New Q&A CNC 23/030: Accounting impact of the change of currency for bookkeeping and annual accounts

The following questions are answered by the CNC in line also with the Q&A CNC 21/024 (R) on the change of accounting methods and the Q&A CNC 22/026(R) on the currency of bookkeeping and annual accounts. The full document can be consulted on the CNC website: CNC 23/03. 

1. Is it possible to change the bookkeeping and annual accounts currency during the life of the company?

As mentioned in the Q&A CNC 22/026 (R), any change of bookkeeping or presentation currency should be exceptional and duly motivated.

If the company is in an exceptional situation where a change of bookkeeping and annual accounts currency seems justified, CNC believes such a change can be done. For example a change in the business model, significant changes in the value chain involving key suppliers and/or customers, a change in major shareholders or the entry of new key investors would be, according to the CNC, a legitimate cause for a change in the accounting and annual accounts currency of a company.

2. Is the bookkeeping and presentation currency linked to the currency of the subscribed capital and does modifying one necessarily imply modifying the other?

As mentioned in the Q&A CNC 22/026 (R), nothing in accounting laws and regulations requires to have a similar currency for the subscribed capital and the currency of the bookkeeping and annual accounts. 

Therefore, companies could theoretically have a currency for its subscribed capital different from the presentation currency of its annual accounts.

The CNC however notes that in practice, an alignment is often performed, so that when there is a change of currency of the capital this generally implies - even if not mandatory - a change of the presentation currency of the annual accounts.

Point of attention: it is important to keep in mind that if the company wants to request for a tax functional currency, one of the conditions is to have the same currency for the subscribed capital as the presentation currency of the annual accounts.

3. What are the competent bodies for changing the bookkeeping and presentation currency?

In line with the law, any restrictive provision in the bylaws can only be amended by the shareholders/partners. If there are no restrictions in the bylaws, the Managers/Directors are competent for changing the presentation currency.

Practically speaking, the currency of the subscribed capital which is mentioned in the bylaws can only be changed by the shareholders/partners, while the presentation currency of the annual accounts is in principle decided by the Managers/Directors (as generally not foreseen in the bylaws).

The CNC insists also on the fact that such a change can only be exceptional and should be duly motivated (reference is made to the Q&A CNC 22/026 (R)).

4. For companies linking the change of currency of the subscribed capital with the change of bookkeeping and annual accounts currency, what is the effective date of the change?

Based on Luxembourg practice, for companies that link the change of the currency of subscribed capital with the change in the presentation currency of annual accounts, the effective date of this change is typically the date of the notarial deed where the shareholders/partners decided to change the currency of the subscribed capital, unless the notarial deed specifies a different date for such a change (such as the first day of the following financial year or retroactively to the first day of the current financial year).

5. What is the effective date of the change of bookkeeping and presentation currency for companies that do not link it to a change of subscribed capital currency?

For companies that do not link the change of the bookkeeping and annual accounts currency to the change in the currency of the subscribed capital, the effective date of the change typically coincides with either the date of the management/shareholder decision or with another date specified in the minutes or written resolutions of these bodies (e.g. the first day of the following financial year or retroactively to the first day of the current financial year).

6. Does the change of currency during the financial year imply two shortened financial years, i.e. closing the annual accounts of the current financial year in the former currency and reopening a financial year in which the accounts are presented in the new currency?

The change of presentation currency does not impact the duration of the financial year which is foreseen in the bylaws. If the company wants to proceed with different financial years, the shareholders/partners will have to modify the bylaws.

Point of attention: in practice, management may need to consider in advance the consequences of such a change to assess its impact from an operational, tax and presentation perspectives. 

7. What is the optimal date for changing the accounting or annual accounts currency?

According to the CNC, setting this date on the first day of the following financial year or retroactively to the first day of the current financial year greatly facilitates the conversion of accounts and the transition between the old and new currency for accounting and annual accounts purposes.

8. What is the method of conversion of bookkeeping and annual accounts in another currency?

There are no guidelines in LuxGAAP regarding the conversion of bookkeeping and annual accounts in a new currency. The CNC however recommends converting all balance sheet and profit and loss account items at the exchange rate applicable on the conversion day as indicated in the notarial deed or resolutions of the management body.

While this method may have conceptual criticisms (e.g. not considering monetary vs. non-monetary or short-term vs. long-term items in the balance sheet, not converting income and expenses at the transaction day rate or an average rate), it has the advantage of avoiding generating conversion differences.

The CNC recalls that conversion differences are generated by applying different rates to the balance sheet and profit and loss accounts (e.g. closing rates for monetary items, historical rates for non-monetary items, average rate for profit and loss accounts).

It's important to note that if a company chooses to apply a method other than the recommended one, it should be applied consistently for the conversion and proper information should be disclosed in the notes to the annual accounts.

Point of attention: in practice, closer attention should be made to monetary items where the original currency is similar to the new reporting currency. As an example, if the company had a receivable of EUR 100 in its GBP annual accounts and now wants to convert its presentation currency from GBP to EUR, a conversion of this receivable from GBP to EUR may lead to a fictive revaluation of the receivable for which the repayment is already fixed at EUR 100 in the legal documentation.

9. Regarding the comparative figures, what should be done when there is a change of bookkeeping and annual accounts currency during the current financial year?

In the case of a change in the currency for accounting and annual accounts during the financial year, the approach for presenting comparative figures for the previous year depends on whether the company is subject to standardised information collection on the eCDF platform or not.

For companies subject to the eCDF forms, they must present comparative figures in the same currency as the new reporting currency. It is then recommended to convert the previous year's figures using the same exchange rate as the one applied for the current financial year, typically the rate in effect on the conversion day (see previous questions). The notes to the annual accounts should also inform users about the conversion rate used to convert the comparative figures and that the figures were presented in the former currency in last year’s annual accounts. It is also recommended to include in the notes to the accounts a three-column table presenting the present and previous year in the new presentation currency as well as the previous year figures as they were published in the former/original currency.

For companies not subject to the eCDF forms, it is recommended, following the principle of intangibility of the opening balance sheet, to present the balance sheet and profit and loss accounts in two distinct currencies: the old currency for comparative figures and the new currency for the current year figures. Moreover, it is recommended to present in the notes to the annual accounts a three-column table presenting next to the current year figures using the new reporting currency and the comparative figures in the old currency, the comparative figures using the new reporting currency. 

10. What information regarding the change of bookkeeping and annual accounts currency should be disclosed in the notes to the accounts?

Considering the significance of a change of currency, the CNC emphasises the importance of providing the relevant information in the notes to the annual accounts which will contribute to provide a true and fair view. The CNC considered the following as a minimum disclosure:  

• A detailed note in the section dedicated to "principles, rules, and valuation methods" explaining the change of currency, its effective date, the conversion method used and the reasons for the change;

• If applicable, a descriptive note explaining the accounting treatment of the conversion differences and their impact on the profit and loss account or, if relevant, on shareholders' equity;

• A three-column table presenting, for the balance sheet and profit and loss account, the current year's figures in the new currency alongside the comparative figures for the previous year presented in the old currency and in the new currency.