividends and the
dividend payable is presented in the income statement.
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Dividend is presented under IFRS and US GAAP as changes in equity,
when the resolution is made by the annual general meeting.
Under HAR, the concept of presentation and functional currency are
not separated. Every company can freely elect to prepare its financial
statements in HUF, EUR or USD. For applying other currency as
Presentation and
functional
currency
different from those that determines the functional currency under US
GAAP and IFRS) should be met.
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Both US GAAP and IFRS, specify indicators that should be assessed by
the companies when determining the functional currency. Accounting
records should be kept in the functional currency and specific rules
apply for translating these balances and transactions to the
presentation currency.
Initial measurement
Property, plant
and equipment
cost model
US GAAP and IFRS contains similar guidance relating to initial
measurement of PPE at costs necessarily incurred to bring it to the
condition and location necessary for its intended use. Under HAR a
detailed list of items is also specified that should be capitalized.
Certain items of that are not allowed under the other two frameworks.
These include:
employee training cost;
insurance cost of the asset before capitalization;
certain foreign exchange differences incurred in
connection with the asset.
Under IFRS and US GAAP it is required to recognize (although with
asset. This is not regulated under HAR.
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Topic
Description of the matter
Chapter
Depreciation
Under IFRS and US GAAP the depreciation of an asset starts when it
is available for use, i.e. when it is in the location and condition
necessary to be capable of operating in the manner intended by
management. This time might precede the starting of the depreciation
under HAR, which begins when it is started to be used.
Property, plant
and equipment
revaluation
model
Under IFRS it is an accounting policy choice to apply the revaluation
model for subsequent measurement of property plant and equipment.
When applied, the revaluation of the asset is accounted for in the OCI.
The revalued amount becomes the basis of accounting for
depreciation. There is an accounting policy choice provided to the
Companies to reclassify the additional depreciation element within
equity from revaluation reserve to retained earnings. If such
reclassification is not performed on yearly basis, it should be
accounted for when the asset is derecognized.
Under HAR similar accounting policy can also be applied, but there
are several differences in the details. The increase in the value is also
recorded against equity but there is no primary statement of
comprehensive income, therefore it is disclosed only in the notes. The
revaluation does not change the basis for depreciation, the revaluation
reserve is derecognized against the value of the asset, when there is a
fall in the market value, or when the asset is derecognized. If this
model is applied, market value of the asset shall be updated on a
yearly basis.
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US GAAP generally prohibits the revaluation of property plant and
equipment.
Investment
property
Under HAR and US GAAP, there is no specific definition of
investment property. Real estate companies usually carry their
investment properties at cost, however under HAR companies may
decide to apply revaluation model for PPE. Under US GAAP certain
industries have specific guidance that allow for carrying property at
fair value.
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Under IFRS, investment properties can be carried at cost or fair value
depending on the accounting policy choice of the Company.
Companies choosing the fair valuation model, do not account for
depreciation for the property, any change in the value of the property
is recognized in the current year income statement.
The most significant differences exist for the internally generated
intangible assets:
Intangible assets
Under HAR it is an accounting policy choice to capitalize:
formation/restructuring expenses and;
capitalized value of experimental developments.
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Topic
Description of the matter
Chapter
Capitalized costs may not exceed the amount that is likely to be
recovered by profits.
Under IFRS certain costs of the development phase of an R&D
projects shall be capitalized if strict recognition criteria are met.
Under US GAAP generally both research costs and development costs
are expensed as incurred, making the recognition of internally
generated intangible assets rare. Separate, specific rules apply in
certain industries.
Intangible assets
revaluation
model
Under HAR intellectual properties and rights can be carried at
revalued amount. The revaluation is accounted for against equity and
they are also presented in the notes to the financial statements. The
basis of amortization is the initial cost of the asset, and not the
revalued amount.
Under IFRS intangible assets (based on accounting policy choice) can
be measured with the revaluation model only if there is an active
market for the intangible assets. In practice this rarely happens.
Similarly to PPE, if revaluation model is applied, the revaluation is
accounted for against equity and presented in OCI. The basis of
amortization is the revalued amount.
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Under US GAAP intangible assets are carried at cost.
Under HAR, when government grant received with the aim to cover
expenses, it is accounted for as other income. If the related expense is
not incurred until the end of the financial period, the respective
amount of other income shall be deferred. If the government grant is
related to a financial period, the other income can be accounted for if
it is received, or claimed by the balance sheet preparation date. When
a government grant received is connected to an investment, it is
accounted for as extraordinary income and deferred until the asset
acquired is depreciated or derecognized.
