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Similarities and DifferencesIFRS and LuxembourgBanking GAAP

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International FinancialReporting Standards

Similarities and Differences – IFRS and Luxembourg Banking GAAP 2

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers S.à r.l, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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Preface 2

How to use this publication 3

The Luxembourg regulatory framework 4

Summary of similarities and differences 5

Accounting framework 15

Financial statements 17

Consolidated financial statements 22

Business combinations 28

Revenue recognition 34

Expense recognition 36

Assets 40

Liabilities 56

Equity 64

Derivatives and hedging 65

Other accounting and reporting topics 69

Glossary 78

Other Publications from PwC on International Financial Reporting 79

Contacts 80

Contents

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International Financial Reporting Standards (IFRS) are gaining momentum. The globalisation of business and finance has inevitably led to calls for a common set of high-quality, global accounting standards. IFRS has been successfully adopted in almost a hundred countries over the last couple of years. The IAS Regulation issued by the European Union in 2002 requires that listed companies in Europe prepares financial information using IFRS. Since 2005, Hong Kong and Australia have converged with IFRS and other places, such as China, Russia and Japan, are also making significant strides towards using IFRS more widely. With the US Securities and Exchange Commission (SEC) voting unanimously to seek public comments on a release in August 2008 that includes both (1) a proposed roadmap for the potential mandatory adoption of IFRS by issuers in the US and (2) a proposed rule that would allow the optional use of IFRS by certain qualifying domestic issuers, the US may eventually join the other places in adopting IFRS.

Luxembourg has also followed the movement: besides the IAS regulation, the option to use IFRS for the preparation of both statutory and consolidated financial statements of certain non-listed regulated entities, including domestic credit institutions, was introduced into national law in 2006 through the endorsement of the EU “modernisation” and “fair value” directives. The national parliament is also in the process of adopting the general company law in the same way, so that any Luxembourg registered commercial companies will be allowed to use IFRS for filing their annual and consolidated accounts.

This publication has been designed to provide the reader with a general comparison between Generally Accepted Accounting Practices in force in the Luxembourg banking sector as provided by the law of 17 June 1992, as amended, and the standards and interpretations currently forming the IFRS accounting framework, as adopted by the European Union. In the aftermath of the financial crisis that surged in autumn 2008, the International Accounting Standards Board (IASB), i.e. the body having the authority to issue or revise existing international standards and interpretations, has been urged to adapt financial reporting requirements by enhancing transparency of information, reducing the complexity of accounting standards for financial instruments and converging towards a single set of high-quality, global accounting standards.

This process is currently ongoing and we have provided in this publication an insight of expected future changes (current as of October 2010). However, IFRS is, now more than ever, a moving set of accounting standards and we recommend the reader to stay tuned on the future upcoming updates.

We hope you will find this guide of interest and stay at your disposal to provide support whatever your needs may be.

Preface

Marc MinetPartner, IFRS Leader

Rima Adas Partner, Banking Leader


This PwC publication is designed for those who wish to gain a broad understanding of the key similarities and differences between IFRS as adopted by the EU (IFRS) and the Luxembourg regulatory and accounting Framework for credit institutions (LUX BANKING GAAP). The Luxembourg Framework material of this brochure is based on the Law of 17 June 1992, as amended, relating to the annual and consolidated accounts of credit institutions (the Law), the “Recueil des instructions aux banques” (the Recueil) and Circulars issued by the “Commission de Surveillance du Secteur Financier” (the CSSF). This publication is not intended to describe the prudential regulatory reporting to the CSSF (also referred to as Financial Reporting (FinRep)). The first part of this document provides a summary of the similarities and differences between IFRS and LUX BANKING GAAP. It refers to subsequent sections of the document where key differences

are highlighted and explained in more details. Where applicable, a summary of recent developments has been added at the end of each section to anticipate future changes in standards and interpretations. No summary publication can encompass the many differences of detail that exist between IFRS and LUX BANKING GAAP. Even if the overall approach taken in the guidance is similar, there can be differences in the detailed application, which could have a material impact on the financial statements. This publication focuses on the measurement similarities and differences most commonly found in practice. When applying the individual accounting frameworks, readers should consult all the relevant accounting standards and the Law. Listed companies should also follow relevant securities regulations and local stock exchange listing rules.

How to use this publication

This publication takes account of authoritative pronouncements issued under IFRS up to 31 October 2010.

It is based on the most recent version of those pronouncements. Should an earlier version of a pronouncement still be effective at the date of this publication, reference to this fact has been inserted.

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Accounting regimes

Legal publication IFRS regime LUX GAAP regime Mixed regime

Consolidated accounts - Listed banks (shares or bonds)

mandatory not applicable not applicable

Consolidated accounts - Unlisted banks

optional with prior approval of the CSSF

optional optional with prior approval of the CSSF for the different “IFRS options”

Annual accounts - Listed banks/Unlisted banks

optional with prior approval of the CSSF

optional optional with prior approval of the CSSF for the different “IFRS options”

The Luxembourg regulatory framework

The Law of 16 March 2006 (amending the Law of 1992) introduced major changes in relation to the accounting regime of accounts published by credit institutions. It gave credit institutions the possibility to publish their annual accounts or, where applicable, their consolidated accounts, in accordance with one of the following three accounting regimes:1) Luxembourg GAAP accounting regime (LUX BANKING GAAP)2) Mixed accounting regime (LUX BANKING GAAP with IFRS options)3) “Full” IFRS accounting regime (IFRS as adopted by the European Union)Options 2) and 3) require prior authorisation from the CSSF. Where IFRS options are available, they have been marked as such in the text. “LUX BANKING GAAP” refers to the accounting rules as defined by the former EU Directives (without IFRS options). Credit institutions whose securities are admitted to trading on a regulated market of a Member State must publish their consolidated accounts in accordance with IFRS as adopted by the EU, pursuant to the IAS Regulation (EC) N° 1606/2002.A summary describing the different accounting regimes applicable to the legal publication of accounts is provided below:

Credit institutions opting for the publication of annual accounts and/or consolidated accounts according to IFRS as adopted by the EU, and those for which the IAS Regulation requires to prepare consolidated accounts in accordance with IFRS as adopted by the EU remain nevertheless subject to the Law of 17 June 1992, as amended, for the provisions not covered by IFRS, namely the provisions relating to the management report, the “Réviseur d’entreprises agréé” and the publication of accounts, as well as the obligation to provide certain information in the notes to the accounts, such as the number of staff members, the remunerations allocated to the members of the administrative, management or supervisory bodies and the fees paid to the Réviseur d’entreprises agréé.The details of the information to be published, the documents to be submitted to the CSSF for the publication of annual accounts and the publication regime are included in the amended Recueil des Instructions aux Banques. Further information on the changes involved by the law of 16 March 2006 is detailed in Circular CSSF 08/340.


Summary of similarities and differences

Subject IfrS Lux Banking GaaP Page

Accounting Framework

Historical cost IFRS generally uses the historical cost convention with certain exceptions: some financial instruments (including derivatives) must be re-measured at fair value. Other assets such as financial instruments, intangible assets, property, plant and equipment (PPE) and investment properties may be fair valued upon election based on a policy choice.

Historical cost or production cost. Revaluation prohibited (unless amended by Grand-Ducal regulation). IFRS option: financial instruments may be accounted for under IAS 39 if authorisation received from the CSSF.

15

First time adoption of accounting Framework

Full retrospective application of all IFRSs effective at the reporting date for an entity’s first IFRS financial statements, with some optional exemptions and limited mandatory exceptions. Reconciliations of profit and loss in respect of the last period reported under previous GAAP, of equity at the end of that period and of equity at the beginning of the earliest period presented in comparatives must be included in an entity’s first IFRS financial statements. The opening statement of financial position prepared at the transition date shall also be presented, together with the two period-ends (end of reporting and comparative period).

No retrospective application. 16

Financial statements

Components of financial statements

Two years’ statement of financial position, statement of comprehensive income, statement of cash flows, statement of changes in equity and accounting policies and notes.

Two years’ balance sheet, profit and loss account, accounting policies and notes to the accounts. IFRS option: other elements of financial statements may be added, subject to authorisation from the CSSF (for instance incorporation of a cash flow statement).

17

Statement of financial position Does not prescribe a particular format. A liquidity presentation of assets and liabilities is used instead of a current/non-current presentation, only when a liquidity presentation provides more relevant and reliable information (which is usually the case for banks). Certain items are presented on the face of the statement of financial position. Equity is clearly segregated from liabilities.

Prescribed format: distinction between total assets and total liabilities, including off-balance sheet position items. IFRS option: a presentation in accordance with IFRS may be adopted but is subject to prior CSSF authorisation.

18

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Statement of comprehensive income

All items of income and expenses recognised in a period are presented either in:(1) a single statement of comprehensive income; or(2) two statements: separate income statement and statement of other comprehensive income.There is no prescribed standard format, although expenses recognised in profit or loss are presented in one of the two formats (by function or by nature). Certain minimum items are presented on the face of the statement of comprehensive income.

Prescribed format with choice between two layouts: vertical layout (format of a list) or horizontal layout (distinction between total income and total expenses). IFRS option: a presentation in accordance with IFRS may be adopted but is subject to prior CSSF authorisation.

19

Statement of changes in equity

Statement that shows transactions with owners, the movement in accumulated profit/loss and a reconciliation of all other components of equity.

Not separately presented, but IFRS option (subject to prior CSSF authorisation) available to include such a statement.

20

Statement of cash flows

Standard headings, but limited flexibility of contents. Use direct or indirect method. Cash includes cash equivalents with short-term maturities (typically less than three months) and may include cash overdrafts.

No cash flow statement required, but IFRS option (subject to prior CSSF authorisation) available to include such a statement.

20

Changes in accounting policy

All comparative amounts should be adjusted as if the new accounting policy had always applied. In addition, IAS 1 (revised) requires the presentation of an additional statement of financial position as at the start of the first period presented.

Principle of consistency must be followed. Exceptional departure is possible when duly justified and disclosed. Impacts are generally included in the current year income statement.

21

Correction of errors Comparatives are restated and, if the error occurred before the earliest prior period presented, the opening balances of assets, liabilities and equity for the earliest prior period presented are restated.

No specific rules. Impacts are generally included in the current year income statement.

21

Changes in accounting estimates

Reported in income statement in the current period and future, if applicable.

No specific rule. Accounting practices similar to IFRS.

21



Consolidated financial statements

Consolidation model Based on control which is the power to govern the financial and operating policies. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of an entity’s voting power. Control also exists when the parent owns half or less of the voting power but has legal or contractual rights to control, or de facto control. The existence of currently exercisable potential voting rights is also taken into consideration.

Similar to IFRS. 22

Special purposes entity Consolidated where the substance of the relationship indicates control.

No specific guidance. 23

Subsidiaries excluded from consolidation

If control, as defined under “Consolidation model” above, does not rest with the entity, the entity does not consolidate the subsidiary. Exclusion possible for any parent undertaking which is also a subsidiary and consolidated at a higher level subject to certain conditions.

Exclusions for subsidiaries: • thatareheldforre-saleinthenear

future• thatarenotmaterial• forwhichinformationcannotbe

obtained without disproportionate expenses or delay

• forwhichrestrictionsonownershiprights exist.

Exclusion also for any parent undertaking which is also a subsidiary and consolidated at a higher level subject to certain conditions.

23

Uniform accounting policies

Uniform accounting policies shall be applied by all entities of a group.

Similar to IFRS. 23

Reporting periods The difference between the group reporting date and the subsidiaries’ closing dates shall not exceed 3 months.

Similar to IFRS. 23

Transactions with minority shareholders, partial disposals and loss of control

The entity must apply the economic entity model, whereby minority shareholders are viewed as having an interest in the consolidated reporting entity model for its transactions with Non Controlling Interests (NCI).

Not specified. 23

Definition of associate Based on significant influence, which is the power to participate in the financial and operating policy decisions which is presumed if 20% or greater interest.

Similar to IFRS. 24

Presentation of associate results

Equity method is used. Share of post-tax results is shown. Investments in associated are tested for impairment. Fair value option applicable under certain conditions.

Use of equity method is optional for statutory accounts and mandatory for consolidated accounts.

24

Presentation of jointly controlled entities (joint ventures)

Both proportional consolidation and equity method permitted. Fair value option applicable under certain conditions.

Both proportional consolidation and equity method permitted.

25

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Business combinations

Types All business combinations are acquisitions, thus the purchase method is the only method of accounting that is allowed.

Acquisition accounting is the norm but uniting of interest can be used when the parent holds at least 90% of the nominal values of the shares in the subsidiary and the acquisition did not include a cash payment of more than 10% of the nominal value of the shares.

28

Consideration transferred The consideration transferred is the sum of the acquisition date fair values of assets transferred, liabilities incurred and equity interests issued by the acquirer. Certain elements – such as transaction costs – are excluded from the consideration transferred. Contingent consideration is included if it can be measured reliably.

Not specified. In practice, transaction costs are included in the acquisition cost to be allocated. No guidance on contingent consideration.

29

Recognition and measurement of identifiable assets and liabilities acquired

Recognition of all assets acquired, liabilities and contingent liabilities assumed at fair value at the date of acquisition.

Contingent liabilities are not recognised on the statement of financial position. In practice, assets acquired and liabilities assumed are often maintained at their predecessor’s value.

29

Non-controlling interests (NCIs)

There is an option to value NCIs at the proportional value of identifiable assets and liabilities (partial goodwill approach) or at their fair value (full goodwill approach).

No goodwill is attributed to non-controlling interests.

30

Goodwill and impairment Capitalised but not amortised. Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually at the cash-generating unit (CGU) level or groups of CGUs, as applicable.

Goodwill is treated as an intangible asset and is amortised over a maximum of five years.

30

Negative goodwill The identification and measurement of acquiree’s identifiable assets, liabilities and contingent liabilities are reassessed. Any excess remaining after reassessment is recognised in the income statement immediately.

Similar to IFRS, however, can only be recognised in the profit and loss account if expectation of unfavourable future results or expectation of costs could incur or if a difference corresponds to a realised gain. Otherwise, it is recorded as a liability.

30

Business combinations achieved in stages

Previously-held interests in the acquiree are fair valued through profit or loss at the date control is obtained.

Not specified but IFRS treatment may be used as a benchmark.

30

Disclosures IFRS requires extensive disclosures. Limited guidance. 31



Revenue recognition

Revenue recognition Based on several criteria, which requires the recognition of revenue when risks and rewards have been transferred and the revenue can be measured reliably. Interest incomes are recognised on an accrual basis using the effective yield method.

General measurement rules require accrual basis accounting for revenues and charges; gains are to be recognised only when they are realised.

34

Fee income Commission income may be recognised either:• aspartofinterestincomeaccruedusing

the effective yield method; or• whenservicesarerendered;or• uponexecutionofasignificantact.

Recognised in the income statement upon execution of a specific transaction or on an accrual basis if related to services rendered over a period of time.

34

Expense recognition

Interest expense Recognised on an accrual basis using the effective yield method.

Discounts or premiums are amortised on a straight-line basis.

36

Employee benefits: pension costs – defined benefit plans

Projected unit credit method is used to determine benefit obligation and record plan assets at fair value. Actuarial gains and losses can be deferred.

Not specified. 36

Share-based payment transactions

Expenses for services purchased are recognised based on the fair value of the equity awarded or the liability incurred. Corresponding amount is recorded either as a liability or as an increase in equity, depending on whether the transaction is determined to be cash-settled or equity-settled. Amount to be recorded is measured at fair value of shares or share options granted.

Disclosure required on stock options granted to directors and management, but no guidance on recognition and measurement.

38

Termination benefits Termination benefits arising from redundancies are accounted for similarly to restructuring provisions. Termination indemnity schemes are accounted for based on the actuarial present value of benefit.

To be accounted for as extraordinary expenses based on the best estimate done by management.

39

Assets

Acquired intangible assets Capitalise if recognition criteria are met; amortised over useful life. Intangibles with an indefinite useful life are not amortised but reviewed at least annually for impairment. Revaluations are permitted in rare circumstances.

No specific rules for recognition. Amortisation over a maximum of 5 years. No definition of intangibles with an indefinite useful life.

40

Internally generated intangible assets

Research costs are expensed as incurred. Development costs are capitalised and amortised only when specific criteria are met.

Research and development costs can be capitalised and amortised over a maximum period of five years.

41

Property, plant and equipment (PPE)

Historical cost or re-valued amounts are used. Regular valuations of entire classes of assets are required when revaluation option is chosen.

Historical cost or production cost. Revaluation may only be permitted by a specific regulation.

42

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Non-current assets held for sale or disposal group

A non-current asset is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. A non-current asset classified as held for sale is measured at the lower of its carrying amount and fair value less costs to sell. Comparative statement of financial position is not restated.

Not specified. 43

Leases - lessor accounting Amounts due under finance leases are recorded as a receivable. Gross earnings allocated to give constant rate of return based on (pre-tax) net investment method.

Amounts due under finance leases as receivable are recorded at their “net value”, which is the acquisition cost minus accumulated depreciation.

44

Leases - classification A lease is a finance lease if substantially all risks and rewards of ownership are transferred (otherwise it is an operational lease). Substance rather than form is important.

Record a lease as a finance lease if the credit institution leases assets it acquired with the sole intention for leasing and:• thecreditinstitutionkeepstheownership

of the leased asset• theleasingperiodcorrespondstothe

presumed useful life of the asset• thecontracthasapurchaseoptionto

acquire the asset at a determined price.

44

Impairment of non-financial assets

If there is an indicator of impairment, assets are written down to the higher of fair value less costs to sell and value in use based on the assessment of discounted cash flows. Reversal of impairment losses is required in certain circumstances, except for goodwill.

For non-current non-financial assets only a permanent reduction in value is recorded.For current non-financial assets, a value adjustment, whether permanent or not, has to be booked.

45

Capitalisation of borrowing costs

Capitalised as part of the constructed asset. May be capitalised as part of the production cost but disclosure required.

46

Investment property Measured at depreciated cost or fair value with changes in fair value recognised in the income statement.

Recognised and measured as “Property, plant and equipment”. Amounts included under “Land and buildings” used by the credit institution in the normal course of its business are disclosed separately.

