TREATMENT OF FOREIGN CURRENCY RECEIVABLES AND PAYABLES IN LUXEMBOURG ACCOUNTING

Accounting treatment

1. Valuation of foreign currency receivables and payables on entry into the accounts

1.1. Recording a foreign currency transaction in the absence of a currency hedging instrument

Transactions in foreign currency are to be recorded in the currency in which the accounts are kept (in principle EUR) using the exchange rate of the day upon which the transaction takes place.

1.2 Recording a foreign currency transaction in the presence of a currency hedging instrument

The foreign currency transaction must in this case be recorded in the accounts using the exchange rate set by the hedging instrument.

2. Inventory of foreign currency receivables and payables in the absence of foreign exchange hedging instruments

The Luxembourg Accounting Act does not directly address the issue of the valuation of foreign currency receivables and payables at the time of the inventory.

This question must therefore be considered in the light of the main accounting principles, and in particular:

• The principle of prudence, according to which only profits realised on the closing date may be entered (Article 51.1.c.aa of the Act of 19 December 2002 on the accounting of undertakings); 
• The principle of a true and fair view, which requires that the annual accounts reflect a true and fair view of the assets and liabilities and financial position of the undertaking (Article 26.3 of the Act of 19 December 2002 on the accounting of undertakings).

Luxembourg practitioners have developed several treatments based on these main principles.

2.1. Approach suggested by the prudence principle

At the time the accounts are closed, receivables are valued at the lower of the historical rate or the exchange rate prevailing at the date upon which the accounts are closed.

Symmetrically, debts are valued at the higher of the historical exchange rate or the exchange rate prevailing on the date upon which the accounts are closed. In this way, only unrealised foreign exchange losses will have an impact on the profit for the financial year.

2.2. Approach suggested by the true and fair view principle

This approach suggests that receivables and payables should be shown in the balance sheet at an amount based on the exchange rate on the date of the inventory (i.e. the date the accounts are closed).

The exchange gains recorded are then credited to the "Translation adjustment (C)" account (in principle account 755) while the exchange losses are debited to the "Translation adjustment (D)" account (in principle account 655).

Tax treatment

Section 23 of the Income Tax Act (ITA) is inspired by the principle of prudence: "(3) The assets (....) are to be valued at acquisition price or cost price. Where the going concern value is lower, the valuation may be made at the lower value. Where the going concern value of assets which formed part of the net invested assets at the end of the preceding financial year is higher than the value at the close of that financial year, the valuation may be made at the going concern value, but the acquisition or cost price may not be exceeded" and "(4) Debts are to be valued by appropriate application of the provisions of the preceding paragraph".

Consequently, the approach described in point 2.1 will be retained from a fiscal point of view. Thus, unrealised gains will not be taken into account in the formation of taxable income, while unrealised losses will be taken into account by setting up appropriate provisions for risks and charges.

Conclusion

The practice of Luxembourg accountants and accountants of the Fiduciaire Luxembourg Paris Genève tends to favour the approach described in point 2.1 which will on the one hand minimise the tax adjustments to be made and on the other hand provide a more prudent asset situation, since it will not integrate gains which remain unrealised.