Audit of consolidation reporting packages

Under the provisions of Act C of 2000 on Accounting, an entity that qualifies as a parent undertaking in relation to one or more undertakings -except for parent undertakings exempted by law – is required to prepare consolidated annual financial statements and a consolidated business report.

The Act provides that the consolidated financial statements must present the assets, financial position and results of operations of the undertakings included in consolidation as if they constituted a single enterprise. To this end, duplications arising from relationships between the parent and its subsidiaries, jointly controlled entities, and from interrelationships among the latter, must be eliminated from the values of assets and liabilities, income and expenses (outputs and costs), and profit and loss.

Accordingly, in the consolidation process both parties – the parent and the subsidiary – have important tasks. The subsidiary must compile the data submissions on the basis of which the necessary eliminations can be performed, while the parent, using the data submissions (consolidation packages) received from the subsidiaries, must carry out the elimination of intragroup items.

Framework applied

In today’s globalised environment, there is growing demand for the comparability of financial statements prepared in different jurisdictions. This need is even more pronounced where a consolidated annual report must be prepared by harmonising data from undertakings operating under different accounting frameworks. A common solution is to require that, regardless of the national framework used for the standalone financial statements, the consolidation reporting package be compiled under the International Financial Reporting Standards (IFRS), which are internationally accepted and widely known. This allows differences among national financial reporting regimes to be bridged at subsidiary level, where the entity’s business is best understood, so that the consolidating parent does not have to address such differences for each subsidiary during consolidation.

From a cost-efficiency perspective, an undertaking may also consider preparing its separate (standalone) financial statements under IFRS, thereby avoiding adjustments required by differences between accounting frameworks. In Hungary today, only certain entities are required to prepare their standalone financial statements in accordance with IFRS – namely, those whose securities are admitted to trading on a regulated market in any state of the European Economic Area, and those that qualify, under Act CCXXXVII of 2013 on Credit Institutions and Financial Enterprises, as credit institutions or as financial institutions subject to prudential regulation equivalent to that of credit institutions. In addition, entities- including those whose direct or indirect parent prepares its consolidated annual financial statements under IFRS- may opt to prepare their standalone financial statements in accordance with IFRS. Adopting this option avoids the adjusting entries otherwise needed to reconcile differences between frameworks.

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