Financial accounting and reporting what is new?

Transcription

1 Financial accounting and reporting what is new? The Law and the Grand Ducal Regulation of 18 December 2015 concerning annual accounts and consolidated accounts are now in force.

2 In December 2015, the European Directive 2013/34/ EU on the annual and consolidated financial statements was transposed to Luxembourg s corporate law. The new Law is effective for financial periods beginning on or after 1 January The Luxembourg Law of 18 December 2015 (the new Law) modifies the first book of the Commercial Code and the amended versions of the laws of: 10 August 1915 on commercial companies (the 1915 Law), 19 December 2002 on the register of commerce and companies and the accounting and annual accounts of undertakings (the 2002 Law) On 28 December 2015, the new Law was published in Luxembourg s official legal gazette, the Mémorial, together with a Grand Ducal Regulation which determines the presentation of the form and content of the balance sheet and the profit and loss account. The new Law follows the draft law No on the transposition of the European Directive 2013/34/EU1 of the European Parliament and of the Council of 26 June 2013 on the annual and consolidated financial statements (the Directive) into Luxembourg corporate law. The revision of the Directive aims to reduce the administrative burden for small size companies in order to stimulate European economic growth. The endorsement of the Directive into Luxembourg law comprises two phases: The new Law incorporates mandatory changes required by the Directive. The Luxembourg Government is currently working on reshaping the Luxembourg corporate law. 1 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 Date of application We draw your attention to the fact that the below mentioned provisions will be applicable for the first time for financial periods beginning on or after 1 January Amendments The following changes apply to the preparation of both the annual accounts and the consolidated financial statements. For additional changes exclusively related to consolidated financial statements please refer to section Consolidated accounts only in this publication.

3 Thresholds for small, medium and large-sized companies and groups (Article 47 of the 2002 Law and Article 313 of the 1915 Law) Small companies (no changes due to new Law) Medium and Large companies Total balance sheet (in m) Net turnover (in m) Staff (in average and full time) New thresholds Previous Introduction and definition of the materiality principle (Article 26 (6) of the 2002 Law and Article 319 (6) of the 1915 Law) Material means the status of information where its omission or misstatement could reasonably be expected to influence decisions that users make on the basis of the financial statements of the undertaking. The Directive explicitly states that a company is obliged to comply with the requirements of the Directive where material. The principle of materiality for financial statements is traditionally an extremely complex concept to implement for a preparer of a company s financial statements. It should govern recognition, measurement, presentation, disclosure and consolidation in financial statements. According to the principle of materiality, information that is considered immaterial may be aggregated in the financial statements. However, while a single item might be considered to be immaterial, immaterial items of a similar nature might be considered material when taken as a whole. Member States are given the option to limit the mandatory application of the principle of materiality to presentation and disclosure. In Luxembourg, to prevent both the difficulties in the application and the risk of abuse, it has been decided to limit the application of the materiality concept to the completeness of the disclosures of notes in the financial statements (Article 51 (1) g) of the 2002 Law). Additionally, the standardization of the terminology used in relation to the principle of materiality was conformed throughout the Luxembourg corporate law, among others: Articles 317 and 318 for its application to determine the consolidation perimeter Article 329 in the context of intra group elimination Article 336 in the context of the application of the equity method for investments in associates 1

4 Presentation and layout of the balance sheet and profit and loss account (Articles 34, 35, 46 and 47 of the 2002 Law and Article 320 (3) of the 1915 Law) 2 Published in the Mémorial, edition A No. 258 on 28 December The platform for electronic gathering of financial data ecdf The main changes introduced by the new Law in view of presenting the balance sheet and the profit and loss account for annual accounts contain: Profit and loss items may only be presented by nature (vertical presentation) The form and content of the balance sheet and profit and loss account (both in full and abridged format) are defined by a Grand Ducal Regulation 2 New layouts already available on the Luxembourg ecdf 3 platform The new Law introduces a further option to present a consolidated balance sheet and profit and loss account i.e.: The horizontal or vertical presentation as per Annex III and IV of the Directive for consolidated balance sheet The presentation by nature or by function as per Annex V and VI of the Directive for consolidated profit and loss account An other amendment introduced by the new Law concerns Article 49 of the 2002 Law: the Directive, as transposed in Luxembourg, removed the notion of extraordinary expenses or income (similar with what is also applicable under other international generally accepted accounting principles such as IFRS). As such extraordinary expenses or income do not appear on the face of the profit and loss account anymore. However the provision to disclose in the notes to the accounts, the amount and nature of individual items of income or expenditure which are of exceptional size or incidence, remains in force. Consolidated accounts only (The 1915 Law) The key developments of the new Law concern: New Article 323 on Business combinations under common control concept: the original Article 323 was repealed since the initial content of this Article was not taken as such by the Directive. It was replaced by the new Article 323 which derives from the transposition of the Article 25 on Business combinations within a group of the Directive. This offers the possibility in the specific context of business combinations within a group to not apply the consolidation principle mentioned in Article 322 of the 1915 Law. The application of business combinations within a group involves: Offsetting the book values of shares held in the capital of an undertaking included in the consolidation against the corresponding percentage of capital only Any difference arising from the above paragraph shall be added to or deducted from consolidated reserves, as appropriate Article 333 Paragraph 2 was removed: as a consequence Goodwill as of the date of acquisition can no longer be deducted directly from reserves. 2

