In 2002, a European Commission (EC) Regulation No. 1606 was passed by the European Parliament and the European Council of Ministers. The new regulation required all European Union (EU) member states adopt International Financial Reporting Standards (IFRSs), formerly International Accounting Standards (IAS), issued by the International Accounting Standards Board. As a result, all EU-listed companies are required to prepare their consolidated financial statements following IFRSs as adopted by the EU beginning on January 1, 2005. Listed companies in Luxembourg therefore follow IFRSs in preparation of their consolidated accounts. Further, the 2006 EC report on the implementation of the Regulation No. 1606 of 2002 points out that Luxembourg permits IFRSs in the annual accounts of listed companies and in the annual and consolidated accounts of all other companies. Apart from the mandatory application of IFRSs, some companies voluntarily follow the practice, whereas others follow Luxembourg's Generally Accepted Accounting Principles (GAAP) which, according to the Deloitte 2007 report, differ from the international standards. However, Luxembourg's legal environment is undergoing changes regarding accounting requirements. As explained in a 2007 IAS Plus update, the national commercial law will be amended to introduce IFRSs into Luxembourg law as a legal alternative to the current local accounting principles. Moreover, the Luxembourg authorities are drafting a commercial law which will give all limited liability companies registered in Luxembourg the option to use IFRSs for statutory accounts. Luxembourg already permits IFRSs as an option for credit institutions.

General Overview

According to the May 2001 Deloitte IAS Plus update, Luxembourg continued to work toward harmonization of its accounting practices with international requirements through legislative changes. In 1999, Luxembourg introduced the "project de loi" to reform its accounting and filing requirements. This project included a proposal to "allow large companies listed on foreign stock exchanges to individually apply for the ability to report under IAS (or other recognized national GAAP such as US GAAP)." In 2002, a EC Regulation No. 1606/2002 was passed by the European Parliament and the European Council of Ministers. This regulation required the adoption of IFRSs formerly IASs, as issued by the International Accounting Standards Board. As a result of the Regulation, all EU- listed companies are required to prepare their consolidated financial statements following IFRSs, beginning on January 1, 2005. As a consequence, listed companies in Luxembourg follow IFRSs in preparation of their consolidated accounts. The 2006 EC report on the implementation of the Regulation No. 1606 of 2002 points out that Luxembourg permits IFRSs in the annual accounts of listed companies and annual and consolidated accounts of all other companies. Therefore, apart from mandatory application of IFRSs, other companies are permitted to follow Luxembourg GAAP. According to the Deloitte 2007 report, however, the Luxembourg GAAP differ from the international standards. Further changes in accounting requirements are underway in Luxembourg's legal environment, as well. As explained in a 2007 IAS Plus update, "IFRS will be introduced into the local Luxembourg commercial law as an alternative to the current Luxembourg accounting principles." Moreover, the Luxembourg authorities are working on a draft commercial law which will give the option to use IFRSs in statutory accounts for any limited liability companies registered in Luxembourg. Luxembourg already permits IFRSs as an option for credit institutions.

Luxembourg reporting requirements are contained in the Commercial Law, which incorporates the EU's 4th and 7th directives, supplemented by the law of December 19, 2002 and the Law of August 10, 1915. According to the description of the legal framework provided in the 2005 self-assessment by the Institute of Companies' Auditors (Institut des Réviseurs d'Entreprises, or IRE), listed companies must additionally comply with the 1998 Law concerning the supervision of markets of financial assets and the Rules and Regulations of the Luxembourg Stock Exchange (Bourse de Luxembourg, or LSEX). The LSEX sets additional requirements with regard to quotations, and listed companies are required to publish a half-yearly report of their activities and profits and losses for the first six months of each financial year. Per the IRE's 2005 self-assessment, the financial sector is governed by the 1993 Law regarding the Financial Sector, the 1988 Law regarding Undertakings for the Collective Investment for Transferable Securities and the 1999 Law regarding Pension-Funds. Further, the insurance sector must comply with requirements laid out in the 1991 Law regarding the Insurance Sector and the 1994 Law regarding the Annual Accounts and Consolidated Annual Accounts of Insurance Companies.