Government
grants
Under IFRS government grants can be recognized generally earlier
than under HAR. When there is reasonable assurance that the entity
will comply with the conditions related to the grant and the grant will
be received, recognition criteria is met. Under IFRS government
grant related to expenses should also be recognized in the income
statement on a systematic basis over the periods in which the entity
recognizes the expenses. There is an accounting policy choice to
account for the government grant as other income (or similar income
statement line) or deduction of the related expense. A government
grant that becomes receivable as compensation for expenses or losses
already incurred or for the purpose of giving immediate financial
support to the entity with no future related costs shall be recognized in
profit or loss of the period in which it becomes receivable. If the
government grant relates to the purchase of assets, it shall be
presented in the statement of financial position either by setting up
the grant as deferred income or by deducting the grant from the value
of the purchased asset.
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Topic
Description of the matter
Chapter
Under US GAAP the recognition of the grant is delayed until
conditions have been fulfilled. Contributions of long-lived assets or for
the purchase of long-lived assets are to be credited to income over the
expected useful life of the asset for which the grant was received.
Under HAR entities shall capitalize only the borrowing cost of the
loans that are directly attributable to the acquisition or construction of
the asset. There is a specific list of such items in the Act on
borrowing costs can be capitalized in case of any PP&E under
construction. The period of capitalization might also differ from the
other two frameworks.
Borrowing cost
Under IFRS borrowing costs that are directly attributable to the
acquisition, construction, or production of a qualifying asset shall be
capitalized. In addition to the specific borrowings, general borrowings
should also be considered when the capitalized amount is determined.
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US GAAP, similarly to IFRS, requires capitalization of interest costs
while a qualifying asset is being prepared for its intended use. US
GAAP allows for more judgment in the determination of the
capitalization rate, which could lead to differences in the amount of
costs capitalized.
Initial measurement
Under HAR, the practice is not fully consistent in terms of
capitalization of overhead expenses. The method used by the company
should be described in the internal costing system policy.
Inventories
Under IFRS and US GAAP the own produced inventories are valued at
cost required to bring the inventory to the present location and
condition. It means that it contains the direct production costs,
variable production overheads and also a systematic allocation of fixed
overheads based on normal production capacity.
Subsequent measurement
Generally under HAR, IFRS and US GAAP inventory is measured at
cost less impairment. There are minor differences between the GAAPs
in the method how impairment is determined.
Under HAR and IFRS FIFO and weighted-average costing are
permitted, but LIFO costing is prohibited. Under US GAAP LIFO
costing is also allowed.
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Topic
Description of the matter
Chapter
There are significant differences between the GAAPs in terms of
classification and measurement of the different types of financial
assets.
Under HAR every company can apply fair valuation, as it is
accounting policy choice. Such application would result in similar
classification of financial assets to IFRS. In practice, only minority of
companies elect this option, therefore in the publication unless
explicitly stated it is assumed that the fair valuation is not applied.
Generally, under HAR the legal form of the asset/liability determines
the accounting treatment. Financial assets are generally carried at
cost, interest is recognized based on the contractual terms and not
based on effective interest rate.
Financial assets
Under IFRS, the legal form does not drive classification of debt
instruments; rather, the nature of the instrument (including whether
there is an active market) is considered. Additional differences involve
financial assets that are carried at amortized cost.
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Under US GAAP, the legal form of the financial assets drives
classification. For example, debt instruments that are securities in
legal form are typically carried at fair value under the available-forsale category (unless they are held to maturity) even if there is no
active market to trade the securities. At the same time, a debt
instrument that is not a security (for example, a corporate loan) is
accounted for at amortized cost even though both instruments (i.e.,
the security and the loan) have similar economic characteristics.
Both IFRS and US GAAP use the effective interest method to calculate
amortized cost and allocate interest income over the relevant period.
HAR performs the classification of an item to equity or liability based
on the legal form (e.g. a dividend preference share is likely to be
treated as equity). HAR contains guidance on the items that should be
treated as equity, other items not included in this list are generally
treated as liability. A specific difference is that treasury shares are
presented as assets and not deducted from equity.
Financial
liabilities &
Equity
Under IFRS an equity instrument is any contract that evidences a
residual interest in the assets of an entity after deducting all of its
liabilities. In summary, the instrument is an equity instrument if, and
only if, both conditions are met.
