What does the audit of a transformation mean?
When a company changes its legal form, merges or demerges, the accounting basis of the process is the transformation balance sheet (vagyonmérleg): a record of what the company’s assets are worth at the moment of the change. The audit of a transformation is the independent review of these balance sheets and of the supporting inventories of assets and liabilities, confirming that they were prepared in line with the detailed requirements of the Hungarian Accounting Act.
This is not an audit of the company’s full annual financial statements. It is a targeted review required by law, and it is one of the conditions of registration at the court of registration. The final transformation balance sheet certified by the auditor serves as the accounting document of the transformation.
When is a transformation balance sheet needed?
Many companies, especially smaller ones, only realise during the process that an auditor is needed for the transformation. It is worth knowing this in advance, because preparation and choosing the right auditor take time.
Under Hungarian rules the following cases count as termination with legal succession, and each of them requires a transformation balance sheet:
- Change of legal form, for example a Kft. (limited liability company) becoming a Zrt. (private company limited by shares). The company ceases to exist in its old form and continues in a new one.
- Merger, either by absorption (the absorbed company ceases to exist and the receiving company continues unchanged) or by consolidation (all participants cease to exist and a new company is created).
- Demerger, either by separation (the company survives and a new company is created with part of its assets) or by division (the company ceases to exist and its assets pass to several new companies).
The law also recognises two more complex forms of demerger, where the newly created company joins an already operating company at the same time.
When is an audit mandatory?
There is an important distinction here that many people are not aware of:
- The final transformation balance sheets must always be reviewed by an independent auditor. This is what provides the accounting document of the transformation.
- The draft transformation balance sheets have to be certified by an auditor only if at least one of the predecessor companies involved is itself subject to a statutory audit.
If you are not sure what is mandatory in your case, send us the basic details of the transformation and we will tell you.
The process and the deadlines
A transformation consists of several steps set out in law, from the owners’ decisions through the preparation of the draft balance sheets and publication in the Company Gazette to registration at the court of registration. A few deadlines worth planning with:
- No more than three months may pass between the balance sheet date of the drafts and the second owners’ resolution on the transformation. Where the drafts are aligned with the financial year end and there is no revaluation of assets, this may be six months.
- The transformation has to be reported to the court of registration within 60 days of signing the deed of foundation of the successor company.
- The final transformation balance sheets have to be prepared and filed within 90 days of the date of the transformation.
So it is not a good idea to leave the auditor to the last minute. Involving us during the planning phase helps you avoid delays later on.
What the auditor confirms, and what it does not
It is important to understand the limits of the review. The auditor confirms that the transformation balance sheets and the inventories of assets and liabilities were prepared in accordance with the Accounting Act and give a true picture. The auditor does not give an opinion on the legality of the transformation, its business merits or the soundness of the owners’ decision. Those fall within the responsibility of the owners and of the legal adviser. Our task is the credibility of the figures, not replacing the decision.
What we pay particular attention to: equity and share capital
One of the most critical points of a transformation balance sheet is the structure of equity and the coverage of the share capital. The law sets out detailed requirements that the successor company’s equity must cover its share capital after the transformation. If this is not met, it can prevent registration at the court of registration. We therefore pay special attention to this area during the review, and we tell you in time if a correction is needed, before the problem holds up the whole process.
Book value or market value? The consequences of revaluation
A transformation can be carried out at the book value of the assets, or at market value through a revaluation. This is not merely a technical choice: revaluation to market value has different accounting and tax consequences. The revaluation difference appears in the transformation balance sheet, it affects the structure of equity, and it may have a tax effect as well, especially where the conditions of a preferential transformation are not met. This decision is best taken with the accounting and the tax consequences in view together, and our audit and tax advisory perspectives support you in exactly that.
Our experience
Our registered auditors have worked on every form of transformation, from a simple change of legal form, for example a Kft. becoming a Zrt., to complex demergers combined with a simultaneous merger. MGI-BPO Audit has been providing audit services since 2005. You can read more about our experience here.
Under Hungarian law, the audit of a transformation may only be carried out by an audit firm or a registered auditor listed by the Hungarian Chamber of Auditors. Our chamber registration number is 002331.
Questions that often come up during the process
Planning a transformation means making a number of decisions in which audit and accounting considerations also play a part:
- Should the transformation be carried out at book value or at market value, with a revaluation of assets?
- How can the ownership structure be changed during the process?
- Is it possible to increase the capital at the same time as the transformation, and what is the best way to do it?
- How can the capital requirements set out in law be met?
- What tax advantages can a preferential transformation bring?
Frequently asked questions
Is this an audit of our whole company?
No. The audit of a transformation covers only the transformation balance sheets and the inventories of assets and liabilities, not the company’s full operations or its annual financial statements. Its purpose is to confirm that the balance sheets were prepared in accordance with the Accounting Act.
Who can act as the auditor of a transformation?
Only an auditor or audit firm registered with the Hungarian Chamber of Auditors. There is also a special conflict of interest rule: the transformation balance sheets may not be reviewed by an auditor who is the appointed auditor of any of the companies involved, or who was in the preceding two years.
Do you have experience with complex, group-level transformations?
Yes. We have worked on every form of transformation, from a change of legal form through mergers and demergers to the combined forms. Once we know the specific structure, we can tell you exactly what to expect.
Can a company reporting under IFRS take part?
If the companies taking part apply different reporting frameworks, one the Hungarian Accounting Act and another IFRS, that is a special case which requires the auditor of the transformation balance sheets to hold an IFRS qualification. We carry out transformations under the Hungarian Accounting Act; we do not take on IFRS consolidation. We clarify such cases at the initial discussion.
How long does it take, and when should we order it?
The timing of the review depends on the type and the complexity of the transformation, and it is closely tied to the statutory deadlines. Since the final transformation balance sheet has to be prepared within 90 days of the balance sheet date, it is worth involving the auditor already at the planning stage.
How do you report the problems you find?
We discuss the issues with management first. In a transformation, the amount of equity and of share capital is of particular importance, because an error there can prevent registration at the court of registration. We pay special attention to these and flag in good time if a correction is needed.
What does it cost, and is the fee fixed or hourly?
Our quote is fixed in advance and depends on the type of the transformation, the number of companies involved and the complexity of the balance sheets. If the range of companies to be reviewed grows during the process, we tell you before it happens.
Get in touch
If you are planning a transformation, a merger or a demerger, contact us already at the planning stage. Send us the basic details and we will help you clarify what is mandatory and how the audit fits the deadlines of the process.