The Commission for the Supervision of the Financial Sector (Commission de Surveillance du Secteur Financier, or CSSF) is the financial market regulator that supervises banks and listed companies, including listed financial institutions and insurance companies. The CSSF reports to the Ministry of Finance. Experts from the legal, auditing, and accounting professions and representatives of the business sector are invited to attend the CSSF committee meetings to discuss developments. The CSSF committees have an advisory role to the government agency. Insurance companies are supervised by the Insurance Commission (Commissariat aux Assurances, or CAA).

According to the 2005 IRE self-assessment, since accounting standards are determined by law and regulations, the Ministry of Justice plays the standard-setting role in Luxembourg. The 2006 self-assessment adds that the IRE plays an advisory role with regard to accounting standards. With regard to the national ethics requirements, the 2006 self-assessment noted that the IRE has adopted the International Federation of Accountants (IFAC) code of ethics, but with modifications. As explained in the self-assessment, "the Institute has enacted into its national standards the IFAC Code of Ethics, complete with: (1) some specific aspects of national legislation; (2) some provisions of the EU Recommendation on the Independence of the Statutory Auditors when more stringent" (p. 47). The IRE is listed as a member on the International Federation of Accountants website.

The Principles

IFRS 1: First-time Adoption of International Financial Reporting Standards (effective 2006)

NC

According to the 2007 Deloitte report, Luxembourg GAAP do not address requirements of this principle.

IFRS 2: Share-based Payment (effective 2005)

NC

According to the 2007 Deloitte report, Luxembourg GAAP do not address requirements of this principle.

IFRS 3: Business Combinations (effective 2004)

NC

According to the 2007 Deloitte report, there are differences in date on which contingent consideration is recorded and recognition of liability for planned post-acquisition restructuring. Differences were also observed in the accounting for minority interest, purchased-in-process R&D, acquired net assets, and combinations of entities under common control.

IFRS 4: Insurance Contracts (effective 2006)

II

According to the 2007 Deloitte report, requirements of IFRS 4 are addressed in the Law on Accounts of Insurance and Reinsurance Undertakings enacted in December 1994. However, there is no further information on whether the national requirements deviate from or conform to the international requirements.

IFRS 5: Non-current Assets Held for Sale and Discontinued Operations (effective 2005)

NC

According to the 2007 Deloitte report, Luxembourg GAAP do not address requirements of this principle.

IFRS 6: Exploration for and Evaluation of Mineral Resources (effective 2006)

II

There is insufficient publicly available information that directly addresses this principle.

IFRS 7: Financial Instruments: Disclosures (effective 2007)

II

There is insufficient publicly available information that directly addresses this principle.

IAS 1: Presentation of Financial Statements (effective 2007)

NC

According to the 2007 Deloitte report, there are differences between the national GAAP and the international requirements. For instance, the report observed differences in elements of financial statements and noted that reporting comprehensive income was not defined under Luxembourg GAAP. There are differences in classification of liabilities on refinancing and, unlike IFRSs, extraordinary items are not prohibited under national GAAP.

IAS 2: Inventories (effective 2005)

NC

According to the 2007 Deloitte report, certain differences exist between the international requirements and the national practice. For instance, the the last-in/first-out (LIFO) method for determining inventory cost is prohibited under IFRSs. However, national GAAP permits the use of LIFO method.

IAS 7: Cash Flow Statements (effective 1994)

NC

According to the 2007 Deloitte report, under Luxembourg GAAP, presentation of a cash flow statement is not required.

IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors (effective 2005)

NC

According to the 2004 PWC report, changes in accounting estimates and correction of errors are not specified under Luxembourg GAAP. Some differences in changes in accounting policies were also observed under the national GAAP.