46

Financial assets - measurement Depends on classification of investment – if held to maturity or loans and receivables, carried at amortised cost based on the effective interest rate, otherwise at fair value. Gains/losses on fair value through profit or loss classification (including trading instruments) are recognised in the income statement. Unrealised gains and losses on available-for-sale investments are recognised in other comprehensive income, except if effective fair value hedge.

Depends also on the classification of the investment: • Non-derivativefinancialassetsare

classified either in the investment portfolio (measured at cost or at lower-of-cost-or-market), in the trading portfolio (measured generally at lower-of-cost-or-market) or in the structural portfolio (measured at lower-of-cost-or-market).

• Derivativesarerecordedintheoff-balancesheet at nominal value. Unrealised gains on derivatives used for trading purposes are ignored, whereas unrealised losses are accounted for. In practice, most derivatives used for hedging are not re-valued.

IFRS option: financial instruments may be recorded at fair value, but this is subject to CSSF authorisation.

47

Reclassification between categories

Allowed in limited circumstances and under certain strict conditions.

Generally allowed, except for a sale of security from the investment portfolio which needs to be duly authorised by the management.

48



Impairment of financial assets For all financial assets, except financial assets at fair value through profit or loss, assessment at each statement of financial position date whether there is any objective evidence of impairment.

For non-current financial assets valued at cost, value adjustments if of permanent nature.For financial assets carried at lower-of-cost-or-market, value adjustment on individual assets in all cases.Exceptional value adjustments authorised. IFRS option: financial instruments may be recorded according to IAS 39, but this is subject to CSSF authorisation.

50

Derecognition of financial assets

Financial assets are derecognised based on a risks and rewards analysis first; a control test is performed in case the risks and rewards analysis is not conclusive.

Not specified. In practice, recognition and derecognition of assets is usually based on ownership principle.

51

Disclosures Requires extensive qualitative and quantitative information exposure to risks arising from financial instruments, including minimum disclosures about credit, liquidity and market risks. A description of management’s objectives, policies and processes for managing those risks is also required.

Requires quantitative disclosures about exposure to risks arising from financial instruments either in the notes or in the Directors’ report but based on previous IAS 32 disclosure requirements.

51

Liabilities

Recognition and measurement of provisions

Liabilities relating to present obligations arising from past events provided outflow of resources is probable (defined as more likely than not) and can be reliably estimated.

Recording of provisions remains more flexible than under IFRS as there is a possibility to take into account foreseeable risks and potential losses. However, an option has been introduced to apply IFRS rules related to provisions and contingencies.

56

Restructuring provisions Restructuring provisions are recognised if a detailed formal plan (identifying specified information) has been announced or implementation has effectively begun.

Not specified. In practice, a management decision is only required.

56

Contingent assets and liabilities Disclose unrecognised possible losses and recognise probable gains.

Disclose total amount of contingent liabilities, and specify those that are acceptances, endorsements, guarantees and assets pledged as collateral.

56

Deferred tax Full provision using the liability method is used (some exceptions) driven by the existence of temporary differences between tax and accounting basis. Deferred tax assets are recognised if recovery is probable (more likely than not).

In practice, not recognised. Disclose deferred taxes if impact is significant.

57

Leases - lessee accounting Finance leases are recorded as asset. and obligation for future rentals. Depreciated over useful life of asset. Rental payments are apportioned to give constant interest rate on outstanding obligation. Operating lease rentals expenses are recognised on straight-line basis over the lease term.

Only dealt with in the case the credit institution is a lessor. Finance leases can either be capitalised or expensed. Treatment of operational lease is similar to IFRS.

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Sale and leaseback transactions

For finance leases, profit arising on sale and finance leaseback is deferred and amortised. If an operating lease arises, profit recognition depends on whether the transaction is at fair value. Substance/linkage of transactions is considered.

Not specified. 60

Classification debt vs. equity Capital instruments are classified depending on substance of the issuer’s contractual obligations, as either liability or equity. Mandatory redeemable preference shares are classified as liabilities.

Shares subscribed by associates or capital contributors, independent of the legal structure are classified as equity instruments. Hybrid capital instruments are disclosed on a separate line.

61

Convertible debt Split accounting is used for convertible debt (fixed number of shares for a fixed amount of cash) with proceeds allocated between equity and debt.

No specific rules, although recognised in practice as a liability.

61

Recognition and measurement of financial liabilities

Financial liabilities are classified in two categories: those that are measured at fair value through profit or loss (including trading instruments) and those that are measured at amortised cost using the effective yield method.

Financial liabilities are measured at nominal value. The premium can be either charged to profit or loss immediately or amortised on a straight-line basis. The discount can be either amortised in a straight-line basis or taken as a profit at maturity date.

61

Derecognition of financial liabilities

Liabilities are derecognised when extinguished. Difference between carrying amount and amount paid is recognised in the income statement.

No specific guidance. Practice is quite similar to IFRS but is based on contractual features.

62

Fund for general banking risks Such amounts for general banking risks and contingencies do not qualify for recognition as provisions under IAS 37. Therefore, a bank recognises such amounts as appropriation of retained earnings.

A Fund for General Banking Risks may be set up and is considered as “quasi-equity”. Movements in the Fund are shown in profit or loss after tax (i.e. allocation to the Fund is not tax deductible and reversals are not taxable).

62

Loan commitments Loan commitments that cannot be settled net in cash or in another financial instrument, that are not designated as financial liabilities at fair value through profit or loss, or that are not subject to the derecognition provisions should be disclosed in the notes. Other loan commitments are within the scope of IAS 39.

Commitments are arrangements and irrevocable facilities that could give rise to a credit risk and are recorded off-balance sheet. Disclosure required for commitments arising out of sale and repurchase transactions.

62

Equity instruments

Capital instruments - purchase of own shares

Show as deduction from equity. Must be disclosed as an asset. 64



Derivatives and hedging

Derivatives - definition A derivative is a financial instrument or other contract within the scope of IAS 39 whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable; that requires no initial net investment or a small initial net investment relative to other types of contracts that have a similar response to changes in market conditions; and that is settled at a future date.

Similar to IFRS. Qualitative/quantitative information concerning financial instruments (derivative and non-derivative) has to be disclosed in the notes and in the Management’s report.

65

Hedge accounting Hedge accounting recognises the offsetting effects on profit or loss of changes in the fair values of the hedging instrument and the hedged item provided that stringent criteria are met. Hedging relationships are of three types:• Fairvaluehedge• Cashflowhedge• Hedgeofanetinvestmentinaforeign

entity.

Hedging of foreign exchange risk is dealt with in the Law and the Recueil. The Recueil also specifies hedging rules for interest rate risk of the investment portfolio. Generally, derivatives used for hedging purposes are following the same measurement principle as the hedged item.

66

Other accounting and reporting topics

Functional currency definition and determination

Currency of primary economic environment in which entity operates. If indicators are mixed and functional currency is not obvious, judgement is used to determine the functional currency that most accurately represents economic results of the entity’s operations by giving priority to currency of primary economic environment in which the entity operates.

No definition of functional currency. 69

Presentation currency When financial statements are presented in a currency other than the functional currency, assets and liabilities are translated at the exchange rate at the statement of financial position date. Income statement items are translated at the exchange rate on the dates of transactions, or average rates if rates do not fluctuate significantly.

Financial statements are established in the currency in which the share capital is expressed.

70

Basic EPS IFRS requires presentation of earnings per share on the face of the income statement for all entities listed (or in the process of being listed) on a regulated market.

Not required. 71

Diluted EPS IFRS is prescriptive about the procedure and methods used to determine whether potential shares are dilutive. “Treasury share” method is used for share options/warrants.

Not required. 71

Related-party transactions - definition

Determine by level of direct or indirect control, joint control and significant influence of one party over another or common control by another party. Include also key management personnel.

Similar to IFRS but not as prescriptive and limited disclosure for key management personnel.

72

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Related-party transactions - disclosures

Name of the parent entity is disclosed and, if different, the ultimate controlling party, regardless of whether transactions occur. For related-party transactions, nature of relationship (seven categories), amount of transactions, outstanding balances, terms and types of transactions are disclosed. Exemption is given only to intra-group transactions in consolidated accounts.

Only specific positions concerning related parties have to be disclosed.

72

Segment reporting - general recquirements

Applies to entities, whose debt or equity instruments are traded in a public market or filed or are in the process of filing, the financial statements with a regulatory organisation for purposes of issuing securities in a public market.

Only provided on a reduced extent. 73

Identification of segments measurements

Operating segments are identified based on internally reported operating segments and the way the chief operating decision-maker (CODM) evaluates financial information for the purpose of allocating resources and assessing performance.

Not specified. 73

Segment reporting - main disclosures

Disclosures include, among others, factors used to identify reportable segments, information about the reportable segment (profit or loss, revenue, expenses, assets, liabilities, basis of measurement), reconciliation of this information with the totals in financial statements, revenues from external customers, etc.

Not specified. 74

Discontinued operations - definition

Operations and cash flows that can be clearly distinguished for financial reporting and represent a separate major line of business or geographical area of operations, or a subsidiary acquired exclusively with a view to resale.

Not specified. 75

Discontinued operations - measurement

Measured at the lower of carrying amount and fair value less costs to sell.

Not specified. 75

Discontinued operations - presentation and main disclosures

At a minimum, a single amount is disclosed on the face of the income statement, and further analysis is disclosed in the notes, for current and prior periods.

Major profit and loss impact from sale of non-current assets should be disclosed in the notes and if unusual, should be presented as extraordinary result.

75

Post balance sheet events Financial statements are adjusted for subsequent events, providing evidence of conditions that existed at the statement of the financial position date and materially affecting amounts in financial statements (adjusting events). Non-adjusting events are disclosed.

Not specified. Practice is similar to IFRS. Important post balance sheet events have to be disclosed in the Management’s report.

76

Interim financial reporting Contents are prescribed and basis should be consistent with full-year statements. Frequency of reporting (e.g., quarterly, half-year) is imposed by local regulator or is at the discretion of the entity.

Mandatory for listed entities on a regulated Stock Exchange within the EU.

77


Conceptual frameworkIFRS includes a conceptual Framework in which there are principles set out to provide a basis for setting accounting standards, and a point of reference for the preparation of financial information where no specific standard exists. LUX BANKING GAAP are defined in the Law of 17 June 1992, completed by Circulars and the Recueil issued by the CSSF. The Law transposes the EU Directives in relation to accounting rules for credit institutions (including the Fair Value and Modernisation Directives). No conceptual Framework is defined but basic principles such as prudence, consistency, and comparability are defined in the Law.

accounting framework

Qualitative characteristics of financial information

IFRS Financial information should provide certain characteristics in order for it to be useful. The IFRS Framework requires financial information to be understandable, relevant, reliable and comparable.

LUX BANKING GAAP There is no definition of the qualitative characteristics of the financial statements but the regulations state that the annual accounts shall be drawn up clearly in accordance with the Law and give a true and fair view of the assets, liabilities, financial position and profit and loss account of the credit institution; the financial information must be comparable and presented consistently.

Reporting elements

IFRS There are five reporting elements in the statement of financial position and the statement of comprehensive income: assets, liabilities, equity, income (including revenues and gains) and expenses (including losses). Assets are resources controlled by an entity as a result from a past event. Liabilities are present obligations arising from a past event. Assets and liabilities are recognised on the statement of financial position when it is likely that economic benefits will flow to or from the entity, and those benefits are reliably measurable. Equity is the residual interest in the assets after deducting the entity’s liabilities. Income relates to increases in economic benefits that result in increases in equity other than those relating to contributions from equity participants. Expenses are decreases in economic benefits that result in decreases in equity other than those relating to distributions to equity participants.

LUX BANKING GAAP The LUX BANKING GAAP presents the same five reporting elements in the statement of financial position and the profit and loss account as IFRS although each element is not defined as such.

Historical cost

IFRS Historical cost is the main accounting convention. However, IFRS permits the revaluation of financial instruments, intangible assets, property, plant and equipment (PPE) and investment property. IFRS also requires certain categories of financial instruments to be reported at fair value.

LUX BANKING GAAP Historical cost is also the main accounting convention. Permission to mark-to-market bonds included in the trading portfolio.

IfrS option: financial instruments and/or investment property may be fair valued in accordance with IFRS provided that prior CSSF authorisation is obtained.

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First time adoption of accounting Framework

IFRS IFRS includes a specific standard on how a company should apply IFRS for the first time. It introduces certain reliefs and imposes certain requirements and disclosures. First time adoption of IFRS as the primary accounting basis requires full retrospective application of IFRS effective at the reporting date for an entity’s first IFRS financial statements, with optional exemptions primarily for PPE, business combinations, share-based payments and pension plan accounting and limited mandatory exceptions. Comparative information is prepared and presented on the basis of IFRS. Almost all adjustments arising from the first time application of IFRS are adjusted against opening retained earnings of the first period presented on an IFRS basis. Some adjustments are made against goodwill or against other classes of equity. Further, in an entity’s first IFRS financial statements, it must present reconciliations of profit or loss in respect of the last period reported under previous GAAP, of equity at the end of that period and of equity at the start of the earliest period presented in comparatives in those first IFRS financial statements. Finally, an entity’s first IFRS financial statements shall include at least three statements of financial position (including the opening statement of financial position at IFRS transition date), Two statements of comprehensive income, two separate income statements (if presented), two statements of cash flows and two statements of changes in equity and related notes.

LUX BANKING GAAP There is no guidance on first time adoption of the Luxembourg accounting Framework. In practice, retrospective application is not required.

references:IFRS: Framework, IAS 1, IFRS 1.LUX BANKING GAAP: Art. 2, 51, 52, 53, 64bis - quater,64 quinquies and sexies, CSSF Circular 08/340.


General requirements

Compliance

IFRS Entities should make an explicit statement that financial statements comply with IFRS. Compliance cannot be claimed unless the financial statements comply with all the requirements of each applicable standard and each applicable interpretation.

LUX BANKING GAAP Provisions of the Law, the Recueil and related Circulars must be applied when preparing annual accounts.

IfrS option: credit institutions may use an IFRS format for the presentation of their financial statements. Such an option is subject to prior CSSF authorisation.

Components of financial statements A set of financial statements under either IFRS or LUX BANKING GAAP includes the following components:

COMPONENT IfrS LUX BaNKING GaaP

Statement of financial position (balance sheet) Required Required

Statement of comprehensive income Required 1 Partly required 2

Statement of changes in equity Required Not required 3

Statement of cash flows Required Not required 3

Accounting policies Required Required

Notes to the financial statements Required Required

1 As an alternate presentation, the statement of comprehensive income may be presented into two different statements: an income statement and a statement of other comprehensive income.

2 Under Lux GAAP, only an income statement is required.3 The IFRS option permits to incorporate such statements, subject to prior CSSF authorisation.

Comparative

IFRS One year of comparatives is required for all numerical information in the financial statements, with limited exceptions. Comparative information for qualitative disclosures is also required unless deemed not rel-evant in improving the quality of the financial statements. In limited note disclosures, more than one year of comparative information is required.

LUX BANKING GAAP Requires one year of comparatives for every caption in the statement of financial position and in the profit and loss account. Although not specifically indicated, all numerical information in the notes generally include one year of comparatives.

financial statements

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Statement of financial position (balance sheet) Each framework requires prominent presentation of a statement of financial position (balance sheet) as a primary statement.

Format

IFRS Entities present current and non-current assets, and current and non-current liabilities, as separate classifications on the face of their statement of financial position except when a liquidity presentation provides more relevant and reliable information. All assets and liabilities are presented broadly in order of liquidity in such cases. Otherwise there is no prescribed statement of financial position format, and management may use judgement regarding the form of presentation in many areas. However, IFRS requires presentation of minimum items on the face of the statement of financial position, including among others:• Assets:PPE,investmentproperty,intangibleassets,financialassets,investmentsaccountedforusing

the equity method, inventories, trade and other receivables, deferred tax assets, and cash and cash equivalents and the total of assets classified as held for sale and assets included in disposal groups classified as held for sale.

• Equityandliabilities:issuedcapitalandreservesattributabletoownersoftheparent,financialliabilities,provisions, current and deferred tax liabilities, trade and other payables, liabilities included in disposal groups classified as held for sale, and non-controlling interests (presented within equity).

LUX BANKING GAAP The Law prescribes a standard format for the presentation of the statement of financial position. The format presents the total assets versus total liabilities. Both assets and liabilities are presented in a decreasing order of liquidity. The Law also requires disclosing some off-balance sheet items after the statement of financial position.

Current/non-current distinction (general)

IFRS The current/non-current distinction is required (except when a liquidity presentation is more relevant, which is usually the case for credit institutions). Where the distinction is made, assets are classified as current assets if they are held for sale or consumed in the normal course of the entity’s operating cycle; or cash and cash equivalents. Both assets and liabilities are classified as current when they are held for trading or expected to be realised within 12 months of the statement of financial position date. Interest-bearing liabilities are classified as current when they are due to be settled within 12 months of the statement of financial position date, even if the original term was for a period of more than 12 months. An agreement to refinance or reschedule payments, on a long-term basis that is completed after the statement of financial position date does not result in non-current classification of the financial liabilities even if executed before the financial statements are issued.

LUX BANKING GAAP The Law requires to present assets in order of liquidity and liabilities in order of repayability, according to the prescribed format.

Offsetting assets and liabilities

IFRS Assets and liabilities cannot be offset, except where specifically permitted by a standard. Financial assets and financial liabilities are offset when an entity has a legally enforceable right to offset the recognised amounts and intends to settle transactions on a net basis or to realise the asset and settle the liability simultaneously. A master netting agreement, in the absence of the intention to settle net or realise the asset and liability simultaneously, is not sufficient to permit net presentation of derivative financial instruments even if it creates a legally enforceable right of offset. Generally, however, an entity’s right of offset under a master netting agreement is conditional and enforceable only on the occurrence of some future event and to offset a financial asset and a financial liability an entity must have a currently enforceable legal right to offset the recognised amounts. Thus, master netting arrangements generally do not meet the conditions of offsetting.

LUX BANKING GAAP Any compensation between assets and liabilities is prohibited, except if specifically foreseen by the Law.