The instrument includes no contractual obligation to deliver
cash or other financial asset to another entity; or to exchange
financial assets or financial liabilities with another entity
under conditions that are potentially unfavorable to the
issuer.
equity instruments, it is non-derivative and includes no
contractual obligation for the issuer to deliver a variable
number of its own equity instruments; or a derivative that
will be settled by the issuer exchanging a fixed amount of
cash or another financial asset for a fixed number of its own
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Topic
Description of the matter
Chapter
equity instruments. For this purpose
instruments do not include instruments that are themselves
contracts for the future receipt or delivery of the i
equity instruments.
US GAAP examines whether the instrument in question contains an
unconditional redemption requirement. Unconditional redemption
requirements result in financial liability classification. Contingent
settlement/redemption requirements and/or put options, however,
generally would not be unconditional, as they may not occur. As such,
under US GAAP, financial liability classification would not be
required. SEC-listed entities, however, would need to consider the
application of mezzanine equity accounting guidance.
HAR does not have any guidance available in order to identify
embedded leases in contracts, therefore usually the legal form is
assessed by the companies. HAR distinguishes between finance lease
and operating lease. The Act on Accounting refers to the Act on Credit
Institutions and Financial Enterprises. The Act lists specific criteria
that should be met in order to classify a lease as finance lease. In
general, less lease agreements are classified as finance lease under
HAR compared to IFRS or USGAAP.
Leases
Under IFRS the guidance focuses on the overall substance of the
transaction. Lease classification as an operating lease or a finance
lease depends on whether the lease transfers substantially all of the
risks and rewards of ownership to the lessee.
Under US GAAP the guidance contains four specific criteria for
determining whether a lease should be classified as an operating lease
or a capital lease by a lessee. The criteria for capital lease classification
broadly address the following matters:
Ownership transfer of the property to the lessee;
Bargain purchase option;
Lease term in relation to economic life of the asset;
Present value of minimum lease payments in relation to fair
value of the leased asset.
Although lease classification criteria is similar in US GAAP and IFRS,
in US GAAP there are differences in evaluation of the criteria.
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Topic
Description of the matter
Chapter
Recognition criteria
All of the GAAPs require that the obligation needs to be probable in
order to qualify for recognition. Under HAR however the term
situation in which the outcome is more likely than not to occur, that is
generally interpreted as any chance greater than 50 percent. US GAAP
outcome is likely to occur. While a numeric threshold for probable
does not exist, practice generally considers an event that has a 75
percent or greater likelihood of occurrence to be probable.
Provisions
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Measurement
Under HAR there is no specific guidance on measurement of
provisions. Under IFRS provision shall be measured at the best
estimate of the expenditure required to settle the present obligation at
the end of the reporting period. Different measurement principles are
applicable under US GAAP for different types of provisions.
Special regulations
HAR does not contain special regulations for the different types of
provision, while US GAAP and IFRS contains special (but different)
regulations to certain provisions (e.g. onerous contract, restructuring)
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Topic
Description of the matter
Chapter
HAR generally follows the legal form of the transaction when
accounting for revenue. Revenue is not limited to the ordinary activity
of the company (e.g. a one-off service provided or goods sold could
also form part of the revenue). There is no agent/principal guidance
available. Provision of services and construction contracts are
generally accounted for in accordance with the completed
contract/milestone method. Under HAR the form of sales discount
determines the treatment and it might affect revenue, other expense,
financial expense or extraordinary expense. HAR does not provide
guidance on how to account for multiple element arrangements
(including customer loyalty programs), does not require discounting
of the balance even if the time value of money is significant.
Revenue
recognition
Under IFRS revenue is accounted for in accordance with principle
based criteria. Revenue includes gross inflow of benefits of ordinary
activity of the company. Specific guidance is available on
principal/agent consideration that enables the companies to decide
whether the transaction should be recorded on gross or net basis.
Revenues from services and construction contracts are generally
accounted for in accordance with the percentage of completion
method. Under IFRS any trade discounts and volume rebates given to
customers are deducted from revenue.
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US GAAP provides a principle based guidance on revenue with
specific extensive guidance on certain areas. Similarly to IFRS specific
guidance is available on principal/agent decisions. For recognition of
revenue from services companies would generally apply the
proportional-performance model or the completed-performance
model. The scope of construction contract is different from IFRS
method to be applied with some exceptions. Sales incentives provided
to the customers in the form of lower selling price should decrease
revenue (and not be recorded for as an expense) under US GAAP.