5 Accounting policies and valuation method (Section 7 and 7bis of the 2002 Law and Article 332 of the 1915 Law) 4 The Directive is relevant for European Economic Area, which contains the European Union Member States and Liechtenstein, Norway and Iceland. 5 Fourth Council Directive of 25 July 1978 based on Article 54 (3) (g) of the Treaty on the annual accounts of certain types of companies (78/660/EEC) Amendments incorporated by the new Law concern: Article 54 of the 2002 Law: the Directive did not retain the possibility for Member States 4 to authorize the use of certain alternative valuation methods. In Luxembourg, the legislator provided during the adoption of the Law of 4 May 1984 which transposed the Fourth Council Directive of 25 July on annual accounts, the possibility to introduce certain alternative methods via a Grand Ducal Regulation. In practice, no Grand Ducal Regulation was ever issued to date on the basis of Article 54 of the 2002 Law. Accordingly, to align the former Article 54 of the 2002 Law and the Directive, valuation methods based on the replacement value or taking inflation into account were removed. The Article 54 was thus amended as displayed below: A Grand Ducal Regulation may allow the revaluation of fixed assets within the limitation of Article 7 of the Directive as follows: Use of the revaluation reserve account within the capital and reserves Such revaluation reserve could be converted into capital Recycling to profit and loss if subsequently realized Not to be distributed unless realized Value adjustment then after determined based on the revalued amount Article 55 dd) of the 2002 Law: value adjustments on goodwill can no longer be reversed. Article 59 (2) of the 2002 Law: intangible assets are amortized over their useful life. In exceptional cases when the useful life of goodwill (both acquired and arising from consolidation) and development costs cannot be reliably estimated, they have to be amortized over a period not exceeding 10 years. Modifications to note disclosures (Article 65 of the 2002 Law and Article 337 of the 1915 Law) The main modifications of the note disclosures include: Notes shall now be presented in the order in which items are presented in the balance sheet and in the profit and loss account Accounting policies and valuation methods are now required to be disclosed in more detail. The accounting methods are not limited to the valuation methods applied to different positions but cover (similar to IFRS) the principles, basis, conventions, rules and practices applied by the company for the preparation and presentation of its annual accounts The introduction of a definition of related parties which is consistent with that of IFRS New requirements to disclose deferred tax balances and movements during the financial period New disclosure obligation regarding the nature and impact of significant events after the balance sheet date for medium and large-sized companies (information previously included in the management report) In special cases where companies carry out set-off in compliance with the law, the amounts set off should be presented as gross amounts in the notes (Article 33 of the 2002 Law) Additional disclosure requirement for small-sized entities related to the average number of staff by category New disclosure exemptions for small-sized entities related to: Information regarding the investments in which they hold at least 20% of the share capital, unless this information is of such critical importance that it could alter the true and fair view of the annual accounts Information on the fair value of financial fixed assets in case the latter is below the book value of the asset Article 338 (2) of the 1915 Law was deleted since the Directive no longer provides for the possibility to omit disclosure in the consolidated financial statements on the breakdown of consolidated net turnover by category of activity and geographical markets. The omission of this information was previously permitted if its disclosure was likely to seriously prejudice one of the companies included in the scope of consolidation 3

