Equity after the report

Mandatory steps and good decisions

According to the provisions of the Accounting Act, the capital that the owner made available to the company or left in the company from the tax profit is provided as equity. In addition, the value of the equity is also part of the valuation and valuation assessment of the values.

The importance of equity and its settlement options

Equity plays a particularly important role: market participants see it as a kind of guarantee, as the proper size of capital indicates that the company is able to sett it its existing obligations. In view of this role, the Civil Code contains regulations that oblige companies to respond to the unfavorable development of their equity within the law and within the deadline.

Before examining the details, let's look at the equity levels the Civil Code requires for each corporate form. These are the following:

Ltd: Minimum HUF 3 million subscribed capital
Zrt.: Minimum HUF 5 million subscribed capital
Nyrt: At least HUF 20 million subscribed capital

Practical cases and consequences of decrease in equity

In the life of companies, a business year ends with a loss. This is particularly common in the early stages of operation, but external circumstances, such as the Covid -19, may lead to a similar situation. One loss -making year alone does not endanger operation, but attention should be paid to the tendency of equity. In the case of Ltd-K and Zrts, capital protection rules must also be adhered to.

The loss of two consecutive years

If the Company does not have equity equity in two consecutive business years, the equity of the registered capital prescribed for the company, the restoration of equity shall be ensured within 3 months of the adoption of the report of the second year. In case of lack of this:

the company must cease within 60 days or
it must be transformed into a company that meets its capital position.

Steps required in the event of a critical decrease in equity

Ltd. In the case of:

If the Executive is aware that

the equity of the capital to half of the capital or
decreased below the minimum required by law,

you will then be required to convene a member meeting or initiate a decision without a meeting. The decision made must be implemented within 3 months. Failure to do so, if the circumstance continues, the capital must be removed.

In the case of Zrt:

If the Board of Directors becomes aware that

equity is for two -thirds of the share capital or
decreased below the minimum prescribed share capital,

you must convene the General Assembly within 8 days. The General Meeting shall make a decision to terminate the situation or the transformation of the company. There are 3 months available to implement the decision. If this does not happen, the share capital must be removed.

Possible ways to settle equity

There are several solutions available to meet the legal requirements. The most common of these are:

Capitalization: It can be used in cases where equity has decreased, but the subscribed capital is still above the minimum value. In this case, the subscribed capital is reduced while increasing the capital reserves, for example, that is, it is an internal rearrangement of capital elements.
Supplementary payment: It can be used primarily for Ltd. If the corporate contract allows this.
Capital increase. It can only be realized by increasing the subscribed capital or so -called. In the form of an increase in capital, when the capital reserve increases in parallel with the increase of registered capital.
Release of an owner's claim: In this case, the owner release his claim against the company, which the company accounts for as a revenue in the year of release.
Free transfer of funds or other assets: Like the release of the ownership claim, this also improves equity through the current year.
valuation Reserve Training: If the Company has assets whose market value is higher than the book value, it is possible to set value. The decision must be recorded in the accounting policy and the change appears directly in its equity - no result.

No matter how capital is done - an instructive example

Although there are many options available, it is important to choose the right solution to the individual position of the business. The following case illustrates the consequences of an inappropriate decision.

A company has not been engaged in active economic activities for a long time. His books included a significant amount of loans received from a parent company and due to the loss of a stake described, his equity turned into negative.

The parent company originally planned to restart the operation and therefore made an increase in capital: it made its claim available to the company as a contribution. Capitalization was also properly accounted for.

Shortly afterwards, however, there was a strategic change of direction: the group decided to leave the Hungarian market and launched the company's liquidation.

What was the problem?

In fact, the capital setting did not serve to support further operation, but to ensure that the company does not have an obligation at the beginning of the liquidation. Therefore, the tax authority interpreted the contribution not as a financial contribution but as a claim. As a consequence, the amount appeared as other revenue, which resulted in a corporate tax liability.

Lesson: A seemingly logical decision, if not in line with the future of the company, can even carry significant tax risk.

How can similar mistakes be avoided?

As an accountant and consultant, it is our responsibility to indicate in time possible problems and develop solutions that meet the goals of the business. Therefore, our colleagues are constantly monitoring the capital position of managed companies and, if necessary, initiate a consultation.

Because a good decision depends not only on the numbers, but also on choosing a solution that best suits the situation. This is only possible if we consider both legal, accounting and business considerations in time.