Employee
benefits
Under HAR there is no specific guidance on accounting for defined
benefit plans that are rare in practice. Employee expenses are usually
recorded when the service is performed by the employee.
IFRS and US GAAP provide extensive guidance on how to account for
defined benefit plans with significant differences in the detailed
regulations.
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Topic
Share-based
payments
Description of the matter
HAR does not contain specific guidance on share-based payment
transactions therefore the general regulations of the Act on
Accounting should be applied. In general, there is no push-down
accounting for group share-based payment transactions provided by
t
-alone
financial statements only if the parent recharges the expenses to the
subsidiary.
Chapter
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Under IFRS and US GAAP detailed guidance is provided for the
accounting of cash-settled and equity-settled share based payment
transactions with significant differences in the details of the
regulations. Both GAAP requires push-down accounting for group
share-based payment transactions. Under US GAAP, push-down
accounting of the expense recognized at the parent level generally
determine the appropriate accounting.
HAR provides a list of taxes that should be presented as income tax in
the income statement.
Income taxes
current taxes
US GAAP and IFRS has similar classification, taxes that are based on
net income should be classified as income tax.
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For example, local business tax and innovation contribution payable
in Hungary is presented as other expense under HAR, while presented
as income tax under US GAAP and IFRS.
HAR does not have the concept of deferred taxation in the separate
financial statements. In the consolidated financial statements limited
types
.
Income taxes
deferred taxes
Business
combinations
Under IFRS and US GAAP companies should account for deferred tax
based on the temporary differences in their separate and the
consolidated financial statements. Under IFRS deferred tax is always
presented as non-current asset/liability, while under US GAAP
detailed guidance is available regarding the presentation in the
balance sheet. Even though the broad concepts of deferred taxation
under IFRS and US GAAP are very similar, there are several
differences in the detailed accounting regulations.
The business combinations standards under US GAAP and IFRS are
close in principles, with two major exceptions: (1) full goodwill and (2)
the requirements regarding recognition of contingent assets and
contingent liabilities. Significant differences also continue to exist in
subsequent accounting. Different requirements for impairment testing
and accounting for deferred taxes (e.g. the recognition of a valuation
allowance) are among the most significant.
Under HAR there is significantly different guidance on accounting
business combinations. Entities have an accounting policy choice
whether to account for the acquisition in the consolidated financial
statements at cost or at the fair value of the assets acquired. The
companies also have an accounting policy choice regarding the
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Topic
Description of the matter
Chapter
determination of the acquisition date. Under HAR the acquirer is
determined based on the legal form of the transaction which is also
different from the guidance in other frameworks. In general, there is
significantly less specific guidance for accounting of complex
transactions such as contingent purchase prices.
Scope of consolidation
HAR allows companies to prepare their consolidated financial
statements in accordance with IFRS. HAR contains a list of
exemptions from the preparation of the consolidated financial
statements and from the inclusion of subsidiaries in the consolidated
financial statements. In general the legal form of an acquisition is
considered for the determination of the acquirer and the method of
consolidation. There is no specific guidance for special purpose
vehicles, potential voting rights, de facto control.
Consolidation
Under IFRS parent entities prepare consolidated financial statements
(with limited exemption) that include all subsidiaries. The
consolidation model contains a detailed guidance for the decision
whether a parent-subsidiary relationship exists. Specific guidance for
special purpose vehicles (structured entity), potential voting rights
and de facto control is also provided.
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US GAAP has a two-tier consolidation model: one focused on voting
rights (the voting interest model) and the second focused on a
qualitative analysis of power over significant activities and exposure to
potentially significant losses or benefits (the variable interest model).
Under US GAAP no specific guidance exists requiring the
consideration of potential voting rights. Effective control is limited to
contractual arrangements since no de facto control concept exists
under US GAAP.
HAR interprets the term of related parties in the same way as IFRS
and also has a separate term for related companies. HAR requires
extensive disclosure for related companies that is only a subset of the
related parties. Related party disclosure is required for transactions
that are significant and not in line with general business practice.
There is no exception available from the disclosures for government
related entities.
Related parties
IFRS does not have the term of related companies, only related parties
and contains extensive disclosure requirements for them. There is a
specific exemption available from the disclosures for government
related entities.
US GAAP similarly to IFRS only uses the term of related parties and
requires less extensive disclosures compared to IFRS. Under US
GAAP there are no exemptions available to reporting entities from the
disclosure requirements for related party transactions with
governments and/or government-related entities.
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