Statement of comprehensive income IFRS requires prominent presentation of a statement of comprehensive income as primary statement. Under IFRS, entities should present all items of income and expenses recognised in a period:• in a single statement of comprehensive income; or• in two statements: a statement displaying components of profit or loss (separate

income statement) and a second statement beginning with profit or loss and displaying components of other comprehensive income (statement of comprehensive income).

Format

IFRS There is no prescribed format for the statement of comprehensive income. The entity should select a method of presenting its expenses recognised in profit or loss by either function or nature; this can either be, as is encouraged, on the face of the statement of comprehensive income, or in the separate income statement (if presented). Additional disclosure of expenses by nature is required if functional presentation is used. Entities should not mix functional and nature classifications of expenses by excluding certain expenses from the functional classifications to which they relate.The following minimum items have to be presented on the face of the statement of comprehensive income:• Revenue;• Financecosts;• Shareofpost-taxresultsofassociatesandjointventuresaccountedforusingtheequitymethod;• Taxexpense;• Post-taxgainorlossattributabletotheresultsandtore-measurementofdiscontinuedoperations;• Profitorlossfortheperiod;• Eachcomponentofothercomprehensiveincomeclassifiedbynature;• Shareoftheothercomprehensiveincomeofassociatesandjointventuresaccountedforusingthe

equity method; and• Totalcomprehensiveincome.The portion of profit or loss and total comprehensive income attributable to the non-controlling interests and to the owners of the parent are separately disclosed on the face of the statement of comprehensive income as allocations of profit or loss and total comprehensive income for the period within that caption.An entity that discloses an operating result should include all items of an operating nature, including those that occur irregularly or infrequently or are unusual in amount.The components of other comprehensive income would include:(a) Changes in revaluation surplus (on account of PPE and intangibles);(b) Actuarial gains and losses on defined benefit plans recognised in full in equity, if the entity elects the

option available under IAS 19;(c) Gains and losses arising from translation of a foreign operation;(d) Gains and losses on re-measuring available-for-sale financial assets;(e) Effective portion of gains and losses on hedging instruments in a cash flow hedge.Entities should present all items of income and expenses recognised in a period:• inasinglestatementofcomprehensiveincome;or• intwostatements:astatementdisplayingcomponentsofprofitorloss(separateincomestatement)and

a second statement beginning with profit or loss and displaying components of other comprehensive income (statement of comprehensive income).

LUX BANKING GAAP Under Lux GAAP only an income statement is required.Given the activity of a credit institution, it is not necessary to distinguish between expenses by nature or by function. As a result, one format has been retained, with the possibility of a vertical or a horizontal layout. The vertical presentation shows the income and expenses in form of a list, the horizontal layout presents total charges versus total income.

The statement of other comprehensive income is not required, but may be included (IFRS option) and is subject to CSSF authorisation. It must be noted, however, that the only element of OCI under LUX BANKING GAAP relates to foreign currency translation adjustment on conversion of consolidated subsidiaries denominated in foreign currencies (for consolidated accounts only).

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Exceptional (significant) items

IFRS The separate disclosure is required for items of income and expense that are of such size, nature or incidence that their separate disclosure is necessary to explain the performance of the entity for the period. Disclosure may be on the face of the income statement or in the notes. IFRS does not use or define the term “exceptional items”.

LUX BANKING GAAP The statement of other comprehensive income is not required, but may be included (IFRS option) and is subject to CSSF authorisation. It must be noted, however, that the only element of OCI under LUX BANKING GAAP relates to foreign currency translation adjustment on conversion of consolidated subsidiaries denominated in foreign currencies (for consolidated accounts only).

Extraordinary items

IFRS Prohibited.

LUX BANKING GAAP Does not make a distinction between extraordinary and exceptional result in the income statement.

Statement of changes in equity

IFRS A statement of changes in equity is presented as a primary statement for all entities. The following minimum items have to be presented:• Totalcomprehensiveincomefortheperiod,showingseparatelythetotalamountsattributabletoowners

of the parent and to non-controlling interest;• Foreachcomponentofequity,theeffectsofretrospectiveapplicationorretrospectiverestatement

recognised in accordance with IAS 8;• Theamountsoftransactionswithownersintheircapacityasowners,showingseparatelycontributions

by and distributions to owners;• Foreachcomponentofequity,areconciliationbetweenthecarryingamountatthebeginningandthe

end of the period, separately disclosing each change.

LUX BANKING GAAP Notes to the financial statements must disclose the number and nominal value of shares subscribed during the period and the total number of shares outstanding by category. The Recueil recommends disclosing the movements in the reserves accounts and the distribution of profit.

IfrS option: a primary statement showing changes in shareholders’ equity is not required,but may be included if CSSF prior authorisation is obtained.

Statement of cash flows

Exemptions

IFRS No exemption.

LUX BANKING GAAP No statement of cash flows required.

Direct/indirect method

IFRS Inflows and outflows of “cash and cash equivalents” are reported in the statement of cash flows. The statement of cash flows may be prepared using either the direct method (cash flows derived from aggregating cash receipts and payments associated with operating activities) or the indirect method (cash flows derived from adjusting net income for transactions of a non-cash nature such as depreciation). The indirect method is more common in practice. Non-cash investing and financing transactions are to be disclosed.

Definition of cash and cash equivalents

IFRS Cash is cash on hand, and demand deposits and cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. An investment normally qualifies as a cash equivalent only when it has a maturity of three months or less from its acquisition date. Short-term interbank placings and takings, including nostro accounts, are generally designated as cash equivalents.


Format

IFRS Cash flows from operating, investing and financing activities are classified separately.

Changes in accounting policy and other accounting changes

Changes in accounting policy

IFRS Changes in accounting policy are accounted for retrospectively. Comparative information is restated and the amount of the adjustment relating to prior periods is adjusted against the opening balance of retained earnings of the earliest year presented. An exemption applies when it is impracticable to change comparative information. Entities are required to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period when they apply an accounting policy retrospectively or when they reclassify items in their financial statements.Policy changes made upon adoption of a new standard must be accounted for in accordance with that standard’s transition provisions. The method described above is used if transition provisions are not specified.

LUX BANKING GAAP Accounting policies must be applied consistently. Departure from policies is permitted in order to give a true and fair view. Any such departure must be disclosed in the notes along with explanations of the reasons for it and a statement of its effects on the assets, liabilities, financial position and profit and loss account. Comparative figures can be amended for information purposes only. The financial statements as approved by the shareholders cannot be restated.

Correction of errors

IFRS The same method as for changes in accounting policy applies.

LUX BANKING GAAP Not specified. Accounting practices are similar to IFRS.

Changes in accounting estimates

IFRS Changes in accounting estimates are accounted for in the income statement when identified.

LUX BANKING GAAP Not specified. Accounting practices are similar to IFRS.

references: IFRS: IAS 1, IAS 7, IAS 8, IAS 21. LUX BANKING GAAP: Art. 2, 3, 4, 6, 7, 7bis, 40, 41, 42, 49, Chapter 7bis, 68.

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Requirement to prepare consolidated financial statements

IFRS Parent entities prepare consolidated financial statements that include all subsidiaries. An exemption applies to a parent entity when all of the following conditions apply:• Itisitselfawholly-ownedsubsidiary,orisapartially-ownedsubsidiaryanditsotherowners(including

those not entitled to vote) have been informed about and do not object to the parent not presenting consolidated financial statements;

• Theparent’sdebtorequitysecuritiesarenotpubliclytradedandtheparentisnotintheprocessofissuing securities in public securities markets;

• TheimmediateorultimateparentpublishesconsolidatedfinancialstatementsthatcomplywithIFRS.A subsidiary is not excluded from consolidation simply because the investor is a venture capital organisation, mutual fund, unit trust or similar entity.

LUX BANKING GAAP Similar to IFRS. Requires the preparation of consolidated financial statements for all credit institutions as defined in the Law, if the undertaking: • Hasamajorityofshareholders’orvotingrightsinanotherundertaking;or• Hastherighttoappointorremoveamajorityofthemanagementorsupervisorybodyofanother

undertaking and at the same time has interests in that undertaking; or • Isashareholderormemberofanotherundertakingandcontrolsalone,pursuanttoanagreementwith

other shareholders, a majority of the voting rights; or• Exercisesorhasthepossibilitytoexercisedominantinfluenceorcontrolovertheundertakingorboth

the credit institution and the undertaking are under the same management.Exemptions exist under certain conditions for preparing consolidated financial statements for subsidiaries of a parent company incorporated in one of the Member States of the European Union and preparing consolidated accounts. Exemptions are not applicable to subsidiaries included in the consolidated accounts of a head office if it has securities listed on an EU stock exchange.

Consolidation model and subsidiaries

Concept of control

IFRS IFRS focuses on the concept of control in determining whether a parent-subsidiary relationship exists. Control is the parent’s ability to govern the financial and operating policies of a subsidiary to obtain benefits. Control is presumed to exist when a parent owns, directly or indirectly, 50 percent of the voting power.IFRS specifically requires potential voting rights to be considered in assessing whether an entity has the power to govern the financial and operating policies of another entity. Instruments that are currently exercisable or convertible are included in the assessment, with no requirement to assess whether exercise is economically reasonable (provided such rights have economic substance).Control also exists when a parent owns half or less of the voting power, but has legal or contractual rights to control the majority of the entity’s voting power or board of directors.In rare circumstances, a parent could also have control over an entity in circumstances where it holds less than 50 percent of the voting rights of an entity and lacks legal or contractual rights by which to control the majority of the entity’s voting power or board of directors (de facto control).

LUX BANKING GAAP Similar to IFRS.

Consolidated financial statements

Preliminary note: the IFRS guidance described below is based on IAS 27 (revised) as adopted by the EU on 12 June 2009.IAS 27 (revised), Consolidated and Separate Financial Statements, must be applied for annual periods beginning on or after July 1, 2009. Earlier application is permitted. However, an entity must not apply the amendments for annual periods beginning before July 1, 2009, unless it also applies IFRS 3, Business Combinations (as revised in 2008). IAS 27 (revised) does not change the presentation of non-controlling interests from the previous standard, which is similar to the new requirement under US GAAP; however, additional disclosures are required to show the effect of transactions with non-controlling interests on the equity attributable to parent company shareholders.


Special purpose entities

IFRS Special purpose entities (SPEs) are consolidated when the substance of the relationship indicates that an entity controls the SPE. Indicators of control are as follows:• TheSPEconductsitsactivitiesonbehalfoftheentity;• Theentityhasthedecision-makingpowertoobtainthemajorityofthebenefitsoftheSPE;• TheentityhasotherrightstoobtainthemajorityofthebenefitsoftheSPE;or• TheentityhasthemajorityoftheresidualorownershiprisksoftheSPEoritsassets.Post-employment benefit plans or other long-term employee benefit plans to which IAS 19, Employee Benefits, applies are excluded from this rule. The guidance applies to activities regardless of whether they are conducted by a legal entity.

LUX BANKING GAAP No specific guidance.

Subsidiaries excluded from consolidation

IFRS All subsidiaries are consolidated, except for those which control has passed to a third party. A subsidiary that meets, on acquisition, the criteria to be classified as held for sale in accordance with IFRS 5, applies the presentation for assets held for sale (i.e., separate presentation of assets and liabilities to be disposed of), rather than normal line-by-line consolidation presentation.

LUX BANKING GAAP Subsidiaries excluded from the consolidation are those which are immaterial, which are only held for re-sale in the near future, for which the information cannot be obtained without disproportionate expense or delay and on which there are severe long term restrictions preventing the parent undertaking from exercising its right over the assets or from managing that undertaking. There is no exemption for subsidiaries with dissimilar activities.

Uniform accounting policies

IFRS Consolidated financial statements are prepared using uniform accounting policies for all entities in a group.

LUX BANKING GAAP Similar to IFRS. Valuation rules for consolidated companies are generally the same as for the parent entity; otherwise this must be disclosed in the notes. Where there are special circumstances, different policies may be used with disclosure of the distinctive features and the effect in the notes.

Reporting periods

IFRS The consolidated financial statements of the parent and the subsidiaries are usually drawn up at the same reporting date. However, the consolidation of subsidiaries accounts can be drawn up at a different reporting date provided the difference between the reporting dates of the subsidiaries is not more than three months. Adjustments are made for significant transactions that occur in the gap period.


Transactions with minority shareholders, partial disposals and loss of control

IFRS Mandatory adoption of the economic entity model, which treats all providers of equity capital as the entity’s shareholders, even when they are not shareholders in the parent company. Consequently, partial disposal of an interest in a subsidiary without losing control does not result in a gain or loss but in an increase or decrease in equity. Purchase of non-controlling interests is treated as a treasury transaction and accounted for in equity with no effect on existing goodwill. A partial disposal of an interest in a subsidiary in which the parent loses control but retains an interest triggers recognition of a gain or loss on the entire interest: a gain or loss on the portion disposed of and a further revaluation gain on the interest retained.

LUX BANKING GAAP No specific guidance. IFRS can be used as a benchmark.

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Investments in associates

Definition

IFRS An associate is an entity over which the investor has significant influence - that is, the power to participate in, but not control, an associate’s financial and operating policies. Participation by an investor in the entity’s financial and operating policies via representation on the entity’s board demonstrates significant influence. A 20% or more interest by an investor in an entity’s voting rights leads to a presumption of significant influence.


Equity method

IFRS An investor accounts for an investment in an associate using the equity method in its consolidated financial statements. The investor presents its share of the associate’s post-tax profits and losses in the statement of comprehensive income. The investor recognises in equity its share of changes in the associate’s equity that have not been recognised in the associate’s other comprehensive income. The investor, on acquisition of the investment, accounts for the difference between the cost of the acquisition and investor’s share of fair value of the net identifiable assets as goodwill. The goodwill is included in the carrying amount of the investment. The investor’s investment in the associate is stated at cost, plus its share of post-acquisition profits or losses, plus its share of post-acquisition movements in reserves, less dividends received. Losses that reduce the investment to below zero are applied against any long-term interests that, in substance, form part of the investor’s net investment in the associate – for example, preference shares and long-term receivables and loans. Losses recognised in excess of the investor’s investment in ordinary shares are applied to the other components in reverse order of priority in a winding up. Further losses are provided for as a liability only to the extent that the investor has incurred legal or constructive obligations to make payments on behalf of the associate. Disclosure of information is required about the revenues, profits or losses, assets and liabilities of associates. Investments in associates held by venture capital organisations, mutual funds, unit trusts and similar entities including investment-linked insurance funds can be carried at fair value through profit or loss.In separate non-consolidated accounts, the entity has a policy choice to carry investments in associates either at cost or in accordance with IAS 39 (i.e. at fair value changes through other comprehensive income).

LUX BANKING GAAP Similar to IFRS for the consolidated accounts. However, the Law requires the disclosure of goodwill separately either in the statement of financial position under intangible assets or in the notes. Information about the name and proportion of the interest in the associate must be presented. Immaterial associates can be excluded. The carrying amount of the investment is increased in the cumulative amount of the quota-share in the equity of the investee company (including the quota-share of net profit or loss, which shall be presented separately in the profit and loss account) and decreased by any dividend payment or by any equity reimbursement made during the period.For statutory non-consolidated accounts, the entity has a policy choice to carry investments in associates either at cost or under the equity method.

Impairment

IFRS If the investor has objective evidence of one of the indicators of impairment set out in IAS 39.59 - for example, significant financial difficulty – the investment is tested for impairment as prescribed under IAS 36, Impairment of Assets. The entire carrying amount of the investment is tested by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. In the estimation of future cash flows for value in use, the investor may use either: its share of future net cash flows expected to be generated by the investment (including the cash flows from its operations) together with the proceeds on ultimate disposal of the investment; or the cash flows expected to arise from dividends to be received from the associate together with the proceeds on ultimate disposal of the investment.

LUX BANKING GAAP Not specified. IFRS might be used as a benchmark.


Investments in joint ventures

Definition

IFRS A joint venture is defined as a contractual agreement whereby two or more parties undertake an economic activity that is subject to joint control. Joint control is the contractually agreed sharing of control of an economic activity. Unanimous consent of the parties sharing control is required.

LUX BANKING GAAP Joint ventures are not defined as such by the Law.

Types of joint ventures

IFRS Distinguishes between three types of joint ventures: • Jointlycontrolledentities–thearrangementiscarriedonthroughaseparateentity(companyor

partnership); • Jointlycontrolledoperations-eachventurerusesitsownassetsforaspecificproject;and• Jointlycontrolledassets–aprojectcarriedonwithassetsthatarejointlyowned.

LUX BANKING GAAP Only refers to jointly controlled entities.

Jointly controlled entities

IFRS Either the proportionate consolidation method or the equity method is allowed in the consolidated financial statements. Proportionate consolidation requires the venturer’s share of the assets, liabilities, income and expenses to be combined on a line-by-line basis with similar items in the venturer’s financial statements, or reported as a separate line item in the venturer’s financial statements.

In separate non-consolidated accounts, the entity has a policy choice to carry investments in joint ventures either at cost or in accordance with IAS 39 (i.e. at fair value with fair value changes through other comprehensive income).

LUX BANKING GAAP A joint venture can be either proportionally consolidated or equity accounted in the consolidated financial statements. For statutory non-consolidated accounts, the entity has a policy choice to carry investments in joint ventures either at cost or under the equity method.

Contributions to a jointly controlled entity

IFRS A venturer that contributes non-monetary assets, such as shares or fixed assets, to a jointly controlled entity in exchange for an equity interest in the jointly controlled entity recognises in the income statement the portion of the gain or loss attributable to the equity interests of the other venturers, except when: • Thesignificantrisksandrewardsofthecontributedassetshavenotbeentransferredtothejointly

controlled entity; • Thegainorlossontheassetscontributedcannotbemeasuredreliably;or• Thecontributiontransactionlackscommercialsubstance.

LUX BANKING GAAP Not specified. However, in practice the exchange of a non-monetary asset between a venturer and a joint venture must be based on fair value with a gain or loss recognised in the venturers’ income statement.

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Jointly controlled operations

IFRS Requirements are similar to jointly controlled entities without an incorporated structure. A venturer recognises in its financial statements: • Theassetsthatitcontrols;• Theliabilitiesitincurs;• Theexpensesitincurs;and• Itsshareofincomefromthesaleofgoodsorservicesbythejointventure.

LUX BANKING GAAP Not specified. In practice, the venturer includes assets it controls, liabilities and expenses it incurs and it’s share of income earned.

