The Luxembourg Parliament adopted on 18 November 2010 (the “Law”) the bill 5976 on the introduction of the International Financial Reporting Standards (“IFRS”) and the modernisation of the Luxembourg commercial accounting rules, as of today mainly described in the law dated 19 December 2002.
Although it would be difficult within the framework of this note to detail every changes brought by this new law, there are a certain number of measures that are worth mentioning as a very first analysis.
First of all, the Law introduces the possibility, on an optional basis, for the companies to prepare their annual and, as the case may be, their consolidated accounts in accordance with the IFRS standards as adopted in the European Union. So far, the IFRS standard was compulsory only for certain entities or in certain cases.
In addition, the companies which prepare their accounts under the Lux GAAP standards may now also opt for the use of fair value accounting for financial instruments. The Law further indicates that should be understand as financial instruments in the sense of the Law for the purpose of an estimation at fair value, financial instruments held for trading or derivatives. For example, participations held in subsidiaries are excluded from the fair value accounting option.
The Law also introduces the substance over form principle, which was mainly known until now for tax matters. In a nutshell, the qualification given to a transaction or an agreement by the parties should not automatically be registered in the accounts of the company if the substance, i.e. the economy of such transaction or agreement, is different that the one showed prima facie. The Law does not provide with a definition of this new accounting concept, and it is unclear at this stage what approach should be privileged: should it be the financial risks, the exercised control, etc.
The size thresholds of the companies is also modified so to make, among others, lighter accounting obligations of the smaller companies.
The management report would also have to include more substantial information regarding the results and the situation of the company in relation with the importance and the complexity of the transactions into which the company is involved, the risks and uncertainties faced by the company, key performance indicators, etc.
Although this reform does not mean that the existing accounting concept will completely disappear (for example the principle according to which the evaluation at the acquisition cost or the principle of prudence remain) but the Law introduces important changes which are in line with a will of improving the transparency and the real financial situation of the companies through their accounts.
It should also be stressed that the tax implications have not been considered by the Law, leaving important uncertainties in this respect.
This is in particular of importance since the financial statements are very much the basis of the tax computation (théorie de l’accrochement du bilan fiscal au bilan commercial). As a result, implementing the Law and opting for IFRS accounting standards or the substance over form principle will have to be closely analysed from a tax perspective.