The requirement to keep accounting records and to produce annual accounts applies to all businesses that are subject to the code of commerce.
The principle that businesses be required to produce annual accounts is established by law. However, the requirement does not apply equally to all businesses, and depends on the legal form of the company, its size and its sector of activity.
From an accounting point of view, the main distinguishing feature is whether or not the company is required to use the Luxembourg standard chart of accounts or PCN (Plan comptable normalisé).
Accounting standards provide a frame of reference for accounting operations. The general rules applicable to businesses' annual accounts provide 3 options as to the accounting standards that Luxembourg businesses may apply.
Who is concerned
The requirement to produce annual accounts, as discussed below, applies to the following types of commercial companies:
As a rule, these businesses are required to use the Luxembourg standard chart of accounts (Luxembourg PCN).
The following business types are not required to the use the Luxembourg PCN:
- sole traders and partnerships (SENC, SCS) with an annual turnover of less than EUR 100,000 excluding VAT;
- special limited partnerships (société en commandite spéciale – SCSp), regardless of their annual turnover;
- credit institutions;
- insurance and reinsurance companies;
- SEPCAVs (sociétés d'épargne-pension à capital variable – variable capital pension savings companies);
- SICAVs and financial holding companies whose activities are limited to investing in transferable securities or acquiring holdings;
- temporary partnerships and joint ventures;
- companies which, by agreement with the Minister of Justice, are allowed to prepare their accounts according to International Financial Reporting Standards (IFRS) or other accounting standards.
Sector-specific rules apply to finance and insurance companies.
How to proceed
Standard LUX GAAP: the accounting framework based on the historical cost method and the prudence concept
Standard annual accounts comprise the balance sheet, the profit-and-loss account and notes to the annual accounts. The documents form an integrated whole.
The balance sheet must satisfy certain requirements in terms of form and content. Reference is made to general accounting principles.
Unless subject to specific rules, there is no set layout for notes.
The valuation of items shown in the annual accounts is based on the following principles:
- the company is assumed to be a going concern;
- accounting and valuation methods may not be changed from one year to the next;
- the prudence concept must always be observed, and in particular:
- only profits actually realised at the balance sheet date may be included;
- the following must be taken into account:
- all liabilities that have arisen during the financial year in question, or a previous financial year, even if such liabilities only become apparent between the balance sheet date and the date on which the accounts are drawn up;
- value adjustments, regardless of whether the result of the financial year is a profit or loss;
- charges and income in respect of the financial year for which the accounts are drawn up, regardless of the date of payment or receipt of such charges or income;
- the components of asset and liability items must be valued separately;
- the opening balance of a financial year must match the closing balance of the previous financial year.
In exceptional circumstances, these principles may be waived if their application would prevent a true and fair view of the business's affairs from being presented. In that case, the annual accounts must nevertheless reflect a true and fair view of the business's assets and liabilities, its financial situation and its result.
If the above-mentioned principles are not applied, this must be mentioned in the notes to the annual accounts, along with the reasons for not applying them and the impact on the business's:
- assets and liabilities;
- financial situation;
As a general rule, balance sheet items are valued at purchase price or cost price.
The purchase price or cost price of stocks of goods belonging to the same category, as well as all fungible items, including transferable securities, may be calculated:
- on the basis of weighted average prices; or
- using a method in accordance with generally accepted best practices.
Formation expenses must be written off over a period of no more than 5 years.
Intangible fixed assets must be written off over their useful lifetime.
In exceptional cases, goodwill and development costs may be written off over 10 years.
LUX GAAP + Fair Value (FV) option
The framework known as LUXGAAP + FV is not a uniform framework. It is basically the LUX GAAP framework, with a number of additional accounting method options.
The presentation of the amounts recorded for profit-and-loss account and balance-sheet items may refer to the substance of the transaction or contractual arrangement in question. As such, the presentation of the annual accounts is open to a degree of interpretation, but must nevertheless reflect a true and fair view of the accounts.
Where liabilities are concerned, businesses may take account of all foreseeable liabilities and potential losses that have arisen during the financial year in question, or a previous financial year, even if such liabilities or losses only became apparent between the balance sheet date and the date on which the accounts are drawn up.
Financial instruments may be valued using a fair value model.
Fair value is determined with reference to:
- a market value, in the case of financial instruments for which a reliable market can readily be identified; otherwise, the value of the components of a similar instrument, or;
- a value derived from generally accepted valuation models and techniques.
Fair value may also be determined based on IFRS accounting standards.
Financial instruments whose value cannot be reliably determined using one of these methods are valued according to standard LUX GAAP rules.
If the fair value option is used for financial instruments, the notes to the accounts must include:
- the main assumptions underlying the valuation models and techniques used;
- for each category of financial instruments: the fair value, the changes in value included in the profit-and-loss account, and the changes included in the fair value reserve;
- for each category of derivative financial instruments: details on the volume and nature of the instruments, and especially:
- significant terms and conditions that could affect the amount;
- the timing and the certainty of future cash flows;
- a table showing movements in the fair value reserve in the course of the financial year.
If the fair value option is used for the valuation of certain categories of assets other than financial instruments, the notes to the accounts must include:
- the main assumptions underlying the valuation models and techniques used when fair value has not been determined with reference to a market value;
- for each category of assets other than financial instruments: the fair value at the balance sheet date and changes in value occurring during the financial year;
- for each category of assets other than financial instruments: details on the significant terms and conditions that could affect the amount and certainty of future cash flows.
International Financial Reporting Standards (IFRS)
IFRS are a set of international accounting standards that have been incorporated into European law.