Jointly controlled assets

IFRS A venturer accounts for its share of the jointly controlled assets and any liabilities it has incurred.

LUX BANKING GAAP Not specified. However proportionate consolidation is acceptable.

references: IFRS: IAS 27, IAS 28, IAS 31, IAS 36, IAS 39, IFRS 5, SIC-12, SIC-13. LUX BANKING GAAP: Art. 18, 76, 77 to 103,107.

recent developments

Exposure Draft 9, Joint arrangementsIn September 2007 the IASB issued Exposure Draft 9, Joint Arrangements, which would amend the existing provisions of IAS 31. The exposure draft’s core principle is that parties to a joint arrangement recognise their contractual rights and obligations arising from the arrangement. The exposure draft therefore focuses on the recognition of assets and liabilities by the parties to the joint arrangement. The scope of the exposure draft is very similar to IAS 31. That is, unanimous agreement is required between the key parties that have the power to make financial and operating policy decisions for the joint arrangement.

Exposure Draft 9 proposes two key changes. The first is the elimination of proportionate consolidation for a jointly controlled entity. This is expected to bring improved comparability between entities by removing the policy choice. The elimination of proportionate consolidation will have a fundamental impact on the income statement and statement of financial position for some entities. Entities that currently use proportionate consolidation to account for jointly controlled entities may need to account for many of the latter by using the equity method. These entities will replace the line-by-line proportionate consolidation of the income statement and statement of financial position by a single net result and a single net investment balance.

The second change is the introduction of a dual approach to the accounting for joint arrangements. Exposure Draft 9 originally carries forward—with modification from IAS 31—the three types of joint arrangement, each type having specific accounting requirements. The first two types are Joint Operations and Joint Assets. The description of these types and the accounting for them is consistent with Jointly Controlled Operations and Jointly Controlled Assets in IAS 31. In May 2009, the Board reached a tentative decision to merge Joint Operations and Joint Assets into a single type of joint arrangement called Joint Operations. The remaining type of joint arrangement is a Joint Venture, which is accounted for by using equity accounting. A Joint Venture is identified by the party having rights to only a share of the outcome of the joint arrangement - for example, a share of the profit or loss of the joint arrangement. The key change is that a single joint arrangement may contain more than one type - for example, Joint Assets and a Joint Venture. Parties to such a joint arrangement account first for the assets and liabilities of the Joint Assets arrangement and then use a residual approach to equity accounting for the Joint Venture part of the joint arrangement.

Exposure Draft 10, Consolidated financial Statements The IASB initiated its project on consolidated financial statements with the objective of publishing a single standard on consolidation to replace the consolidation requirements in IAS 27, Consolidated and Separate Financial Statements and SIC-12 Consolidation – Special Purpose Entities. The main objectives of the project are to improve the definition of control and related application guidance so that a control model can be applied to all entities, and to improve the disclosure requirements about consolidated and unconsolidated entities. An exposure draft was issued in December 2008.

In addition to the proposals in this exposure draft, the Board is also reviewing, in a separate project, its requirements for the derecognition of financial instruments. The derecognition of financial instruments sometimes involves the use of structured entities. Therefore, the projects on consolidation and derecognition of financial instruments are closely related in those circumstances. The Board would have preferred to publish exposure drafts for these projects at the same time. However, in response to the wide demand for a revised consolidation standard, the Board decided not to delay publication of the consolidation exposure draft. The Board published its exposure draft on the recognition of financial instruments in March 2009.


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Types

IFRS A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses. A business is defined as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, increased share prices or other economic benefits to investors. A business generally consists of inputs, processes applied to those inputs, and resulting outputs that are, or will be, used to generate revenues. If goodwill is present in a transferred set of activities and assets, the transferred set is presumed to be a business.

If a group of acquired assets is not accompanied by any associated processes and outputs, the acquired group is not a business and shall be recognised as a group of assets.

IFRS 3 (revised) excludes from its scope business combinations involving entities under common control and formation of joint ventures.

All business combinations within the scope of IFRS 3 (revised) are accounted for as acquisitions and purchase method of accounting applies.

LUX BANKING GAAP The Law requires acquisition accounting for subsidiaries, but it allows also “merger accounting” or “uniting of interest” to be used when the parent holds at least 90% of the nominal values of the shares in the subsidiary and the arrangement does not include a cash payment of more than 10% of the nominal value of the shares.

Acquisitions

Identification of the acquirer

IFRS The acquirer is the combining entity that obtains control of the acquiree. Guidance in IAS 27 (revised) shall be used. In some business combinations, the acquirer is the entity whose entity interests have been acquired, and the issuing entity is the acquiree (reverse acquisitions). In reverse acquisitions, consolidated financial statements should be issued under the name of the legal parent but described in the notes as a continuation of the legal subsidiary’s financial statements.

LUX BANKING GAAP Similar to IFRS. Although reverse acquisition accounting is not defined in the Law, the IFRS principles regarding control have been introduced in the Law through the law of 16 March 2006 and the same treatment shall be applied.

Date of acquisition

IFRS The date on which the acquirer obtains control over the acquired entity or business.

LUX BANKING GAAP Not specified. IFRS may be used as a benchmark.

Business combinations

Preliminary note: the IFRS guidance described in this section is based on IFRS 3 (revised) as adopted by the EU on 12 June 2009. IFRS 3 (revised) is applied prospectively to business combinations occurring in the first annual period beginning on or after July 1, 2009. It can be applied early, but only to an annual period beginning on or after June 30, 2007. Retrospective application to earlier business combinations is not permitted unless it is being applied in conjunction with a first-time adoption of IFRS.


Consideration transferred

IFRS Consideration transferred is the sum of the acquisition date fair values of the assets transferred, the liabilities incurred by the acquirer to the former owners of the acquiree and the equity interests issued by the acquirer to the former owners. It shall include all forms of consideration (transferred) such as cash, other assets, business or subsidiaries of the acquirer, deferred and contingent considerations, equity instruments, options, warrants and replacement share-based awards.

IFRS 3 (revised) lists some elements that shall be excluded from the consideration transferred, such as payments made at the time of acquisition for transaction costs and costs to issue debt or equity, settlement of pre-existing relationships, remuneration for future employee services or transactions for paying the acquirer’s acquisition in costs. These elements shall be expensed as incurred.

LUX BANKING GAAP Not specifically addressed by the Law. In practice, transaction costs are included in the acquisition cost so that they may be recognised as part of the initial goodwill. There is no guidance on contingent consideration or other consideration transferred so that IFRS treatment may be used as a benchmark.

Recognition and measurement of identifiable assets and liabilities acquired Both IFRS and LUX BANKING GAAP require separate recognition, by the acquirer, of the acquiree’s identifiable assets, liabilities and contingent liabilities (contingent liabilities are however not recognised under LUX BANKING GAAP) that existed at the date of acquisition. These assets and liabilities are recognised at fair value (or at their predecessor’s value under LUX BANKING GAAP) at the date of acquisition. The two Frameworks apply different criteria to the recognition of intangible assets and restructuring provisions.

Asset and liability recognition

IFRS Identifiable assets acquired and liabilities assumed are recognised if the definition of assets and liabilities is met at the date of acquisition and they are part of what was exchanged in the business combination. Identifiable assets and liabilities assumed are measured at fair value. Some exceptions to these recognition and measurement rules apply to contingent liabilities (recognised at fair value although not meeting all recognition criteria for liabilities), income taxes (measured in accordance with IAS 12), employee benefits (measured in accordance with IAS 19), indemnification assets (recognised by the acquirer at the same time and on the same basis as the indemnified item is recognised as a liability of the acquiree), reacquired rights previously granted to the acquiree to use an asset such as franchise agreements (measured based on market rates and conditions at the acquisition date), share-based payment awards of the acquiree (measured in accordance with IFRS 2) and assets held for sale (measured in accordance with IFRS 5).

Contracts should be re-assessed for conditions existing at acquisition date except for insurance and leases for which classification is made on the basis of the contractual terms and other factors at the inception of the contract.

LUX BANKING GAAP To the extent feasible, the difference between the acquisition cost and the net assets acquired is first allocated to the revaluation of assets or liabilities if carried at a lower amount. In practice, pre-business combinations book values are often used. Contingent liabilities are not recognised separately under LUX BANKING GAAP.

Restructuring provisions

IFRS The acquirer may recognise restructuring provisions as part of the acquired liabilities only if the acquiree has an existing liability at the acquisition date for restructuring recognised in accordance with IAS 37, Provisions, Contingent liabilities and Contingent Assets.

LUX BANKING GAAP The Law states that “account must be taken of all risks which have risen in the course of the financial year or of a previous year, even if such risks become apparent only between the date of the statement of financial position and the date on which it is drawn up”. The Law does not limit the type of expenses nor is it necessary to make a public announcement of a restructuring plan.

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Non-controlling interests

IFRS Where an investor acquires less than 100% of a subsidiary, the parent has the option, on a transaction-by-transaction basis, to measure non-controlling, interests at the value of their proportion of identifiable assets and liabilities (partial goodwill approach) or at full fair value (full goodwill approach).

LUX BANKING GAAP No goodwill will be attributed to the non-controlling interest when applying the cost method but the fair value method requires the consideration of goodwill.

Goodwill Goodwill arises as the difference between the cost of the acquisition and the acquirer’s share of fair value of identifiable assets, liabilities and contingent liabilities acquired. Purchased goodwill is capitalised as an intangible asset.

IFRS Goodwill is not amortised but reviewed for impairment annually, and when indicators of impairment arise, at the Cash-Generating-Unit (CGU) level, or group of CGUs, as applicable. CGUs may be aggregated for purposes of allocating goodwill and testing for impairment. Groupings of CGUs for goodwill impairment testing cannot be larger than a segment.

LUX BANKING GAAP Goodwill is treated as an intangible asset and is amortised through profit or loss. Amortisation is normally five years unless companies can justify a longer useful life.

Impairment

IFRS An impairment review of goodwill is required annually or whenever an indication of impairment exists. The impairment review does not need to take place at the statement of financial position date.

A one-step impairment test is performed. The recoverable amount of the CGU (i.e., the higher of its fair value less costs to sell and its value in use) is compared to its carrying amount. The impairment loss is recognised in operating results as the excess of the carrying amount over the recoverable amount. Impairment is allocated first to goodwill. Allocation is made on a pro rata basis to the CGU’s other assets if the impairment loss exceeds the book value of goodwill.

LUX BANKING GAAP No impairment test is required as goodwill is either written off directly or amortised over a maximum five-year period.

Negative goodwill

IFRS If any excess of fair value over the purchase price arises, the acquirer reassesses the identification and measurement of the acquiree’s identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination. Any excess remaining after reassessment is recognised immediately in the income statement.

LUX BANKING GAAP Negative goodwill can only be recognised in the income statement if it corresponds to the expectation of unfavourable future results of the relevant undertaking, to costs that could incur or to a realised gain. Otherwise, it is recorded as a liability.

Subsequent adjustments to assets and liabilities

IFRS Adjustments against goodwill to the provisional fair values recognised at acquisition are permitted provided those adjustments are made within 12 months of the acquisition date. Adjustments made after 12 months are recognised in the income statement.

LUX BANKING GAAP Not specified.

Business combinations achieved in stages

IFRS When a business combination is achieved in stages, the acquirer should re-measure its previously held interests in the acquiree at its fair value at the date control is obtained, recognising a resulting gain or loss in profit or loss. The prior interest held is deemed to be part of the consideration paid in exchange for the controlling interest.

LUX BANKING GAAP Not specified. In practice, both treatments may be used as a benchmark.


DisclosureIFRS 3 (revised) requires extensive disclosures about business combinations effected during a period. The main requirements are presented in the table below.

Item IfrS LUX BaNKING GaaP

General

Names and descriptions of the acquiree Required. Requires name of head office only but a description would be encouraged.

The acquisition date Required. Required.

The percentage of voting equity instruments acquired Required. Required.

The primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree

Required. Not specified.

Goodwill

Qualitative descriptions of the factors comprising goodwill Required. Not specified.

Total amount of goodwill expected to be tax deductible Required. Not specified.

For each business combination of the period (or in aggregate for business combinations that are individually immaterial but collectively material):• Grossamountofgoodwillandaccumulatedimpairmentlossesatthe

beginning of the period;• Additionalgoodwillrecognisedduringtheperiod;• Goodwillincludedinadisposalgroupclassifiedasheld-for-saleinaccordance

with IFRS 5;• Goodwillderecognisedduringtheperiod;• Impairmentlossesrecognisedduringtheperiod;• Netexchangedifference;• Anyotherchangesinthecarryingamount;• Grossamountofgoodwillandaccumulatedimpairmentattheendofthe

period.


Amount of goodwill not allocated to cash-generating units and reasons thereof Required. Not specified.

All IAS 36-Impairment of Assets, disclosure requirements regarding impairment of goodwill


Consideration transferred

For each business combination of the period (or in aggregate for business combinations that are individually immaterial but collectively material), the fair value of the consideration transferred, in total and by each major class, such as:• Cash;• Tangible/intangibleassets;• Liabilitiesincurred;• Equityinterests(incl.methodofdeterminingtheirfairvalue);• Detailsofcontingentconsiderationandofindemnificationassets,incl.

description of the arrangements and basis of determination of the amount of any payment;

• Anychangesinthepreviouslyrecognisedamountsofcontingentconsideration;

• Anychangesintheundiscountedrangeofoutcomesforcontingentconsideration and reasons for it;

• Valuationtechniquesandkeymodelinputsusedtomeasurecontingentconsideration.


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Identifiable assets and liabilities acquired

For each business combination of the period (or in aggregate for business combinations that are individually immaterial but collectively material), the amounts recognised for each major class of the acquiree’s net assets and liabilities


Summary of pre-acquisition IFRS amounts of net assets and liabilities acquired with separate disclosure of cash equivalents


For contingent liabilities assumed:• Descriptionofthenatureoftheobligationandexpectedtimingofoutflow;• Uncertaintiesontheamountandtimingofoutflow,andmajorassumptions

about future events included in the liability’s measurement;• Amountofanyexpectedreimbursement(incl.thosenotrecognised).


For unrecognised contingent liabilities, the reasons why they cannot be estimated reliably together with:• Estimateofthefinancialeffects;• Indicationoftheuncertaintiesrelatingtotheamountandtimingofanyoutflow;• Possibilityofanyreimbursement.


Post-acquisition activities and post-business combinations

Amount of the acquiree’s post-acquisition revenue and profit or loss included in the acquirer’s profit or loss


Amount and explanation of any gain or loss recognised in a period that:• Relatestoidentifiableassetsandliabilitiesinabusinesscombinationthatwas

effected in the current or a previous period;• Isofsuchsize,natureorincidencethatdisclosureisrelevanttoan

understanding of the combined entity financial performance.


Other disclosures

Annual pro forma figures, as if the business combinations had been effected at the beginning of the period for:• Thecombinedentity’srevenue;• Thecombinedentity’sprofitorloss.


If the initial accounting for a business combination is incomplete and still contains provisional figures:• Thereasonswhyinitialaccountingisincomplete;• Theassets,liabilities,equityinterestsoritemsofconsiderationwhere

accounting is incomplete;• Thenatureandamountofmeasurementperiodadjustmentsrecognisedinthe

period.


All information disclosed shall also cover post-statement of financial position business combinations and include comparative figures


Summary of fair value and pre-acquisition IFRS amounts of assets and liabilities acquired with separate disclosure of cash equivalents

Required unless impractical.

Not specified.

Provisions for terminating or reducing activities of acquiree Required, subject to meeting IAS 37 recognition criteria.

Not specified.

Effect of acquisition on the financial position at the statement of financial position date and on the results since the acquisition

Required unless impractical.

Not specified.

Initial purchase accounting not yet finalised. If the purchase price had not been finalised at the date of issue of the financial statements, this and the reasons are disclosed. Adjustments made to initial allocations in subsequent periods are also to be disclosed

Required. Not specified but the circumstance should be disclosed to provide a true and fair view.



Details of amounts allocated to intangible assets including total amounts, amortisable/non-amortisable, residual values and amortisation period by assets


Pro-forma income statement including comparatives Not required; however, the revenue and profit or loss for the period is disclosed as though the acquisition date had been the beginning of that period, unless impractical.

Not specified.

accounting for uniting of interestsIFRS prohibits the use of this method of accounting if the transaction meets the definition of a combination and is within the scope of the relevant standard. Under LUX BANKING GAAP it is very rare to account for a business combination as a uniting of interests. A uniting of interests only applies when an acquirer cannot be identified. Control must not pass from one entity to another; the parties must come together in substance to create a new reporting entity and to share in its future risks and benefits.

Pooling (uniting) of interest method Under LUX BANKING GAAP, the uniting of interests does not involve an acquisition but a continuation of the business that existed before the transaction. The financial statements of the combining parties are simply added together. The combined assets, liabilities and reserves are recognised at their existing carrying amounts (after booking of the adjustments necessary to conform to the accounting policies and practices). The results are combined from the earliest year reported and comparatives are restated. No goodwill is recognised on the transaction; any difference arising is adjusted against a reserve. Expenses relating to a uniting of interests are recognised in the income statement in the period in which they are incurred.

Business combinations involving entities under common control

IFRS Does not specifically address such transactions. Entities should develop and apply consistently an accounting policy; management can elect to apply purchase accounting or the pooling-of-interests method to a business combination involving entities under common control. The accounting policy can be changed only when the criteria in IAS 8, Accounting policies, Changes in Accounting Estimates and Errors are met.


references: IFRS: IAS 8, IAS 27, IAS 36, IAS 37, IFRS 3. LUX BANKING GAAP: Art.88, 89, 100, 101.

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Revenue

Definition

IFRS Income is defined in the Framework as including revenues and gains. The standard on Revenue Recognition defines revenue as the gross inflow of economic benefits during the period arising from the ordinary activities of an enterprise when the inflows result in an increase in equity, other than increases relating to contributions from equity participants.

LUX BANKING GAAP No specific definition in the Law of income. In practice, it includes revenues and realised gains.

revenue recognition

MeasurementBoth Frameworks require measurement of revenues at the fair value of the consideration received or receivable. This is usually the amount of cash or cash equivalents received or receivable. Discounting to a present value is required under IFRS where the inflow of cash or cash equivalents is deferred, but not under LUX BANKING GAAP.

