Two frameworks, two distinct accounting philosophies
Luxembourg accounting law, based on the amended law of 19 December 2002, recognises three accounting regimes. The first, traditional LUX GAAP, is based on the principle of prudence and historical cost measurement. The second, LUX GAAP-FV, allows the fair value option for certain assets such as financial instruments. The third corresponds to IFRS-EU, i.e. International Financial Reporting Standards as adopted by the European Union.
The fundamental distinction between these frameworks lies in their approach to asset valuation. LUX GAAP prioritises historical acquisition cost and prohibits the recognition of unrealised gains, thereby ensuring a prudent view of the company’s financial position. By contrast, IFRS applies the principle of substance over form and makes extensive use of fair value, providing a more dynamic but more volatile picture of financial performance and position.
From a legal perspective, European Regulation 1606/2002 requires the application of IFRS for the consolidated accounts of companies listed on a regulated European market. This obligation applies only to consolidated financial statements: individual (statutory) accounts may still be prepared under LUX GAAP. For non-listed companies, Article 72bis of the 2002 law allows the voluntary adoption of IFRS without prior authorisation since the law of 10 December 2010.
Technical differences that impact your financial statements
The treatment of goodwill perfectly illustrates the philosophical gap between the two frameworks. Under LUX GAAP, goodwill is systematically amortised over a maximum period of ten years, resulting in predictable and recurring expenses. Under IFRS, goodwill is not amortised; instead, it is subject to an annual impairment test, which may lead to significant and sudden charges when the recoverable amount falls below the carrying amount.
Lease accounting is another major divergence following the introduction of IFRS 16. Under LUX GAAP, operating leases remain off balance sheet, with rental expense recognised on a straight-line basis. Under IFRS, the lessee recognises a right-of-use asset and a corresponding liability for future lease payments. For a five-year office lease with annual rent of EUR 50,000, IFRS would increase both assets and liabilities by approximately EUR 215,000, significantly affecting financial ratios.
The recognition of provisions also differs. LUX GAAP allows provisions to be recognised as soon as a risk is considered probable, in line with the prudence principle. IFRS requires three cumulative and more restrictive conditions: a present obligation, a probable outflow of resources (greater than 50%), and a reliable estimate. A lawsuit with an estimated loss probability of 40% would be provisioned under LUX GAAP but only disclosed in the notes under IFRS.
Finally, financial statement requirements differ significantly. LUX GAAP requires three components: balance sheet, profit and loss account, and notes, with possible simplifications for small entities. IFRS mandates five components, including a cash flow statement and a statement of changes in equity, accompanied by more extensive disclosures.
Advantages and constraints depending on your business strategy
LUX GAAP offers significant advantages for companies with a local focus. Its direct link to Luxembourg taxation is its key strength: in the Grand Duchy, the taxable base is derived directly from the accounting result. Using LUX GAAP therefore avoids the complex tax adjustments often required under IFRS. Implementation simplicity also generates substantial cost savings: lower audit fees, less expensive staff training, and compatibility with standard accounting tools.
Small companies benefit from substantial simplifications. Since the Grand Ducal Regulation of 25 October 2024 increased thresholds by 25%, a company is considered small if it does not exceed two of the following three criteria: total assets below EUR 7.5 million, net turnover below EUR 15 million, and an average workforce of fewer than 50 employees. Such companies may prepare abridged balance sheets and are exempt from the management report and statutory audit.
IFRS becomes relevant as soon as a company pursues an international dimension. Its global comparability facilitates relationships with foreign partners and mergers and acquisitions. Institutional investors systematically prefer IFRS financial statements, enabling due diligence without prior conversion. For subsidiaries of multinational groups consolidated under IFRS, voluntary adoption of IFRS for statutory accounts eliminates double accounting and consolidation adjustments.
Which framework for your specific situation
If you run a Luxembourg SME with local shareholders and domestic activities, traditional LUX GAAP is generally the most appropriate choice. You benefit from reduced compliance costs, perfect alignment with tax obligations, and readily available local accounting expertise.
If your company is a subsidiary of an international group consolidated under IFRS, voluntary adoption of IFRS for statutory accounts deserves consideration. This approach avoids maintaining two parallel accounting systems and simplifies group reporting. The decision will depend on the balance between reporting efficiencies and the additional cost of preparing local IFRS accounts.
If you manage a holding company (SOPARFI), LUX GAAP is generally preferable. Most SOPARFI entities qualify as small companies, as received dividends do not count towards turnover for threshold purposes. Reduced accounting obligations and lower compliance costs are decisive advantages. The LUX GAAP-FV option may be relevant if you hold investment properties that you wish to measure at fair value.
If you are seeking international financing or considering an IPO, IFRS becomes unavoidable. Institutional investors, private equity funds, and international banks often require financial statements aligned with global standards. Anticipating this transition avoids a costly and complex conversion at a critical fundraising stage.
A change of accounting framework remains possible at any time. The transition from LUX GAAP to IFRS has been freely permitted since 2010 without prior authorisation. The company must apply IFRS 1 on first-time adoption and explain the effects of the transition in its financial statements. The reverse transition, from IFRS back to LUX GAAP, is more complex and requires solid justification and a thorough analysis of tax implications.
Conclusion: a strategic choice not to be overlooked
The choice of accounting framework affects far more than the presentation of your annual accounts: it impacts your tax burden, administrative costs, and attractiveness to financial partners. For locally focused companies, LUX GAAP provides a simple, stable, and tax-efficient framework. For businesses with international ambitions or belonging to multinational groups, IFRS represents a worthwhile investment in credibility and operational efficiency.
This decision requires a tailored analysis that takes into account your growth objectives, shareholding structure, and future financing needs. The PCG team supports you in this strategic reflection to determine the most suitable framework for your situation and to ensure a smooth transition where necessary.
