Interpretation of the two consecutive years rule of the accounting law

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Interpretation of the two consecutive years rule of the accounting law

18 October 2019

Regulatory News Alert

On 30 September 2019, the Luxembourg Accounting Committee or the Commission des Normes Comptables (the CNC) published a Q&A (Catégorisation des entreprises : interprétation du critère de répétition visé à l'article 36 LRCS) related to the interpretation of the two consecutive years rule of the Law of 19 December 2002 on the commercial and companies register and on the accounting records and annual accounts of undertakings (the Accounting Law).

This new Q&A shines a light on a very old, grey area of Luxembourg legal framework about the interpretation of “the two consecutive years rule” included in Article 36 of the Accounting Law. Crossing the line in the subject of size criteria may have significant impacts on the regulatory life of groups and companies. It may lead to various new obligations, such as audit requirements, drawing-up non-abridged balance sheets and profit and loss accounts, additional disclosures in annual accounts, preparation of a management report, and consolidation requirements.

In a nutshell, the CNC guidance indicates that the impacts of exceeding the size criteria only apply as from the third year those criteria are exceeded.

The CNC guidance also illustrates how to label newly incorporated entities/group that may be categorized as medium/big from day one. The CNC considers that “the two consecutive years rule” should not apply to newly incorporated entities/groups. The management of concerned entities/ groups has the responsibility to prepare, under the good faith principle, forecasts as at the end of their first financial year to determine which size criteria is met and the related requirements. It should be noted that i) this analysis should be reviewed periodically in order to match with the actual figures at the end of the first financial year, and ii) in case of a financial period of less/more than 12 months, a prorate shall be applied to the turnover threshold.

This new guidance may impact newly formed groups, in particular, in the Private Equity and Real Estate industry, with audit and consolidation requirements from the first year.

The size criteria remain unchanged and are:

At stand-alone level:

  • Total balance sheet of EUR 4,400,000
  • Net turnover of EUR 8,800,000
  • Average number of full-time staff employed during the financial year is limited to 50.

At group level:

  • Total balance sheet of EUR 20,000,000
  • Net turnover of EUR 40,000,000
  • Average number of full-time staff employed during the financial year is limited to 250.
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