Revenue recognition

IFRS There is a standard on revenue recognition that describes specific criteria for the sale of goods, the rendering of services and interest, royalties and dividends. The revenue recognition criteria common to each of these are the probability that the economic benefits associated with the transaction will flow to the entity, and that the revenue and costs can be measured reliably. Additional recognition criteria apply to revenue arising from the sale of goods. IFRS requires the seller to have transferred the significant risks and rewards of ownership to the buyer and neither retained management involvement in, nor control over, the goods. Revenue from the rendering of services is recognised by reference to the state of completion of the transaction at the statement of financial position date. Interest revenue is recognised on a basis that takes into account the asset’s effective yield. Royalties are recognised on an accrual basis, dividends are recognised when the shareholder’s right to receive payment is established.

LUX BANKING GAAP General measurement rules require accrual accounting basis for revenues and charges and the general principle of prudence states that only realised profits at statement of financial position date shall be recorded. All income relating to the current year must be accounted for whether or not paid. Revenue from the rendering of services can be recognised using either the completion method (if final result can be accurately estimated) or the completed contract method. The method applied should be defined in the notes to the financial statements.

Fee income

IFRS IAS 18 (appendix) considers 3 types of financial fee income:• Commissionswhichareanintegralpartoftheeffectiveyieldofafinancialinstrument,suchasloan

commitment fees when the credit is drawn. These commissions are part of interest income, which is accrued on the basis of the effective interest method;

• Commissionswhichareearnedwhenservicesarerendered,suchascreditmaintenancefeesorcustodian fees;

• Commissionswhichareearneduponexecutionofasignificantact,suchasarrangementfees.Theseare immediately recognised as income when the significant act is rendered and the entity has no further obligation to service an asset or to provide other services.

LUX BANKING GAAP Not specified. Practice is similar to IFRS except that commissions which are an integral part of the effective yield of a financial instrument under IFRS are expensed as they occur.

references: IAS 18. LUX GAAP: art 43 to 51.

recent developments

Exposure Draft, revenue recognitionOn 24 June 2010, the FASB and IASB issued an exposure draft proposing a new revenue recognition model that could fundamentally alter the way entities across a variety of industries recognise revenue. The proposal is an output of the boards’ joint efforts to develop a converged revenue recognition standard based on the same principles. A key objective is to increase the consistency of revenue recognition for similar contracts, regardless of industry. The proposed model requires a contract-based approach that focuses on the assets and liabilities that are created when an entity enters into and performs under a contract.

The proposed model requires that revenue is recognised when an entity satisfies its obligations to its customer (performance obligations). The proposal defines a performance obligation as an enforceable promise in the contract that includes both explicit and implicit promises to transfer goods and services to a customer. Performance obligations are satisfied when control of a good or service transfers to the customer, which is when the customer is able to use, and receive benefits from, the good or service.

Revenue is measured based on the transaction price, which is the amount the customer promises to pay in exchange for goods or services. The transaction price will include variable or contingent consideration when such amounts can be reasonably estimated, which is a fundamental change from most current practice. In those cases, the transaction price is measured using a probability-weighted estimate of the consideration expected to be received. The transaction price should also reflect the customer’s credit risk by recognising only a probability-weighted estimate of the expected receipts and the impact of the time value of money, when material. The proposal will generally require greater use of estimates than under existing guidance.

The proposed model requires the transaction price to be allocated to performance obligations based on relative standalone selling prices. Other allocation methods used under existing guidance will not be allowed. The best evidence of the standalone selling price is the price of a good or service when the entity sells it separately. The selling price is estimated if a standalone selling price is not available.

Performance obligations are not re-measured after the inception of the contract unless the transaction price changes. For example, estimates of the transaction price could change particularly when there is variable consideration. The proposed model requires an on-going assessment of the costs expected to satisfy outstanding performance obligations. If the direct costs exceed the allocated transaction price related to a performance obligation, a loss is recorded immediately.The new model will require more extensive disclosures than are currently required under US GAAP and IFRS. These disclosures will focus on qualitative and quantitative information, and the significant judgments and assumptions made in measuring and recognising revenue.

The proposal requires full retrospective application upon adoption, meaning that an entity must apply the model to all contracts in existence in any of the periods presented (even for contracts completed before the year of adoption). The exposure draft does not propose a specific effective date. We anticipate the final standard to have an effective date no earlier than 2014, given the proposed retrospective application of the new model.


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Expenses

Definition

IFRS Expenses are defined in the Framework to include losses. Expenses are decreases in economic benefits that result in a decrease in equity.

LUX BANKING GAAP Expenses are not specifically defined in the Law.

Interest expense

IFRS Interest expense is recognised on an accrual basis. When interest expense includes a discount or premium arising on the issue of a debt instrument, the discount or premium is amortised using the effective interest rate method. The effective interest rate is the rate that discounts the estimated future cash payments through the expected life of the debt instrument to the carrying amount of the debt instrument.

LUX BANKING GAAP Interest expense is recognised on an accrual basis. Discount or premium has to be amortised on a straight-line basis or using the effective yield method.

Expense recognition

Employee benefits - pensions Both frameworks require the cost of providing these benefits to be recognised on a systematic and rational basis over the period during which employees provide services to the entity. Both frameworks separate pension plans into defined contribution plans and defined benefit plans, but accounting for defined benefit plans under IFRS is very different than under Lux Banking GAAP.

Defined contribution plansDefined contribution plans are post-employment benefit plans that require the entity to pay fixed contributions into a Fund (the Fund can either be a group insurance policy or a pension fund in favour of the employees). The entity is under no legal or constructive obligation to make further contributions to the fund even if losses are incurred. Risks attributable to the plan assets rest with the employee. Both frameworks require pension cost to be measured as the contribution payable to the fund on a periodic basis. Under IAS 19, Employee Benefits, a careful analysis of all the terms and conditions of the plan, including its legal standing, is performed to determine whether the substance of the plan is that of a defined contribution plan or a defined benefit plan.

Defined benefit plansDefined benefit plans oblige the employer to provide defined post-employment benefits to their employees. The risks associated with plan assets rest with the employer.


Item IfrS

Determination of pension and other post-retirement obligation and expense

Projected unit credit actuarial method used.

Discount rate for obligations Based on market yields for high-quality corporate bonds. Government bond yields used when there is no deep market in high-quality corporate bonds.

Recognition of asset or

liability in respect of a

defined benefit plan

The amount recognised as a defined benefit asset (or liability) is the present value of the defined benefit obligation less the fair value of plan assets, plus or minus actuarial

Gains and losses not yet recognised as a result of the application of the ‘corridor’ approach (see below) and unrecognised past service cost.

Statement of financial position asset limitation

Asset limited to the lower of: (a) the asset resulting from applying the standard; and (b) the total of any unrecognised actuarial losses and past-service cost, and the present value of any available refunds from the plan or reduction in future contributions to the plan.

Valuation of plan assets Measured at fair value or using discounted cash flows if market prices unavailable.

Recognition of actuarial gains

and losses

Recognised immediately or amortised into profit or loss over expected remaining working lives of participating employees.

At a minimum, a net gain/loss in excess of 10% of the greater of the defined benefit obligation or the fair value of plan assets at the beginning of the year is amortised over expected remaining working lives (the ‘corridor’ method). Note that this corridor method will be removed in the amendment of IAS19.

An entity can adopt a policy of recognising actuarial gains and losses in full in the period in which they occur, and recognition may be outside of the income statement as other comprehensive income “OCI”. Amounts recognised through OCI are not subsequently recognised in the income statement.

Bases of charge to income

statement

The expense will be made up of service cost, interest cost, expected return on assets, recognised actuarial gains/losses, recognised past service costs, curtailment or settlement impacts and any impact of the asset ceiling. Actuarial gains/losses and the impact of the asset ceiling will be recognised either in the OCI or the income statement depending on the chosen policy for actuarial gains/losses.

IFRS does not prescribe where in the income statement each element of pension expense is recognised but requires disclosure of the line item in which each component is recorded.

Past-service cost Positive and negative past-service cost are recognised in the income statement over the remaining vesting period. Where benefits have already vested, past-service cost is recognised immediately.

Multi-employer plans If it is a defined benefit plan, it is accounted for as such, unless sufficient information is not available. If there is a contractual agreement between the multi-employer plan and its participants, and the plan is accounted for as a defined contribution plan, the asset or liability that arises from the contractual agreement and the resulting income or expense in profit or loss are recognised.

Subsidiary’s defined benefit

pension plan forming part of

a group plan

Plans with participating entities under common control are not multi-employer plans. If there is a contractual arrangement between the subsidiary and the parent, the subsidiary accounts for the benefit costs on that basis; otherwise, the contribution payable for the period is recognised as an expense, except for the sponsoring employer, which must apply defined benefit accounting for the plan as a whole.

Curtailment definition A curtailment occurs either when an entity is demonstrably committed to making a material reduction in the number of employees covered by the plan or when it amends the terms of the plan such that a material element of future service by current employees will no longer qualify for benefits, or will only qualify for reduced benefits.

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Item LUX BaNKING GaaP

Pension costs The Luxembourg Pension Law gives the definitions of defined contribution and defined benefit plans but the Banking Accounting Law does not specify requirements concerning the measurement of employee benefits. In practice, under LUX BANKING GAAP, pension costs under a defined contribution plan are measured as the contribution payable to the Fund. For a defined benefit plan that is externally financed (group insurance or pension fund), expenses equal premiums that need to be paid to the insurance company or into the pension fund. No pension liability remains in the accounts, except for unpaid premiums, if any. In case of a defined benefit book reserved plan (internally financed plan), expenses are the amounts needed to set up the necessary book reserves. The level of provisions related to a defined benefit plan (whether or not it is externally financed) has to comply with minimum levels as imposed by Luxembourg regulations.

Share-based payment transactions

Recognition

IFRS The fair value of shares and options awarded to employees is recognised over the period to which the employees’ services relate. The award is presumed to be for past services if it is unconditional and vests immediately. When shares or options are awarded to non-employees in exchange for goods or services, the fair value of those goods or services is recognised when the goods are obtained or as the services are received.

LUX BANKING GAAP Not applicable as recognition is currently not required. Only disclosure is required for stock options granted to directors or senior management.

Employee share-based payment transactions

IFRS For equity-settled share-based payment transactions involving employees, the fair value of employee services received is measured by reference to the fair value of the equity instruments granted with a corresponding increase in equity. If the equity-settled share-based payment does not vest because a non-market condition is not met, there is no charge. For cash-settled share based payment transactions, the services received and the liability incurred are measured at the fair value of the liability.


Non-employee share-based payment transactions

IFRS IFRS 2 requires an equity-settled share-based payment transaction with a non-employee to be determined by reference to the fair value of the goods or services acquired by the entity. In rare cases, if the entity cannot estimate reliably the fair value of the goods or services received, it should measure the goods or services received by reference to the fair value of the equity instruments granted. Where the identifiable fair value of the goods or services received is less than the fair value of the equity instruments issued, there is a presumption that unidentifiable goods or services have also been received. Identifiable goods or services acquired in a share-based payment transaction are recognised when they are received. Unidentifiable goods or services are measured at fair value on the grant date.


Employer’s payroll tax payable on exercise of share options by employees

IFRS Employers’ social security liability arising from share-based payment transactions is recognised over the same period or periods as the share-based payment expense.



Termination benefits

IFRS Termination benefits are recorded when the entity is demonstrably committed to the reduction in workforce.

Termination indemnities are generally payable regardless of the reason for the employee’s departure. The payment of such benefits is certain (subject to any vesting or minimum service requirements), but the timing of their payment is uncertain. Termination indemnities are accounted for consistently with pension obligations (ie, including a salary progression element and discounting).

LUX BANKING GAAP Not specified. In practice, the rules for provisions would apply. The related expenses are usually classified as extraordinary expenses based on the best estimate of the amount required to be paid to settle the obligation.

references: IFRS: IAS 19, IAS 37,IAS 39, IFRS 2, IFRIC 14. LUX BANKING GAAP: Art. 31, 51, 56, 60, 61.

recent developments

IaS 19 amendment exposure draftThe exposure draft proposes improvements to the recognition, presentation and disclosure of defined benefit plans.1. Immediate recognition of defined employee benefit cost The IASB proposes to remove from IAS 19 options that allow a company not

to recognise some gains and losses that arise when the company changes its estimate of a defined benefit obligation, or when there are changes in the fair value of its plan assets. Instead, the ED proposes that companies should recognise these items immediately.

2. Presentation The ED proposes a new presentation approach that will improve the visibility

of the different types of gains and losses arising from defined benefit plans. Specifically, the ED proposes that companies should present:• Service cost – in profit or loss;• Finance cost – as part of finance costs in profit or loss; Re-measurement – in

other comprehensive income.3. Disclosure The ED proposes improved disclosure requirements about matters such as:

• The characteristics of the company’s defined benefit plans;• The amounts recognised in the financial statements;• Risks arising from defined benefit plans;• Participation in multi-employer plans.

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Historical cost or fair value

IFRS Historical cost is the main accounting convention. However, IFRS permits the revaluation of intangible assets, property, plant and equipment (PPE) and investment property. IFRS also requires certain categories of financial instruments and certain biological assets to be reported at fair value.

LUX BANKING GAAP Historical cost is also the main accounting convention. Permission to mark-to-market bonds included in the trading portfolio.

IfrS option: Financial instrument and/or investment property may be fair valued subject to prior CSSF authorisation.

Intangible assets

Definition

IFRS An intangible asset is an identifiable non-monetary asset without physical substance controlled by the entity. It may be acquired or internally generated.

LUX BANKING GAAP There is no specific definition in the Law, but different items are to be included in the prescribed statement of financial position caption “Intangible assets”: research and development costs; concessions, patents, licences, trademarks and similar rights and assets; goodwill; formation expenses; payments on account. The movements of those categories of intangible assets have to be disclosed in the notes to the accounts.

Formation expenses

IFRS Formation expenses cannot be capitalised and should be recognised directly as an expense.

LUX BANKING GAAP Formation expenses may be capitalised.

Recognition – separately acquired intangibles

IFRS General IFRS asset recognition criteria apply. The acquired intangible asset is recognised if future economic benefits attributable to the asset are probable and the cost of the asset can be measured reliably.

LUX BANKING GAAP Recognition criteria are less strict than under IFRS.

Recognition – additional criteria for internally generated intangibles

IFRS The costs associated with the creation of intangible assets are classified between the research phase and development phase. Costs in the research phase are always expensed. Costs in the development phase are expensed unless the entity can demonstrate all of the following:

• Thetechnicalfeasibilityofcompletingtheintangibleasset;

• Theintentiontocompletetheintangibleasset;

• Theabilitytouseorsellit;

• Howtheintangibleassetwillgeneratefutureeconomicbenefits-theentityshoulddemonstratetheexistence of a market or, if for internal use, the usefulness of the intangible asset;

• Theavailabilityofadequateresourcestocompletethedevelopment;and

• Theabilitytomeasurereliablytheexpenditureattributabletotheintangibleassetduringitsdevelopment.

Development costs initially recognised as an expense cannot be capitalised in a subsequent period.

LUX BANKING GAAP Costs of research and development are not defined in the Law. No distinction is made between research costs and development costs; in practice only development costs may be capitalised.

assets


Recognition – website development costs

IFRS Costs incurred during the planning stage are expensed. Costs incurred for activities during the website’s application and infrastructure development stages are capitalised, and costs incurred during the operational stage are expensed as incurred.

LUX BANKING GAAP No specific guidance, but the criteria for internally generated assets would apply.

Measurement at initial recognition - acquired intangibles

IFRS Recognised initially at cost. The cost of a separately acquired intangible asset at the date of acquisition is usually self-evident, being the fair value of the consideration paid.


Measurement at initial recognition - internally generated intangibles

IFRS The cost comprises all expenditures that can be directly attributed or allocated to creating, producing and preparing the asset from the date when the recognition criteria are met.

LUX BANKING GAAP Not specified. In practice similar to IFRS.

Subsequent measurement - acquired and internally generated intangibles

IFRS Intangible assets subject to amortisation are carried at historical cost less accumulated amortisation/impairment, or at fair value less subsequent amortisation/impairment. Intangible assets with indefinite useful lives are not subject to amortisation and are carried at historical cost unless impaired. Subsequent revaluation of intangible assets to their fair value is based on prices observable on an active market. Revaluations are performed regularly and at the same time if an entity adopts this treatment (extremely rare in practice).

LUX BANKING GAAP Intangible assets are recorded at cost less accumulated depreciation/impairment.

Amortisation - acquired and internally generated intangibles

IFRS Amortised if the asset has a finite life; not amortised if the asset has an indefinite life, but should be tested at least annually for impairment. There is no presumed maximum life.

LUX BANKING GAAP Formation expenses and research and development costs have to be amortised over a maximum five-year period.

Impairment – acquired and internally generated intangibles

IFRS Impairment reviews are required whenever changes in events or circumstances indicate that an intangible asset’s carrying amount may not be recoverable. Annual impairment tests are required for intangible assets with indefinite useful lives and for assets not yet ready for use. Reversals of impairment losses are allowed under specific circumstances.

LUX BANKING GAAP An impairment test is not defined in the Law. Value adjustments must be made with regard to intangible assets, so that they are valued at the lower figure to be attributed to them at the statement of financial position date if it is expected that the reduction in value will be permanent.

references:IFRS: IAS 36, IAS 38, SIC-32. LUX BANKING GAAP: Art. 20, 54, 55, 56.

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Property, plant and equipment (PPE)

Definition

IFRS Property, plant and equipment are tangible assets that are held by an entity for use in the production or supply of goods or services, for rental to others, or for administrative purposes. They are expected to be used during more than one period.

LUX BANKING GAAP Property, plant and equipment are not defined as such in the Law but listed by items. In practice, they are disclosed as “tangible assets” in the statement of financial position. Movements in tangible assets during the period have to be disclosed in a note, with a distinction between: land and buildings, plant and equipment, other fixtures and fittings, tools and equipment and payments on account and assets under construction.

Recognition

IFRS General IFRS asset recognition criteria apply. PPE is recognised if future economic benefits attributable to the asset are probable and the cost of the asset can be measured reliably.