IAS 10: Events after the Reporting Period (effective 2005)

II

According to the 2004 PWC report, treatment of the post balance-sheet events is similar to IFRSs. However, there is no further information publicly available.

IAS 11: Construction Contracts (effective 1995)

NC

According to the 2007 Deloitte report, unlike IFRSs, the method of accounting for construction contracts when the percentage of completion cannot be determined is not specified under Luxembourg GAAP. While international requirements specify the cost-recovery method, national GAAP allow the use of cost recovery or the completed contracts method.

IAS 12: Income Taxes (effective 2001)

NC

According to the 2007 Deloitte report, unlike IFRSs, classification of deferred tax assets and liabilities is not specified. Luxembourg GAAP do not specify accounting treatment for several other international requirements. Further, contrary to IFRSs, reconciliation of actual and expected tax expense is not required under national GAAP.

IAS 14: Segment Reporting (effective 1998)

NC

According to the 2007 Deloitte report, there are differences in the basis for segment reporting. Also, disclosures for different types of segments, the accounting basis for segment reporting, and segment results are not required under national GAAP.

IAS 16: Property, Plant and Equipment (effective 2005)

NC

According to the 2007 Deloitte report, there are differences in the basis for property, plant, and equipment. Unlike IFRSs, revalued amount is prohibited. Additionally, there are differences in accounting for major inspection or overhaul costs and the measurement of the residual value of property, plant, and equipment.

IAS 17: Leases (effective 2005)

NC

According to the 2007 Deloitte report, under Luxembourg GAAP, "leases are generally considered as operational leases. For tax purposes, financial leases might be recognized on the tax balance sheet based on rules mainly similar to IAS 17" (p. 17). However, unlike IFRSs, disclosure of lease maturities and recognition of a gain on a sale and leaseback transaction (where the leaseback is an operating lease) is not specified under national GAAP.

IAS 18: Revenue (effective 1995)

NC

As explained in a 2004 PWC report, under Luxembourg GAAP there are "no specific provisions in the Law on revenue recognition. The prudence principle requires recognizing only realized gains" (p.27).

IAS 19: Employee Benefits (effective 2006)

NC

According to the 2007 Deloitte report, unlike IFRSs, under Luxembourg GAAP, measurement of gain or loss on curtailment of a benefit plan is not specified. Also, timing and recognition of gain/losses on curtailment of a benefit plan, accounting for a multi-employer plan (to be accounted for as a benefit plan under IFRSs) and minimum liability recognition under such a plan is not specified. The report also noted that, unlike IFRSs, there is no limitation on the amount that can be recognized as pension assets.

IAS 20: Accounting for Government Grants and Disclosure of Government Assistance (effective 1984)

NC

According to a 2004 PWC report, under Luxembourg GAAP, there are no guidelines on accounting for government grants. IFRSs might be used as a benchmark.

IAS 21: The Effects of Changes in Foreign Exchange Rates (effective 2005)

NC

According to a 2004 PWC report, "there is no rule defined in the Luxembourg Commercial Company Law for the translation of items denominated in foreign currencies" (p. 55).

IAS 23: Borrowing Costs (effective 1995)

NC

According to the 2007 Deloitte report, there are differences between IFRSs and the national GAAP with regard to types of borrowing costs eligible for capitalization. Also, under Luxembourg GAAP, guidance on income on temporary investment of funds borrowed for construction of an asset is not specified.

IAS 24: Related Party Disclosures (effective 2005)

NC

According to the 2004 PWC report, under Luxembourg GAAP certain related party relationships defined under IFRSs are not specifically considered as related parties.

IAS 26: Accounting and Reporting by Retirement Benefit Plans (effective 1998)

II

There is insufficient information publicly available that directly addresses this principle.