They are mandatory for all publicly traded companies. Other companies incorporated in Luxembourg may elect to use this framework instead of LUX GAAP for their annual accounts and consolidated accounts.
Some of the rules provided for in LUX GAAP also apply under IFRS – most notably those which apply to:
- the layout of the notes to the accounts;
- the management report;
- the corporate governance statement;
- internal audits;
- the liability of company officers;
- the special regime for parent companies and their subsidiaries regarding the publication of annual accounts.
For certain capital companies, unrealised income, gains and positive changes in equity may not be used for other purposes.
These items must be allocated to an 'unavailable' reserve, the use of which is restricted.
Contents of the notes
The notes to the accounts contain essential information, such as:
- the accounting and valuation methods used;
- the names and registered offices of undertakings in which the reporting company holds at least 20 % of the share capital, the proportion of the share capital held, and possibly the amount of capital;
- the number and nominal value or, in the absence of nominal value, the accounting par value, of shares acquired during the financial year;
- when there are several classes of shares: the number and nominal value or, in the absence of nominal value, the accounting par value, of each of them;
- the existence and number of any profit units, convertible bonds, warrants, stock options or any similar securities or rights, and the rights they confer;
- the amounts owed by the business becoming payable in more than 5 years, and details of the collateral securing such debts;
- the total amount of significant financial commitments not included in the balance sheet must be reported individually;
- the nature and commercial purpose of significant transactions not included in the balance sheet, as well as the financial impact of such transactions on the business;
- transactions between the business and related parties, including the transaction amounts, the nature of the relationship with the related party, and any other information about such transactions as may be necessary to understand the financial situation of the business. Businesses have the option to include in the notes only those related-party transactions that were not effected in normal market conditions;
- information on any related-party transactions that were not effected in normal market conditions;
- the breakdown of net turnover;
- the average number of staff employed in the financial year in question;
- information on differences between:
- taxes charged to the financial year in question and earlier financial years;
- tax already paid;
- information on deferred tax liabilities at the end of the financial year in question;
- emoluments and pensions granted to members of management and supervisory bodies during the financial year in question;
- information on advances and loans granted to members of management and supervisory bodies;
- information on charges incurred during the financial year and payable after the end of the financial year;
- the name and registered office of the business entity that has drawn up the consolidated accounts, and the fees paid to each auditor;
- the nature and financial impact of significant events occurring after the balance sheet date which are not included in the profit-and-loss account or the balance sheet.
Small and medium-sized enterprises may present abridged notes.
Contents of the management report
The management report complements the annual accounts and includes information such as:
- historic and prospective commentary on the business entity's activities;
- a fair review of the entity's business, results and position;
- a description of the main risks and uncertainties facing the business entity.
Requirements regarding the contents of the management report vary depending on the type of business entity.
They mainly apply to large companies incorporated as:
- European companies (SE);
- public limited companies (SA);
- limited liability companies (SARL);
- and in certain cases:
- partnerships limited by shares (SCA);
- limited partnerships (SCS).
Where applicable, the report should also contain information on:
- key financial and non-financial performance indicators;
- environmental and staff-related issues;
- research and development activities;
- the purchase of treasury shares;
- the use of financial instruments and the risk-management policy;
- the business entity's exposure to price-, credit- and cash-flow-related risks.
Additional requirements apply to business entities whose securities have been admitted to trading on a regulated market, and include information on:
- the entity's corporate governance policy;
- corporate governance practices;
- the main features of the entity's control and risk-management systems;
- the composition and operation of administrative, management and supervisory bodies and their committees;
- the policy on diversity within the entity's administrative, management and supervisory bodies, with regard to criteria such as age, gender, qualifications and work experience;
- the objectives and implementation of the policy on diversity.
Non-Financial Reporting is mandatory only for large public-interest capital companies:
- with more than 500 employees at the balance sheet date;
- with a turnover of more than EUR 400 million, or a balance sheet total of EUR 20 million.
The non-financial report must be included in the management report. The non-financial report includes information on the company's performance and position, and on the impact of its operations with regard to environmental, social and personnel issues, and from the standpoint of human rights and the fight against corruption, and more particularly:
- a brief description of the company's business model;
- a description of the policies implemented by the company in respect of these issues, including due diligence procedures;
- the outcome of those policies;
- the main risks in connection with these issues and the extent to which they could affect the company's operations, including, where relevant and proportionate, any business relations, products and services that could have a negative impact on those domains and on the way in which the company manages those risks;
- key non-financial performance indicators for the activities in question.
If the company has no policies on one or more of these topics, the non-financial report should contain a clear and well-reasoned explanation of the reasons for their absence.
The statutory auditor is only required to ascertain whether or not the non-financial report has been provided.
The non-financial report must be published with the management report.
Corporate governance declaration
The requirement to produce a corporate governance declaration applies to companies whose securities have been admitted to trading on a regulated market.
The statement is to be included in the management report as a separate section. At the very least, this section should indicate:
- the corporate governance code by which the company is required to abide; and/or
- the corporate governance code by which the company has voluntarily chosen to abide; and/or
- any relevant information on corporate governance practices beyond that required by law.
This report may be published separately from the management report, on the company's website.
Report on payments to governments
The requirement to publish this report applies mainly to large companies involved in the extraction/exploitation of natural resources, e.g., ore, oil, natural gas, primary forest timber, etc.
This type of report is a means of bringing information on the amounts paid by extraction companies to non-EU governments to the attention of the general public with a view to raising awareness on related issues.
The report is to be published annually. It should mention the various forms of payment, as well as their nature, frequency and amount.
For Luxembourg companies subject to this disclosure requirement, the report must be filed with the RESA.
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