LUX BANKING GAAP No recognition criteria defined as such. Recognition is based on ownership principle.

Initial measurement

IFRS PPE, at initial measurement, comprises the costs directly attributable to bringing the asset to the location and working condition necessary for it to be capable of operating in the way management intends, including costs of testing whether the asset is functioning in the way the management intends. Start-up and pre-production costs are not capitalised unless they are a necessary part of bringing the asset to its working condition.

The following costs are also included in the initial measurement of the asset:

• Thecostsofsitepreparation;

• Initialdeliveryandhandlingcosts;

• Installationandassemblycosts;

• Costsofemployeebenefitsarisingfromconstructionoracquisitionoftheasset;

• Costsoftestingwhethertheassetisfunctioningproperly;

• Professionalfees;

• Fairvaluegains/lossesonqualifyingcashflowhedgesrelatingtothepurchaseofPPEinaforeigncurrency; and

• TheinitialestimateofthecostsofdismantlingandremovingtheitemandrestoringthesiteonwhichPPEis located.

The entity shall include the borrowing costs incurred during the period of acquiring, constructing or producing the asset for use. Government grants received in connection with acquisition of PPE may be set off against the cost.

LUX BANKING GAAP Costs of internally generated assets, which can be directly attributed to the assets, can be capitalised. A reasonable proportion of the costs which are only indirectly attributable may be added to a certain extent. It is possible to include related borrowing costs. In such case, specific disclosures in the notes are necessary.

Subsequent expenditure

IFRS Subsequent maintenance expenditure is expensed as incurred. Replacement of parts may be capitalised when the recognition criteria are met. The cost of a major inspection or overhaul occurring at regular intervals is capitalised where the recognition criteria are satisfied. The net book value of any replaced component would be expensed at the time of overhaul.

LUX BANKING GAAP Not specified. In practice, expenses which enhance or increase the useful life of the assets are capitalised. Costs to keep the performance of an asset should not be capitalised.


Depreciation

IFRS The depreciable amount of an item of PPE (cost or valuation less residual value) is allocated on a systematic basis over its useful life, reflecting the pattern in which the entity consumes the asset’s benefits. Additionally, an entity is required to depreciate separately the significant parts of PPE if they have different useful lives. Any change in the depreciation method used is treated as a change in accounting estimate, reflected in the depreciation charge for the current and prospective periods. The depreciation methods are reviewed periodically; residual values and useful lives are reviewed at each statement of financial position date.


Subsequent measurement

IFRS PPE is accounted for either under the cost model or the revaluation model. Under the cost model, PPE is carried at cost less accumulated depreciation and impairment.

Under the revaluation model, PPE is carried at fair value at the date of revaluation less depreciation and impairment. The revaluation model should be applied to an entire class of assets. Revaluations have to be kept sufficiently up-to-date to ensure that the carrying amount does not differ materially from fair value.

The increase of an asset’s carrying amount as a result of a revaluation is credited as other comprehensive income, unless it reverses a revaluation decrease for the same asset previously recognised as an expense. In this case it is recognised in the income statement. A revaluation decrease is recognised as other comprehensive expense against any related revaluation surplus for the same asset; any excess is recognised as an expense in the income statement.

LUX BANKING GAAP Cost less accumulated depreciation and impairment losses.

references: IFRS: IAS 16, IAS 23, IAS 36. LUX BANKING GAAP: Art. 21, 52, 53, 56, 57, 64, 65.

Non-current assets held for sale

IFRS A non-current asset is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. The asset should be available for immediate sale in its present condition, and its sale should be highly probable. Specific criteria must be met to demonstrate that the sale is highly probable. Once classified as held for sale, the asset is measured at the lower of its carrying amount and fair value less costs to sell with any loss being recognised in the income statement. These assets are not depreciated or amortised during the selling period. They are presented separately from other assets in the statement of financial position.

LUX BANKING GAAP There is no requirement for assets to be disposed of and there is no requirement to reclassify assets as held for sale. Non-current assets for sale are presented in the appropriate account.

references: IFRS: IFRS 5.

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Leases - lessor accounting Classification The lease classification concepts are quite similar in both Frameworks. Substance rather than legal form principle is followed under IFRS and LUX BANKING GAAP. The overriding principle is to provide a “true and fair view”. The Law indicates that in order to present a true and fair view, the accounts must show the economic substance of transactions, which must take priority over the legal form. The Recueil specifies that if the lease fulfils the following conditions, it is a financial lease: the credit institution leases assets it acquired with the sole intention for leasing and: • The credit institution keeps the ownership of the leased asset; • The leasing period corresponds to the presumed useful life of the asset; and • The contract has a purchase option to acquire the asset at a determined price. All transactions that do not meet this definition are operating leases and the related assets have to be disclosed as tangible assets. A finance lease exists if the agreement substantially transfers all the risks and rewards associated with the ownership of the asset to the lessee. The two Frameworks provide quite similar indicators for determining the classification of a lease. These are presented in the table below.

Indicator IfrS LUX BaNKING GaaP

Primary indicators of a finance lease

Ownership is transferred to the lessee at the end of the lease term. Indicator of a finance lease. Indicator of a finance lease.

A bargain purchase option exists. Indicator of a finance lease. Indicator of a finance lease.

The lease term is for the majority of the leased asset’s economic life. Indicator of a finance lease. Indicator of a finance lease.

The present value of minimum lease payments is substantially equal to the fair value of the leased asset.

Indicator of a finance lease. A present value of 90% is suggested as an indicator of a finance lease.

The leased assets are of a specialised nature such that only the lessee can use them without major modification.

Indicator of a finance lease. Not specified.

Secondary indicators of a finance lease

On cancellation, the lessor’s losses are borne by the lessee. Indicator of a finance lease. Not specified.

Gains and losses from the fluctuation in the fair value of the residual fall to the lessee.


The lessee has the ability to continue the lease for a secondary period at below market rent.



Recognition of the investment in the lease

IFRS The standard requires the amount due from a lessee under a finance lease to be recognised as a receivable at the amount of the net investment in the lease. This will comprise, at any point in time, the total of the future minimum lease payments and the unguaranteed residual value less gross earnings allocated to future periods. Minimum lease payments for a lessor include guarantees from the lessee or a party related to the lessee or a third party unrelated to the lessor. The interest rate implicit in the lease would generally be used to calculate the present value of minimum lease payments. The rentals are allocated between receipt of the capital amount and receipt of finance income to provide a constant rate of return. Initial direct costs are amortised over the lease term. IFRS requires use of the net investment method to allocate earnings; this excludes the effect of cash flows arising from taxes and financing relating to a lease transaction.

LUX BANKING GAAP Receivables are recorded at net book value, which corresponds to the purchase price less accumulated amortisation. The lease payments have to be split between amortisation of the leased asset and interest income from the invested capital.

Operating leases Both Frameworks require an asset leased under an operating lease to be recognised by a lessor as PPE and depreciated over its useful life. Rental income is generally recognised on a straight-line basis over the lease term.

Incentives given

IFRS Requires the lessor to recognise the aggregate cost of incentives given as a reduction of rental income over the lease term on a straight-line basis.

LUX BANKING GAAP Does not provide specific guidance on this issue. IFRS could be used as a benchmark, although in practice incentives are often recognised in the profit and loss account at the beginning of the lease.

references: IFRS: IAS 17, IFRIC 4. LUX BANKING GAAP: Art. 16.

Impairment of non-financial assets

Recognition and measurement

IFRS An entity should assess at each reporting date whether there are any indications that an asset may be impaired. The asset is tested for impairment if there is any such indication. An impairment loss is recognised in the income statement when a non re-valued asset’s carrying amount exceeds its recoverable amount. When the asset is carried at a re-valued amount, the impairment loss is recognised in other comprehensive income to the extent that the impairment loss does not exceed the amount in the revaluation surplus for that same asset and any excess is recognised in the income statement. The recoverable amount is the higher of the asset’s fair value less costs to sell and its value in use. Value in use represents the future cash flows to be derived from the particular asset, discounted to present value using a pre-tax market-determined rate that reflects the current assessment of the time value of money and the risks specific to the asset for which the cash flow estimates have not been adjusted. Fair value less cost to sell represents the amount obtainable from the sale of an asset or cash-generating unit in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal.

LUX BANKING GAAP Not detailed in the Law. In case of a permanent reduction in value of a non-current asset, a value adjustment has to be recorded. For current assets, a reduction in value, whether permanent or not, gives rise to a value adjustment. In practice the replacement cost is an indicator to consider under the prudence principle for potential impairment losses.

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Reversal of impairment loss

IFRS Impairment losses are reversed when there has been a change in economic conditions or the expected use of the asset.


references: IFRS: IAS 36. LUX BANKING GAAP: Art. 56, 58.

Capitalisation of borrowing costs

Recognition

IFRS Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are required to be capitalised as part of the cost of that asset. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale.

LUX BANKING GAAP Interest expenses on capital borrowed to finance the production of fixed assets may be included in the production cost as far as they relate to the period of production. The capitalisation of such interest must be disclosed in the notes.

references: IFRS: IAS 23. LUX BANKING GAAP: Art. 56.

Investment property

Definition

IFRS Investment properties include lands and buildings held in order to earn rentals and/or for capital appreciation. The definition does not include owner-occupied property or property held for sale in the ordinary course of business. However, they include investment properties being constructed or developed.

LUX BANKING GAAP Not separately foreseen in LUX BANKING GAAP. Investment properties should be treated as property, plant and equipment. Amounts included as “land and buildings” used by the credit institution in the normal course of its business are to be disclosed separately.

Initial measurement

IFRS The same cost-based measurement is used for acquired and self-constructed investment property. The cost of a purchased investment property includes its purchase price and any directly attributable costs such as professional fees for legal services, property transfer taxes and other transaction costs. Unlike the previous applicable standard, self-constructed property is directly accounted for as an investment property during the construction phase. Property under finance or operating lease can also be classified as investment property.

LUX BANKING GAAP No specific rules for investment property. Such property is accounted for in the same way as PPE.


IFRS The entity can choose between the fair value model and the cost model for all investment property. When fair value is applied, the gain or loss arising from a change in the fair value is recognised in the income statement. The carrying amount is not depreciated.

LUX BANKING GAAP The depreciated cost model must be applied.

IfrS option: Investment property may be fair valuedsubject to prior CSSF authorisation.


Frequency and basis of revaluations

IFRS The fair value of investment property reflects the market conditions and circumstances as of the statement of financial position date. The standard does not require the use of an independent and qualified appraiser, but the use is encouraged. Revaluations should be made with sufficient regularity that the carrying amount does not differ materially from fair value.

LUX BANKING GAAP Same as IFRS, if the fair value model is authorised by the CSSF.

references: IFRS: IAS 40. LUX BANKING GAAP: Art. 21, 56, 64 quinquies.

financial assets In the aftermath of the financial crisis, the IASB issued a new standard on financial instruments in response to comments received from the G20 and many practitioners. This new standard, IFRS 9, is presently dealing with revised measurement rules for financial assets and liabilities and has not yet been endorsed by the EU. Listed companies in the EU will therefore not be able to adopt IFRS 9 before such endorsement becomes effective but will continue to use the existing EU adopted version of IAS 39.Nevertheless, as non EU listed companies can prepare their financial statements under IFRS (opposed to IFRS as adopted by the EU) and because this IFRS 9 is the basis for important changes to come, we have included a summary of IFRS 9 requirements at the end of this section. Chapter 7bis of the Law introduces the IFRS option to fair value all financial instruments (including derivatives) according to IAS 39, prior to CSSF approval. The LUX BANKING GAAP descriptions below are based on the current non-IFRS accounting principles.

IFRS Outlines the recognition and measurement criteria for all financial assets, defined to include derivatives.

LUX BANKING GAAP The Law distinguishes between financial fixed assets and transferable securities (disclosed as current assets).

Circular 01/32 issued by the CSSF in 2001 introduces detailed presentation requirements of financial instruments. This Circular adopts the recommendation of the European Union 2000/408/CE on publication of information on financial instruments. Definitions of non-derivative financial assets in the Circular are based on the definitions given in IAS 32 (Presentation of financial instruments). Measurement of financial assets is prescribed in the Law, completed with guidance in the Recueil.

Definition

IFRS Defines a financial asset to include:

• Cash;

• Acontractualrighttoreceivecashoranotherfinancialassetfromanotherentityortoexchangefinancialinstruments with another entity under conditions that are potentially favourable; and

• Anequityinstrumentofanotherentity.

Financial assets include derivatives (including many contracts that will or may be settled in the entity’s own equity instruments).

LUX BANKING GAAP Definitions of financial assets is included in circular 01/32 and is based on the definitions under IFRS.

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IFRS IFRS requires an entity to recognise a financial asset when and only when the entity becomes a party to the contractual provisions of a financial instrument. A financial asset is recognised initially at its fair value (which is normally the transaction price), plus, in the case of a financial asset that is not recognised at fair value with changes in fair value recognised in the income statement, transaction costs that are directly attributable to the acquisition of that asset.

LUX BANKING GAAP Does not prescribe any specific criteria for recognition of financial assets. Recognition is mainly based on the ownership criteria and initial measurement is at purchase price, including transaction costs.

The following table outlines the classification and measurement requirements for various financial assets under IAS 39 and LUX BANKING GAAP.

Classification IfrS LUX BaNKING GaaP

Financial assets at fair value through profit or loss

Two sub-categories: financial assets held for trading (see below), and those designated to the category at inception. Any financial asset may, on initial recognition, be classified at fair value through profit or loss provided it meets certain criteria (fair value option).

Irrevocable decision to classify a financial asset at fair value, with changes in fair value recognised in the income statement, provided it results in more relevant information because either: a) it eliminates or significantly reduces a measurement or recognition inconsistency; b) a group of financial assets, financial liabilities or both is managed and performance is evaluated on a fair value basis; or c) the contract contains one or more substantive embedded derivatives.

Only trading category exists. See below.

Held-for-trading financial assets

Debt and equity securities held for sale in the short term. Includes non-qualifying hedging derivatives.

The intention should be to hold the financial asset for a relatively short period, or as part of a portfolio for the purpose of short-term profit- taking. Subsequent measurement at fair value. Changes in fair value are recognised in the income statement.

Similar to IFRS. Must be traded on a market whose liquidity can be assumed to be certain, and market price must be available at anytime to third parties. Subsequent measurement at the lower-of-cost or market value. Mark-to-market value only possible for fixed-income securities.Derivatives are not dealt with in the Law. The general principle of accounting for all foreseeable liabilities and potential losses, which have arisen in the course of the financial year, is applicable to derivatives. Furthermore, the total amount of any financial commitment that is not included in the statement of financial position, as far as they are significant for the understanding of the financial position, have to be disclosed in the notes to the accounts.


Classification IfrS LUX BaNKING GaaP

Held-to-maturity investments

Financial assets held with a positive intention and ability to hold to maturity. Includes assets with fixed or determinable payments and maturities. Does not include equity securities, as they have an indefinite life.

An entity should have the “positive intention and ability” to hold a financial asset to maturity, not simply a present intention. When an entity sells more than an insignificant amount of assets (other than in limited circumstances), classified as held to maturity, it is prohibited from using the held-to-maturity classification for two full annual reporting periods (known as tainting rule). The entity should also reclassify all of its held-to-maturity assets as available-for-sale assets. Measured at amortised cost using the effective-yield method.

The held-to-maturity category does not exist as such. The investment portfolio contains securities intended to be held on a long-term basis. Transfers out of this portfolio are permitted under certain conditions. These assets are measured either at cost or at lower-of-cost or market value. Measurement at cost is subject to conditions. Possibility to use both measurement methods for the investment portfolio. Premiums/discounts are generally amortised on a straight-line basis. Effective yield method is possible.

Loans and receivables

Financial assets with fixed or determinable payments not quoted in an active market. May include loans and receivables purchased, provided their intention is similar, but not interests in pools of assets (for example, mutual funds).

Measured at amortised cost using the effective-yield method.

Category as such does not exist. Similar to financial assets presented in the financial statements in the captions loans and advances to credit institutions and to customers. Measured at cost less value adjustments.

Available-for-sale financial assets

Includes debt and equity securities designated as available-for-sale, except those classified as held-for-trading, and those not covered by any of the above categories.

Measured at fair value. Changes in fair value are directly recognised net of tax effects in reserve and recycled to the income statement when sold, impaired or collected. Foreign exchange gains and losses on debt securities are recognised in the income statement.

The structural portfolio is similar to the available-for-sale category but the measurement rules are different: transferable securities not contained in the investment or trading portfolios or purchased for their investment return or yield, or held to set up a particular asset structure or a secondary source of liquidity. Measured at lower-of-cost or market value.

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Reclassification of assets between categories

IFRS Financial assets may be reclassified between categories, albeit with conditions.

More significantly, debt instruments may be reclassified from held for trading or available-for-sale into loans and receivables, if the debt instrument meets the definition of loans and receivables and the entity has the intent and ability to hold for the foreseeable future.

Also, a financial asset can be transferred from held for trading to available-for-sale but only in rare circumstances.

Reclassification is prohibited for instruments where the fair value option is elected.

Reclassifications from the held-to-maturity category as a result of a change of intent or ability are treated as sales and, other than in exceptional circumstances; result in the whole category being tainted. The most common reason for a reclassification out of the category is when the whole category is tainted and has to be reclassified as available for sale for two years. The assets are re-measured to fair value in these circumstances, with any difference recognised in equity.

An instrument may be reclassified into the category where the tainted held-to-maturity portfolio has been “cleansed”. In this case, the financial asset’s carrying value at the date of reclassification is re-characterised and becomes its amortised cost. For financial assets that do not have a fixed maturity, any gains and losses already recognised in equity remain in equity until the asset is impaired or derecognised. For financial assets with a fixed maturity, the gain or loss is amortised to profit or loss over the remaining life of the instrument using the effective yield method.

LUX BANKING GAAP It is possible to reclassify financial assets between categories (trading, structural and investment portfolio). A sale or a transfer out of the investment portfolio into another category has to be duly authorised by the managerial or supervisory bodies of the credit institution. Reclassifications are done at book value at the date of the transfer.