IAS 27: Consolidated and Separate Financial Statements (effective 2005)

NC

According to a 2007 Deloitte report, there are differences between IFRSs and Luxembourg GAAP with regard to basis of consolidation. Also, unlike IFRSs, there exists no specific guidance for special purpose entities. Luxembourg GAAP allow for the use of equity accounting in accounting for investments in subsidiaries in parent's separate financial statements. This is not permitted under IFRSs.

IAS 28: Investments in Associates (effective 2005)

NC

According to the 2007 Deloitte report, there are differences between IFRSs and Luxembourg GAAP with regard to differences in reporting dates of investor and associate and accounting policies of investor and associate. Also, Luxembourg GAAP allow for the use of equity accounting in accounting for investments in subsidiaries in parent's separate financial statements however, this is not permitted under IFRSs.

IAS 29: Financial Reporting in Hyperinflationary Economies (effective 1990)

NC

According to the 2007 Deloitte report, unlike IFRSs, under Luxembourg GAAP, guidance on adjusting financial statements of an entity that operates in a hyperinflationary economy is not specified.

IAS 31: Interests in Joint Ventures (effective 2005)

NC

According to the 2004 PWC report, under Luxembourg GAAP, joint ventures are not defined by the Law. Further, the report noted that while IFRSs distinguish between three types of joint ventures/arrangements, national GAAP only refer to jointly controlled entities.

IAS 32: Financial Instruments: Disclosure and Presentation (effective 2005)

NC

According to the 2007 Deloitte report, there are differences in classification of convertible debt instruments under IFRSs and national GAAP.

IAS 33: Earnings per Share (effective 2005)

NC

According to the 2007 Deloitte report, unlike IFRSs, under Luxembourg GAAP, disclosures of earning per share and calculation of year-to-date diluted earnings per share EPS is not required. Also, guidance on contracts to be settled is not specified.

IAS 34: Interim Financial Reporting (effective 1999)

NC

According to the 2007 Deloitte report, unlike IFRSs, Luxembourg GAAP do not specify guidance on interim reporting - revenue and expense recognition.

IAS 36: Impairment of Assets (effective 2004)

NC

According to the 2007 Deloitte report, there are differences in treatment of level-of-impairment testing for goodwill and other indefinite-life assets under IFRSs and national GAAP. Differences were also observed in the calculation of impairment of goodwill and impairment of indefinite-life intangible assets other than goodwill. The report noted that subsequent reversal of an impairment loss is also treated differently under Luxembourg GAAP.

IAS 37: Provisions, Contingent Liabilities and Contingent Assets (effective 1999)

NC

According to the 2007 Deloitte report, there are differences in measurement of provisions under IFRSs and Luxembourg GAAP. Also, unlike IFRSs, national GAAP do not have specific guidance on measurement of decommissioning provisions, recognition of restructuring provisions and disclosures that may prejudice the position of the entity in a dispute.

IAS 38: Intangible Assets (effective 2004)

NC

According to the 2007 Deloitte report, there are differences in accounting treatment of start-up costs, development costs, subsequent expenditure on purchased in process R&D, and revaluation of intangible assets under IFRSs and national GAAP.

IAS 39: Financial Instruments: Recognition and Measurement (effective 2006)

NC

According to the 2007 Deloitte report, there are several differences between IAS 39 and Luxembourg GAAP. For instance, the option to designate any financial asset or financial liability to be measured at fair value through profit and loss is allowed through the application of the Fair Value Directive under national GAAP. Under IFRSs, this option is allowed only when certain criteria is met.

IAS 40: Investment Property (effective 2005)

NC

According to the 2007 Deloitte report, the Luxembourg GAAP and IFRSs differ in the measurement basis for investment property and accounting treatment of property interests held under an operating lease.

IAS 41: Agriculture (effective 2003)

NC

According to the 2007 Deloitte report, the Luxembourg GAAP and the IFRS differ in the measurement basis of agricultural crops, livestock, orchards, and forests.