6 Management report (Article 68 (2) of the 2002 Law and Article 338 (2) of the 1915 Law) The requirement to report any important event that has occurred since the end of the financial year was removed from the content of the management report. This information is now required to be disclosed directly in the notes to the accounts. Audit report (Articles 69 and 69bis of the 2002 Law and Articles 340 and 340bis of the 1915 Law) The following articles related to the content of the audit report were amended: Article 69 of the 2002 Law respectively Article 340 of the 1915 Law: to transpose into national law the requirements, introduced by the Directive, regarding the obligation by the approved statutory auditor To verify that the management report is consistent with the annual accounts and prepared in accordance with the applicable legal requirements To state whether, in the light of the knowledge and understanding of the undertaking and its environment obtained in the course of the audit, they have identified material misstatements in the management report, and shall give an indication of the nature of any such misstatements Article 69bis of the 2002 Law respectively Article 340bis of the1915 Law: to align national provisions with the Directive with respect to the content of the audit report Deposit of annual accounts Special limited partnerships (société en commandite spéciale S.C.Sp.) are now required to file financial information for statistical purposes to the register of commerce and companies which will transfer the data to the Central Service for Statistics and Economic Studies STATEC. The filing procedure, the form and content will be determined by a Grand Ducal Regulation. This financial information will not be available to the public. 4

7 Reporting on payments made to governments The Directive has introduced a new obligation to companies to enhance transparency of payments made to governments designated by the generic term country by country reporting 6. The purpose of this, in this particular context, is to fight against corruption in third countries which are rich in natural resources, including minerals, oil, natural gas or primary forest. This obligation was transposed into Luxembourg law by the following provisions: The 1915 Law: Sub-Section 4bis The 2002 Law: Chapter IIter Undertakings required to report on payments to governments include: Entities having all or part of their activities involved in the extractive industry 7 or logging of primary forests 8 and further meet the mandatory criteria set out below: Large-sized companies in one of the following legal forms: public limited company (société anonyme S.A.), European company (société européenne S.E.), partnership limited by shares (société en commandite par actions S.C.A), private limited company (société à responsabilité limitée S.à r.l.), certain 9 unlimited companies (société en nom collectif S.N.C) or certain common limited partnership (société en commandite simple S.C.S) Public interest entities 10 Groups which are subject to the requirement to prepare consolidated financial statements. A parent company is considered to be in scope if one of its subsidiaries is in scope. It seems unlikely that credit institutions or (re-)insurance companies are directly or indirectly active through subsidiaries in the extractive industry or logging of primary forests. However, if such a situation arises, these sector companies would find themselves within the scope of the reporting obligation as applicable for public interest entities. 6 The country-by-country reporting is a generic concept of which the scope, content, methods and objectives vary depending on the context in which it is applicable. Its use is promoted internationally by non-governmental organizations, eg: Publish What You Pay coalition (www. publishwhatyoupay.org) The Tax Justice Network ( 7 Activities involving the exploration, discovery, development and extraction of mineral deposits, oil and gas: activities referred in Annex I Section B division regulation EU no1893/2006 NACE Rev 2 8 Activities involving the exploitation of primary forests: activities referred in Annex I Section A division 02 Group 02.2 regulation EU no1893/ S.N.C or S.C.S subject to article 77 2 and 3 of the 2002 Law 10 Public Interest entities are defined in the article 2 1) of the Directive The provisions for reporting requirements, responsibility and publication are as follows: Payments made to governments during a fiscal year must be declared on an annual basis within: Country by country Government by Government Project by project Individual payment or series of related payments equal to or greater than 100,000 Payments effectively disbursed Reporting on an individual and/or consolidated basis This annual declaration will be made via a distinct annual report under the responsibility of the management board; the publication of which will be mandatory (publication in Luxembourg s official legal gazette, the Mémorial edition C within 12 months of the financial year closing date) Some exemptions may apply Control of the report by an independent auditor or another professional: This new report is not intended for now to be submitted to supervision by the person in charge of statutory audit or another professional. 5

8 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young S.A. All Rights Reserved. ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/luxembourg Contacts Thierry Bertrand Partner, Financial Accounting, Advisory and Reporting services Leader Thierry.Bertrand@lu.ey.com Bob Fischer Partner, Financial Accounting, Advisory and Reporting services Bob.Fischer@lu.ey.com Jeannot Weyer Partner, Commercial Services Leader, LuxGAAP Technical Desk Leader Jeannot.Weyer@lu.ey.com Caroline Nicoletti Senior Manager, IFRS and LuxGAAP technical expert Caroline.Nicoletti@lu.ey.com