Impairment

IFRS Entities should consider impairment on financial assets except those classified at fair value through profit or loss when there is an indicator of impairment, such as: the deterioration in the creditworthiness of the issuer; an actual breach of contract; a high probability of bankruptcy; the disappearance of an active market because of financial difficulties based on observable data, or in the case of an equity instrument, whether there has been a significant or prolonged decline in the fair value of that investment below its cost. A decline in the fair value of a debt financial instrument below its cost that results from the increase in the risk-free interest rate is not necessarily evidence of impairment. An impairment of a security does not set up a new cost basis.

IFRS generally requires that for financial assets carried at amortised cost, the impairment loss is the difference between the asset’s carrying amount and its estimated recoverable amount (present value of expected future cash flows discounted at the instrument’s original effective interest rate). For financial assets carried at fair value, the recoverable amount is usually based on quoted market prices or, if unavailable, the present value of the expected future cash flows discounted at the current market rate. Any loss that has been deferred in equity is recycled to the income statement on impairment.

LUX BANKING GAAP Value adjustment requirements are less strict than impairment rules under IFRS. Value adjustments can be grouped in three categories:

• Specificvalueadjustmentsonindividualassets(similartotheIFRSrequirements,althoughnotspecifically defined as such);

• Exceptionalvalueadjustmentsmadeonthebasisofareasonableassessmentthatthevaluationshouldbe corrected as the result of a fluctuation in value occurring shortly after the statement of financial position date (for non-current financial assets);

• Valueadjustmentsaccordingtoart.62definedbytheLaw,limitedto4%ofthenetvalueofthefinancialasset and not tax deductible.

LUX BANKING GAAP requires recognition in the income statement immediately upon identification of impairment. Reversals of previous impairments have to be recognised in the income statement. For financial assets measured at the lower-of-cost-or-market, it is permitted, for tax purposes, to maintain a lower book value even if the market value has subsequently increased (Beibehaltungsprinzip).

LUX BANKING GAAP allows a tax-deductible lump-sum provision calculated on financial assets and off-balance sheet positions.


Derecognition

IFRS An entity consolidates any subsidiaries including SPEs before applying the derecognition tests to the consolidated entity. The entity then considers whether it has transferred the contractual rights to the cash flows or entered into a so-called ‘pass-through arrangement’. In such cases, an analysis of the risks and rewards of the asset is required. The entity derecognises the asset if an entity substantially transfers all of the risks and rewards of the ownership of the asset (for example, an unconditional sale of a financial asset). It continues to recognise the asset (the transaction is accounted for as a collateralised borrowing) if it substantially retains all of the risks and rewards of the ownership of the asset. If an entity neither transfers nor substantially retains all of the risks and rewards of the ownership of the asset, it needs to determine whether it has retained control of the asset. Control is based on the transferee’s practical ability to sell the asset. The asset is derecognised if the entity has lost control. If the entity has retained control, it continues to recognise the asset to the extent of its continuing involvement.

The difference between the amount received and the carrying amount of the asset is recognised in the income statement on derecognition. Any fair value adjustments of the assets formerly reported in equity are recycled to the income statement. Any new assets or liabilities arising from the transaction are recognised at fair value.

LUX BANKING GAAP Adopts a more “ownership” approach for derecognition of assets, focusing on whether substantially all of the ownership, the risks and rewards of an asset are retained or transferred by the credit institution. Special rules exist for repurchase agreements.

Disclosures

IFRS IFRS 7 applies to all risks arising from all financial instruments. It requires disclosure of the significance of financial instruments for an entity’s financial position and performance as well as qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk.

The qualitative disclosures describe management’s objectives, policies and processes for managing those risks. The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity’s key management personnel.

LUX BANKING GAAP CSSF Circular 01/32 issued in 2001 details the quantitative and qualitative disclosures to be made by Luxembourg credit institutions in the statutory accounts regarding financial instruments, either in the notes to the accounts or in the Director’s report. It is based on disclosures requirements from IAS 32 before issuance of IFRS 7. Most of those disclosures requirements have been introduced into the Law in 2006.

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DISCLOSUrES IfrS LUX GaaP

Description of financial instruments used

The carrying amount of each category of financial instruments shall be disclosed either on the face of the statement of financial position or in the notes to the accounts. Comprehensive disclosures are specifically required for financial instruments at fair value through profit or loss.

In the instances where the bank did not make use of the IFRS option to fair value financial instruments as referred to in Chapter 7 bis, indication of:• Thefairvalueofeachcategoryofderivative

financial instruments;• Forfinancialassetscarriedatanamountwhich

is higher than their fair value, and for which the bank did not make use of the possibility to record a value adjustment;

• Thefairvalueandthecarryingamountofthesefinancial assets, either disclosed separately for each instruments or adequately grouped;

• Thereasonswhythecarryingvaluehasnotbeen reduced, and in particular why there are reasons to believe that the carrying value will be recovered.

Qualitative disclosures on financial risks and description of strategy in using financial instruments

For each type of risk arising from financial instruments, an entity shall disclose:• Theexposuretotheriskandhow

they arise;• Itsobjectives,policiesandprocessesfor

managing the risk and the methods used to measure the risk.

Banks are required to disclose the objectives and strategies relating to the use of financial instruments. They are also required to describe their risk management policies and practices linked to the trading and banking activities.

Quantitative disclosures on liquidity risk

A maturity analysis for financial liabilities (incl. derivatives) that shows the remaining undiscounted contractual cash outflows shall be given in a liquidity table.

Split of non-trading financial instruments by maturities in terms of carrying amounts.

Fair value disclosures Fair value of all financial instruments should be disclosed in the notes if not presented in the statement of financial position. Comprehensive disclosures are required on fair value of instruments that factors non-market based input.

Fair value of trading financial instruments split by maturities in terms of carrying amounts and fair values if they differ materially from the amounts at which they are included in the accountsSplit by maturity of non-trading derivatives in terms of notional amounts, fair values and category (over-the-counter or exchange traded instruments).

Geographical and economical sector segmentation

Not required by IFRS 7.See also disclosures related to IFRS 8 on operating segments.

Description of credits, other statement of financial position items, commitments and over-the-counter derivatives split by geographical zones and by economic sectors.

Quantitative disclosures on market risks

Banks shall provide a sensitive analysis for each type of market risk to which the entity is exposed, showing how profit or loss and equity would have been affected by changes in the relevant risk variable. Methods and assumptions supporting the sensitivity analysis shall also be disclosed.

Information on market risk may be presented in any of the following forms:• valueatriskinformation;• potentialeffectonfutureearningsofselected

hypothetical changes in market prices and rates;• marketpricemeasure,otherthanthosereferred

to in the above two indents;• analysisoftheaggregatefairvaluesoftrading

instruments.

Quantitative disclosures on credit risk

The banks shall present their maximum exposure to credit risk together with a description of any collateral held or credit enhancement. Information about credit quality of financial assets that are neither past due nor impaired shall also be disclosed. An ageing analysis of past due or impaired financial assets is also required.

The banks shall present their maximum exposure to credit risk together with any collateral held to mitigate this exposure. The maximum exposure for derivative instruments is defined as the replacement cost by reference to capital requirement regulation (Basel 2). Major concentration of credit risk shall be disclosed.

references: IFRS: IAS 39, SIC-12, IFRS 7. LUX BANKING GAAP: Art. 11, 56, 58, Recuei, Chapter 7bis, Recueil, Circular 01/32


recent developments

IfrS 9IFRS 9 ‘Financial instruments’ currently addresses classification and measurement of financial assets. The major changes to existing guidance in IAS 39 are outlined below.

• IFRS 9 replaces the multiple classification and measurement models in IAS 39 with a single model that has only two classification categories: amortised cost and fair value. Classification under IFRS 9 is driven by the entity’s business model for managing the financial assets and the contractual characteristics of the financial assets. A financial asset is measured at amortised cost if two criteria are met: a) the objective of the business model is to hold the financial asset for the collection of the contractual cash flows, and b) the contractual cash flows under the instrument solely represent payments of principal and interest.

Categories Conditions for classification

Financial assets at amortised cost

• Theobjectivesoftheentity’sbusinessmodel is to hold the instrument to collect the contractual cash flows; and

• Thecontractualtermsofthefinancialasset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding.

Financial assets at fair value through OCI

• Onlyfortheequityinstrumentnotheldfor the purpose of trading; and

• Irrevocableelection,atinitialrecognition, to present subsequent changes in Fair value in OCI.

Financial assets at fair value through profit or loss

• Ifnottobemeasured/classifiedatamortised cost;

• Ifnotelectedtobeclassifiedinfinancial asset at fair value through OCI.

• The new standard removes the requirement to separate embedded derivatives from financial asset hosts. It requires a hybrid contract to be classified in its entirety at either amortised cost or fair value. Most embedded derivatives introduce variability to cash flows. This is not consistent with the notion that the instrument’s contractual cash flows solely represent the payment of principal and interest. Most hybrid contracts with financial asset hosts will therefore be measured at fair value in their entirety;

• Two of the existing three fair value option criteria become obsolete under IFRS 9, as a fair value driven business model requires fair value accounting, and hybrid contracts are classified in their entity. The remaining fair value option condition in IAS 39 is carried forward to the new standard – that is, management may still designate a financial asset as at fair value through profit or loss on initial recognition if this significantly reduces an accounting mismatch. The designation at fair value through profit or loss will continue to be irrevocable;

• IFRS 9 prohibits reclassifications except in rare circumstances when the entity’s business model changes; in this case, the entity is required to reclassify affected financial assets prospectively;

• There is specific guidance for contractually linked instruments that create concentrations of credit risk, which is often the case with investment tranches in a securitisation. In addition to assessing the instrument itself against the IFRS 9 classification criteria, management should also ‘look through’ to the underlying pool of instruments that generate cash flows to assess their characteristics. To qualify for amortised cost, the investment must have equal or lower credit risk than the weighted-average credit risk in the underlying pool of instruments, and those instruments must meet certain criteria. If a “look through” is impractical, the tranche must be classified at fair value through profit or loss;

• IFRS 9 classification principles indicate that all equity investments should be measured at fair value. However, management has an option to present in other comprehensive income unrealised and realised fair value gains and losses on equity investments that are not held for trading. Such designation is available on initial recognition on an instrument-by-instrument basis and is irrevocable. There is no subsequent recycling of fair value gains and losses to profit or loss; however, dividends from such investments will continue to be recognised in profit or loss;

• IFRS 9 removes the cost exemption for unquoted equities and derivatives on unquoted equities but provides guidance on when cost may be an appropriate estimate of fair value.

IFRS 9 represents the first milestone in the IASB’s planned replacement of IAS 39. The next steps involve further exploration and field testing of the proposed impairment approach for financial assets, and development of enhanced guidance on hedge accounting. The IASB is also likely to publish a request for views on the FASB comprehensive exposure draft on financial instruments, which is expected to be issued in 2010. The IASB aims to fully replace IAS 39 by mid-2011.

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recent developments

Exposure Draft on amortised Cost and ImpairmentIn November 2009, the International Accounting Standards Board published for public comment an exposure draft on the amortised cost measurement and impairment of financial instruments. The proposals form the second part of a three-part project to replace IAS 39, ‘Financial instruments: Recognition and measurement’, with a new standard, to be known as IFRS 9, ‘Financial instruments’.

The proposed approach is built upon the premise that interest charged on financial instruments includes a premium for expected losses, which should not be included as part of interest revenue/income, and results in an allocation of the initial estimate of expected credit losses over the expected life of the financial asset. The lender will be required to identify the ‘effective interest rate’ (EIR) component at the inception of an instrument that represents compensation for the expected losses. Interest income is recognised over the life of the instrument at the EIR, net of the expected loss component identified at inception. The premium associated with the expected losses is reflected each period as a reduction in the basis of the receivable (effectively a provision for bad debts).

Unlike the incurred loss model currently required under IAS 39, the ECF approach does not wait for evidence that impairment has occurred, but instead requires a continuous assessment of the expected cash flows over the life of the instrument. No impairment losses will be recognised if the original expectations of the expected losses prove accurate. The premium associated with the initial estimate of expected losses will have already reduced the receivable balance to the amount expected to be collected. However, if more losses are expected than originally estimated, an impairment charge will be recognised for the decrease in the expected cash flows. If favourable changes to loss expectations occur, a credit to income will be recognised for the increase in expected cash flows. The approach requires the use of allowance account for credit losses. Direct write-offs are prohibited.The ED sets out robust presentation and disclosure requirements to ensure that users can evaluate the financial effect of interest revenue and interest expense, and the credit quality of financial assets held by the entity. In particular, it requires:

• Presentation of the gross contractual interest revenue, a reduction to gross interest revenue reflecting the portion of initial expected credit losses allocated to the period, and a subtotal for the net (economic) interest revenue;

• Presentation of gains and losses resulting from changes in estimates in relation to financial assets and liabilities measured at amortised cost;

• Reconciliation of changes in credit loss allowance account (with minimum required line items) and the entity’s write-off policy;

• Disaggregation of gains and losses into amounts attributable to changes in credit loss expectations and other factors;

• Comparison between the development of credit loss allowance over time and cumulative write-offs (a loss triangle);

• Explanation of inputs, assumptions and methodology used in determining expected credit losses and changes thereto, sensitivity analysis, and stress testing if performed internally;

• Reconciliation in the movement of non-performing loans (defined as 90 days or more overdue);

• Origination and maturity (vintage) information for financial assets at amortised cost;

• Further qualitative and quantitative disclosures depending on the entity’s specific circumstances.

The IASB recognises that there are significant operational challenges in implementing and applying the ECF approach. Estimating cash flows over the life of the instrument and the complexity of the EIR methodology are expected to be two of the most difficult areas. The IASB is therefore setting up an Expert Advisory Panel to advise the Board on the operational issues surrounding application of the ECF approach and possible practical expedients and to facilitate field testing. The ED has an unusually long exposure period, with comments requested by 30 June 2010. This long exposure period is to facilitate the work of the Expert Advisory Panel. The Expert Advisory Panel will consider both the IASB and FASB impairment models.The FASB impairment model is still under development and both Boards would like the impairment guidance to arrive at similar outcomes. However, a ‘converged’ impairment standard may be a challenge if the broader financial instruments guidance of the IASB and the FASB is not converged.A final IFRS on amortised cost and impairment is expected by mid-2011. The Board expects that the IFRS will not become mandatory until about three years after it is issued.

recent developments

Exposure Draft on Lease accounting – Lessor accountingThe IASB and FASB have proposed a new approach to lease accounting that would significantly change the way entities account for leases. Their exposure drafts, both entitled ‘Leases’, will result in a converged standard that aims to address the weaknesses of existing standards. The key objective is to ensure assets and liabilities arising from lease contracts are recognised in the balance sheet.The boards were unable to agree upon a single lessor accounting model and decided that concerns about the application of each of the two approaches in certain fact patterns could only be addressed through a dual model.• For leases where the lessor retains exposure to significant

risks or benefits associated with the leased asset either during the term of the contract or subsequent to the term of the contract, the ‘performance obligation’ approach would be followed. The lessor recognises the underlying asset and a lease receivable, representing the right to receive rental payments from the lessee, with a corresponding performance obligation, representing the obligation to permit the lessee to use the leased asset.

• For all other leases, the ‘derecognition approach’ would be followed. The lessor recognises a receivable, representing the right to receive rental payments from the lessee and records revenue. In addition, a portion of the carrying value of the leased asset is viewed as having transferred to the lessee and is derecognised and recorded as cost of sales. Similar to lessee accounting, lessors under either approach would also need to estimate the lease term and contingent payments and true-up these estimates as facts and circumstances change.

The proposed model will require more extensive disclosures than are currently required under IFRS and US GAAP. The disclosures focus on qualitative and quantitative information, and on the significant judgments and assumptions made in measuring and recognising lease assets and obligations.Pre-existing leases are not expected to be grandfathered. The boards are proposing the new leasing approach to be applied by lessees and lessors by recognising assets and liabilities for all outstanding leases at the date of the earliest period presented using a simplified retrospective approach.The exposure draft does not propose an effective date. We anticipate the final standard to have an effective date no earlier than 2012.


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Liabilities

Recognition

IFRS A provision is recognised when:

• Theentityhasapresentobligationtotransfereconomicbenefitsasaresultofpastevents;

• Itisprobable(morelikelythannot)thatsuchatransferwillberequiredtosettletheobligation;and

• Areliableestimateoftheamountoftheobligationcanbemade.

A present obligation arises from an obligating event. It may take the form of either a legal obligation or a constructive obligation. An obligating event leaves the entity no realistic alternative to settle the obligation created by the event. If the entity can avoid the future expenditure by its future actions, it has no present obligation and a provision is not recognised.

LUX BANKING GAAP Provisions are intended to cover losses or liabilities the nature of which is clearly defined and which at the date of the statement of financial position are either likely to be incurred or certain to be incurred but uncertain as to their amount or as to the date on which they will arise.

An option has been introduced to also take into account foreseeable risks and potential losses.

Measurement

IFRS The amount recognised as a provision is the best estimate of the expenditure required to settle the present obligation at the statement of financial position date. The anticipated cash flows are discounted using a pre-tax discount rate(s) that reflect(s) current market assessments of the time value of money and those risks specific to the liability if the effect is material. If a range of estimates is predicted and no amount in the range is more likely than any other amount in the range, the “mid-point” of the range must be used to measure the liability.

LUX BANKING GAAP Similar to IFRS but no discounting has to be done. The Law requires a provision not to be higher than the “necessary” amount.

Restructuring provisions

IFRS A present obligation exists only when the entity is “demonstrably committed” to the restructuring. An entity is usually demonstrably committed when there is legal obligation or when the entity has a detailed formal plan for the restructuring. The entity must be unable to withdraw because it has started to implement the plan or announced its main features to those affected (constructive obligation). A current provision is unlikely to be justified if there will be a delay before the restructuring begins, or the restructuring will take an unreasonably long time to complete.

LUX BANKING GAAP Similar to IFRS but less restrictive: i.e., management approval and commitment to the restructuring plan is sufficient.

Contingent asset

IFRS A contingent asset is a possible asset that arises from past events, and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity’s control. An asset is recognised when the realisation of the associated benefit, such as an insurance recovery, is virtually certain.

LUX BANKING GAAP Not defined.

