A Matter of Principle: Recent Developments in Hungarian Accounting Thought and Regulation

ABSTRACT

This paper provides, against a review of prior literature on the problems faced by economies in transition from plan to market, an analysis of developments in Hungarian accounting regulation during the past 15 years. Significant legislative events are examined, as well as gradually shifting attitudes of the key players involved in the regulatory processes. We identify a number of obstacles to the development of a regulatory framework suitable to provide decision-useful accounting information, among which the roles and attitudes of the legislator and the accounting profession feature prominently, as well as the lingering influence of taxation on accounting, and of other Continental European, code-law regulatory and accounting features. We conclude that a reduction of the influence of government and legislation is required, as well as a more progressive approach in the education and training of accountants. This should focus on the teaching of a new way of thinking and move away from the traditional teaching of detailed accounting methods.

Acknowledgements

We are grateful to two anonymous referees for their helpful suggestions.

Notes

¹The Czech Republic, Cyprus, Estonia, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia.

²But see, for example, Piesse (1993), Rooz et al. (1996), Roberts et al. (1998, 2002), Borda (2001), Campbell (2002) or Day and Taylor (2004, 2005).

³Here: of consolidation rules, compared between the UK, Poland and the Czech Republic.

⁴In some transitional economies (Bulgaria, Croatia and Romania) IFRS have been implemented for all enterprises (Sucher and Jindrichovska, 2004).

⁵The main sources with regard to these points were: Bailey (1995), Sucher et al. (1996), King et al. (2001), Sucher and Alexander (2001), Sucher and Bychkova (2001), Sucher and Jindrichovska (2004) (also with reference to World Bank Reports), Illés et al. (1996), Vellam (2004).

⁶The journal had covered articles on Hungarian taxation also before 1999, thus the change of the title did not reflect a change in content, but rather an aligning of the title with the content. Earlier it would have been taken for granted that taxation was included, reflecting the dominance of taxation over accounting.

⁷Conversion rates for the HUF against the US dollar and euro at selected dates are shown below:

Table

⁸Respectively, a prominent academic and the deputy editor of the periodical Accounting and Bookkeeping.

⁹In 2003 31 banks operated in the banking system, with total assets of HUF 11.7 trillion (or US$56.2 billion) (World Bank, 2004).

¹⁰In 2003 53 companies were listed on the Budapest Stock Exchange, with a total market capitalisation of about US$16.7 billion – around 19.5% of GDP (World Bank, 2004).

¹¹The president's presentation on ‘The requirement of the fiscal and the monetary policy in the sustainable development’ at the 43rd Congress of the Hungarian Economists in 2005, http://www.mkt.hu/docs/2005-08-15-14-10-32-Jarai_Zsigmond.ppt

¹²The Hungarian name is: 1991. évi XVIII. törvény a számvitelről.

¹³Or ‘entrepreneurs’, including, until 1997, natural persons (Borda, 2001).

¹⁴Going concern, completeness, truth, understandability, consistency, the principle that one year's closing balance sheet had to correspond to the next year's opening balance sheet, matching, accruals, prudence, and the separate valuation of assets and liabilities, and income and expenditure (respectively).

¹⁵Hungarian: ‘megbízható és valós’. Borda (2001) interprets this in stating that the law required a TFV ‘of the income generating capabilities, development of net assets, and financial position of an economic entity’ (Borda, 2001, p. 1541); however, ‘the concept of a true and fair view has not been included in such words’ (Roberts et al., 2002, p. 567). Roberts et al. (ibid.) interpret the requirement as follows: ‘The Act requires a “realistic” report and reliance is placed on the notes to complete a “true” picture.’

¹⁶Hungarian law permits inclusion of all related expenses in the purchase price.

¹⁷For example, with regard to the asymmetric treatment of exchange gains and losses.

¹⁸The latter was felt necessary to protect creditors during such periods of transition.

¹⁹In Hungarian: 2000. évi C. törvény a számvitelről.

²⁰For example, with regard to pure research or doubtful debts.

²¹Law on Accounting C of 2000 4§ (4, 5).

²²Head of the Finance Ministry's Accounting Department.

²³Balance sheet total: 500 million HUF; net annual sales: 1,000 million HUF; and average number of employees: 50 (cf. Table 1).

²⁴By comparison (source: Hungarian Central Statistical Office, 2006, available at http://portal.ksh.hu/pls/ksh/docs/eng/xstadat/tabl4_01_17a.html):

Table

²⁵The chairman of the National Accounting Board.

²⁶An academic (as quoted in Pankucsi, 2001b).

²⁷The dual valuation of the organic balance sheet theory shows assets and liabilities based on current costs and the income statement on historical costs (Baricz, 1990). See also, for example, Schmidt (1921) and, for a comprehensive summary of his and related or opposing theories, Küpper and Mattessich (2005).

²⁸See I. Nagy (2002) for a comprehensive examination of the differences in valuation principles between Hungarian accounting law, IAS and US GAAP, with an illustration of the impact on assets, liabilities and results.

²⁹Lukács distinguished between the realisation of TFV in standard-based and in law-based regulation. In his view, in the latter the definition of the TFV is given by the law, in the former the same problem may be differently interpreted by the enterprise and the state authorities (note that the standard setter had not been established at Lukács’ time of writing). The fact that no (official) definition of ‘exceptional cases’ is provided – other than to suggest they apply when the detailed requirements of the law do not meet the TFV requirement – is perceived as problematic, as seems the case in most regulatory systems with no tradition of the TFV (override).

³⁰We are grateful to one of our anonymous referees for pointing this out.

³¹In 2003 99.9% of operating enterprises were SMEs, which accounted for 60.8% of total turnover, 51.4% of gross value added and 74.0% of employment (Némethné, 2005).

³²The current IASB project on small and medium-sized enterprises may perhaps provide a suitable solution.

³³See http://www1.pm.gov.hu/web/home.nsf/(PortalArticles)/7E15CBEC6D500362C12570 FA003197D8