Provisions and contingencies IFRS has a specific standard on accounting for various types of provisions. LUX BANKING GAAP is based on the prudence principle, requiring to take into account all foreseeable liabilities and potential losses. IFRS prohibits recognition of provisions for future costs, including costs associated with the compliance with proposed but not yet effective legislation, while LUX BANKING GAAP allows it in some cases.


Contingent liability

IFRS A contingent liability is a possible obligation whose outcome will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events outside the entity’s control. It can also be a present obligation that is not recognised because it is not probable that there will be an outflow of economic benefits, or the amount of the outflow cannot be reliably measured. Contingent liabilities are disclosed unless the probability of outflows is remote.

LUX BANKING GAAP Operations for which the credit institution has committed to obligations towards third parties and therefore incurs associated risks. They are recorded in the off-balance sheet in the following categories: guarantees and other direct substitutes for credit, acceptances, documentary credits, guarantees by endorsement and counter-guarantees. A credit institution has to present the total amount of contingent liabilities at the end of the balance sheet, disclosing separately acceptances and endorsements, and guarantees and assets pledged as collateral security.

references: IFRS: IAS 37. LUX BANKING GAAP: Art. 31, 37, 51, 61.

Deferred tax

IFRS IFRS requires full provision for deferred tax.

Issue IfrS

General considerations

General approach Full provision.

Basis for deferred tax assets and liabilities Temporary differences - i.e., the difference between carrying amount and tax base of assets and liabilities (see exceptions below).

Exceptions (ie, deferred tax is not provided on thetemporary difference)

Non-deductible goodwill (that which is not deductible for tax purposes) does not give rise to taxable temporary differences.Initial recognition of an asset or liability in a transaction that: (a) is not a business combination; and (b) affects neither accounting profit nor taxable profit at the time of the transaction.Other amounts that do not have a tax consequence (commonly referred to as permanent differences) exist and depend on the tax rules and jurisdiction of the entity.

Measurement of deferred tax

Tax rates Tax rates and tax laws that have been enacted or substantively enacted at the statement of financial position date.Rate used is the applicable rate for expected manner of recovery - e.g., dependent on whether asset is to be used or sold - or a combination of these.

Recognition of deferred tax assets A deferred tax asset is recognised if it is probable (more likely than not) that sufficient taxable profit will be available against which the temporary difference can be utilised.

Discounting Prohibited.

Presentation of deferred tax

Current/non-current Deferred tax assets and liabilities are classified net as non-current on the statement of financial position, with supplemental note disclosure for: (a) the components of the temporary differences, and (b) amounts expected to be recovered within 12 months and more than 12 months of the statement of financial position date.

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Issue IfrS

Specific applications

Unrealised intra-group profits - for example, on inventory Deferred tax recognised at the buyer’s tax rate.

Revaluation of PPE and intangible assets Deferred tax recognised in equity.

Intra-period tax allocation (backwards tracing) Deferred tax is recognised in the income statement unless changes in the carrying amount of the assets are taken to equity. In this case, deferred tax is taken to equity (the follow-up principle).

Foreign non-monetary assets/liabilities when thetax reporting currency is not the functional currency

Deferred tax is recognised on the difference between the carrying amount determined using the historical rate of exchange and the tax base determined using the statement of financial position date exchange rate.

Investments in subsidiaries - treatment of undistributed profit Deferred tax is recognised except when the parent is able to control the distribution of profit and it is probable that the temporary difference will not reverse in the foreseeable future.

Uncertain tax positions While not specifically addressed within IFRS, an entity reflects the tax consequences that follow from the manner in which it expects, at the statement of financial position date, to be paid to (recovered from) the taxation authorities. The tax position is measured using either an expected value approach or a single best estimate of the most likely outcome. The cumulative probability model is not permitted under IFRS.

Share-based compensation If a tax deduction exceeds cumulative share-based compensation expense, deferred tax calculations based on the excess deduction are recorded directly in equity. If the tax deduction is less than or equal to cumulative share-based compensation expense, deferred taxes arising are recorded in income statement. The unit of accounting is an individual award.If changes in the stock price impact the future tax deduction, the measurement of the deferred tax asset is based on the current stock price.

Business combinations - acquisitions

Step-up of acquired assets/liabilities to fair value Deferred tax is recorded unless the tax base of the asset is also stepped up.

Previously unrecognised tax losses of the acquirer A deferred tax asset is recognised if the recognition criteria for the deferred tax asset are met as a result of the acquisition. Offsetting credit is recorded in income statement, not goodwill.

Tax losses of the acquiree (initial recognition) Similar requirements as for the acquirer, except the offsetting credit, are recorded against goodwill.


LUX BANKING GAAP For statutory accounts, no details provided as far as how deferred taxation should be calculated, nor is it a requirement to recognise deferred taxation. The Law states that “the difference between the tax charged for the financial year and for earlier years and the amount of tax already paid or payable in respect of those years, to the extent that this difference is material for purposes of future taxation, should be disclosed in the notes. This amount may also be disclosed in the balance sheet as a separate item”. For consolidated accounts, balance sheet and profit and loss account take into account any difference resulting from the differing valuation methods between mother company and subsidiaries arising on consolidation between the tax chargeable for the financial period and for preceding financial period and the amount of tax paid or payable in respect of those period provided that it is possible that an actual charge to tax will arise within the foreseeable future for one of the undertakings included in the consolidation.

references: IFRS: IAS 12, IFRS 3. LUX BANKING GAAP: Art. 68, 98.

Leases - lessee accounting

Finance leases

IFRS Requires recognition of an asset held under a finance lease (see classification criteria on page 45) with a corresponding obligation for future rentals, at an amount equal to the lower of the fair value of the asset and the present value of the future minimum lease payments at the inception of the lease. The asset is depreciated over its useful life or the lease term if shorter. However, this is only permitted if there is no reasonable certainty of the lessee obtaining ownership of the asset. The interest rate implicit in the lease is normally used to calculate the present value of the minimum lease payments. If the implicit rate is unknown, the lessee’s incremental borrowing rate may be used. Rental payments are allocated between repayment of capital and interest expense. Interest is calculated to give a constant periodic rate of interest on the remaining balance of the liability.

LUX BANKING GAAP Lessee accounting is not specifically addressed by the Law. Therefore finance leases could either be capitalised or expensed.

Operating leases Under IFRS and LUX BANKING GAAP, the rental expense under an operating lease is generally recognised on a straight-line basis over the lease term.

IncentivesA lessor often provides lease incentives to encourage the lessee to renew a lease arrangement. Under IFRS, the lessee recognises the aggregate benefit of incentives as a reduction of rental expense over the lease term. The incentive is amortised on a straight-line basis unless another systematic basis is representative of the pattern of the lessee’s benefit from the use of the leased asset. Under LUX BANKING GAAP, incentives can be amortised or taken into profit and loss account in a single installment at the beginning of the lease.

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Issue IfrS LUX BaNKING GaaP

Finance lease

Profit or loss on sale Deferred and amortised over the lease term. Recognised at the date of sale.

Operating lease

Sale at fair value Immediate recognition. Similar to IFRS.

Sale at less than fair value Immediate recognition unless the difference is compensated by lower future rentals. In such cases, the difference is amortised over the period over which the asset is expected to be used.

Similar to IFRS.

Sale at more than fair value The difference is amortised over the period for which the asset is expected to be used.

Immediate recognition.

references: IFRS: IAS 17, SIC-15. LUX BANKING GAAP: Art. 16.

Sale and leaseback transactions The seller-lessee sells an asset to the buyer-lessor and leases the asset back in a sale and leaseback transaction. Sale and leaseback transactions are not covered specifically in LUX BANKING GAAP. In practice, there are certain differences in the rules on dealing with profits and losses arising on sale and leaseback transactions across the two Frameworks highlighted in the table below.

financial liabilities Chapter 7bis of the Law introduces the IFRS option to record all financial instruments (including derivatives) according to IAS 39, which is subject to CSSF approval. The LUX BANKING GAAP descriptions below are based on the current non-IFRS accounting principles.

DefinitionIFRS defines a financial liability to include a contractual obligation to deliver cash or a financial asset to another entity, or to exchange financial instruments with another entity under conditions that are potentially unfavourable. Financial liabilities include derivatives In LUX BANKING GAAP, the definition of financial liabilities is based on the IFRS definition.


Classification debt vs. equity

IFRS When there is a contractual obligation (either explicit or indirectly through its terms and conditions) on the issuer of an instrument whereby the issuer may be required to deliver either cash or another financial asset to the holder, that instrument meets the definition of a financial liability regardless of the manner in which the contractual obligation may otherwise be settled. The issuer also classifies the financial instrument as a liability if the settlement is contingent on uncertain future events beyond the control of both the issuer and the holder. An instrument that is settled using an entity’s own equity shares is also classified as a liability if the number of shares varies in such a way that the fair value of the shares issued equals the obligation. Same puttable instruments (financial instruments that give the holder the right to put the instrument back to the issuer for cash or another asset) are liabilities. Specific guidance exists when the holder’s right to redemption is subject to specific limits. Preferred shares that are not redeemable, or that are redeemable solely at the option of the issuer, and for which distributions are at the discretion of the issuer, are classified as equity. Preferred shares requiring the issuer to redeem for a fixed or determinable amount at a fixed or determinable future date and for which distributions are not at the discretion of the issuer are classified as liabilities. However, if dividends are discretionary, the instrument is treated as a compound instrument with a debt and equity component. Preferred shares where the holder has the option of redemption and for which distributions are not at the discretion of the issuer are also classified as liabilities; in addition there is an embedded put option that may have to be accounted for separately.

LUX BANKING GAAP When an instrument is not an equity instrument and its provisions include an obligation to transfer economic benefits, then it is classified as a financial liability.

Convertible debt

IFRS “Split accounting” is used for convertible instruments where the conversion is a fixed amount of cash for a fixed number of shares. The proceeds are allocated between the two components; the equity conversion rights are recognised in equity and the liability recognised in liabilities at fair value calculated by discounting at a market rate for a non-convertible debt. Certain embedded derivatives may have to be bifurcated.

LUX BANKING GAAP Not specified, although recognised in practice as a liability.


IFRS There are two categories of financial liabilities: those that are recognised at fair value through profit or loss (includes trading), and all others. Financial liabilities other than those that are incurred for trading purposes can only be designated at fair value through profit or loss provided they meet certain criteria. All other (non-trading) liabilities are carried at amortised cost using the effective interest rate method. Financial liabilities are measured at fair value on initial recognition, which is usually the consideration received plus incremental and directly attributable costs of issuing the debt.

LUX BANKING GAAP No categories of financial liabilities are defined for measurement purposes. The statement of financial position categories comprise: amounts owned to credit institutions and customers, debt evidenced by certificates and subordinated liabilities.

Liabilities are recorded at their reimbursement amount. When the amount repayable on any debt is greater than the amount received, the difference may be shown as an asset and amortised on a straight line basis, no later than the time of the repayment of the debt. The premium can also be recorded in a single installment in the profit or loss account at the beginning of the transaction. When the reimbursement amount is lower than the amount received, the difference shall be accounted for in the profit or loss account at the maturity date or amortised on a straight line basis no later than the maturity date.

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Derecognition of financial liabilities

IFRS A financial liability is derecognised when: the obligation specified in the contract is discharged, cancelled or expires; or the primary responsibility for the liability is legally transferred to another party. A liability is also considered extinguished if there is a substantial modification in the terms of the instrument – for example, if the discounted present value of the new cash flows is different from the old cash flows by at least 10%.

The difference between the carrying amount of a liability (or a portion thereof) extinguished or transferred and the amount paid for it is recognised in the net profit or loss for the period.

LUX BANKING GAAP No specific guidance exists. In practice, a financial liability is derecognised when: the obligation specified in the contract is discharged, cancelled or expires; or the primary responsibility for the liability is legally transferred to another party.

Fund for general banking risks

IFRS In certain jurisdictions, credit institutions may be required or allowed to set aside amounts for potential contingencies or to create prudential provisions intended to cover general banking risks (hidden reserves). Those amounts do not qualify for recognition as provisions under IAS 37. Therefore, a bank recognises such amounts as appropriation of retained earnings.

LUX BANKING GAAP Luxembourg banks are allowed to allocate amounts to a fund for general banking risks. Transfers in and out of the fund for general banking risks are recorded through specific profit and loss accounts (although they are not included in the determination of the taxable profit or loss for the period). Allocation to and reversal from the fund for general banking risks is non-deductible and non-taxable for tax purposes respectively.

Loan commitments

IFRS Loan commitments that cannot be settled net in cash or another financial instrument, that are not designated as financial liabilities at fair value through profit or loss, or that are not subject to the derecognition provisions that do not provide a loan at a below-market interest rate, should be disclosed in the off-statement of financial position. Other loan commitments are within the scope of IAS 39.

LUX BANKING GAAP Commitments are arrangements and irrevocable facilities which could give rise to a credit risk. They are presented in the off-balance sheet. Forward purchase/sale of assets, uncalled amounts on investments, confirmed credits not used and facilities are disclosed in the notes.

references: IFRS: IAS 32, IAS 37, IAS 39, IFRS 7, SIC-16, IFRIC 19. LUX BANKING GAAP: Art. 26, 27, 28, 32, 38, 63, Chapter 7bis.


recent developments

IFRS 9 – Classification and measurement of financial liabilitiesIn October 2010, the IASB has updated IFRS 9, ‘Financial instruments’ to include guidance on financial liabilities and derecognition of financial instruments. The accounting and presentation for financial liabilities and for derecognising financial instruments has been relocated from IAS 39, ‘Financial instruments: Recognition and measurement’, without change, except for financial liabilities that are designated at fair value through profit or loss.

The requirements in IAS 39 regarding the classification and measurement of financial liabilities have been retained, including the related application and implementation guidance. This means that there continue to be two measurement categories for financial liabilities: fair value through profit or loss (FVTPL) and amortised cost. The criteria for designating a financial liability at FVTPL also remain unchanged. Entities are still required to separate derivatives embedded in financial liabilities where they are not closely related to the host contract. The separated embedded derivative continues to be measured at FVTPL, and the residual debt host continues to be measured at amortised cost. The existing application guidance relating to embedded derivatives has also been included in IFRS 9; it will also continue to apply to derivatives embedded in nonfinancial items − for example, foreign currency derivatives embedded in purchase and sales contracts. The requirements in IAS 39 for determining when financial instruments are derecognised from the balance sheet have also been relocated to IFRS 9 without change.

Under the new standard, entities with financial liabilities designated at FVTPL recognise changes in the fair value due to changes in the liability’s credit risk directly in other comprehensive income (OCI). There is no subsequent recycling of the amounts in OCI to profit or loss, but accumulated gains or losses may be transferred within equity. However, if presenting the change in fair value attributable to the credit risk of the liability in OCI would create an accounting mismatch in profit or loss, all fair value movements are recognised in profit or loss. An entity is required to determine whether an accounting mismatch is created when the financial liability is first recognised, and this determination is not reassessed. The mismatch must arise due to an economic relationship between the financial liability and a financial asset that results in the liability’s credit risk being offset by a change in the fair value of the asset. Financial liabilities that are required to be measured at FVTPL (as distinct from those that the entity has designated at FVTPL), including financial guarantees and loan commitments measured at FVTPL, will continue to have all fair value movement recognised in profit or loss. Derivatives such as foreign currency forwards and interest rate swaps, or a bank’s own liabilities that it holds in its trading portfolio, continue to have all fair value movements recognised in profit or loss.

The effective date and transition requirements are consistent with IFRS 9 issued in November 2009 for the classification and measurement of financial assets. That is, IFRS 9 ismandatory for annual periods beginning on or after 1 January 2013. Entities may choose to adopt early, but EU endorsement is not expected before end of 2011.

Exposure Draft on Lease accounting – Lessee accountingThe IASB and FASB have proposed a new approach to lease accounting that would significantly change the wayentities account for leases. Their exposure drafts, both entitled ‘Leases’, will result in a converged standard that aims to address the weaknesses of existing standards. The key objective is to ensure assets and liabilities arising from lease contracts are recognised in the balance sheet.

The proposed model will eliminate off-balance sheet accounting. All assets currently leased under operating leases will be brought onto the balance sheet, removing the distinction between finance and operating leases. The new asset − representing the right to use the leased item for the lease term − and liability − representing the obligation to pay rentals − will be recognised and carried at amortised cost, based on the present value of payments to be made over the term of the lease. The lease term will include optional renewal periods that are ‘more likely than not’ to be exercised. Lease payments used to measure the initial value of the asset and liability will include ‘contingent’ amounts, such as rents based on a percentage of a retailer’s sales or rent increases linked to variables such as the Consumer Price Index (CPI). The proposed model will require lease renewal and contingent rents to be continually reassessed, and the related estimates to be trued up as facts and circumstances change.

Income statement ‘geography’ and timing of recognition will change. Straight-line rent expense will be replaced by depreciation, which will be recognised on a basis similar to similar owned assets, and interest expense, which will be recognised on a basis similar to a mortgage. The proposed model will require more extensive disclosures than are currently required under IFRS and US GAAP. The disclosures focus on qualitative and quantitative information, and on the significant judgments and assumptions made in easuring and recognising lease assets and obligations. Pre-existing leases are not expected to be grandfathered. The boards are proposing the new leasing approach to be applied by lessees and lessors by recognising assets and liabilities for all outstanding leases at the date of the earliest period presented using a simplified retrospective approach. The exposure draft does not propose an effective date. We anticipate the final standard to have an effective date no earlier than 2012.

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Equity instruments

Recognition and classification

IFRS An instrument is classified as equity when it does not contain an obligation to transfer economic resources. Preference shares that are not redeemable, or that are redeemable solely at the option of the issuer, and for which distributions are at the issuer’s discretion, are classified as equity. Only derivative contracts that result in the delivery of a fixed amount of cash, or other financial asset for a fixed number of an entity’s own equity instruments, are classified as equity instruments. All other derivatives on the entity’s own equity are treated as derivatives. Puttable instruments at fair value may be recognised as equity instruments under certain strict conditions, including the fact that these instruments must be the most subordinated class of financial instruments issued by the entity.

LUX BANKING GAAP Subscribed capital includes all amounts which have to be considered, based on the legal form of the entity, as equity subscribed by the shareholders.

Purchase of own shares

IFRS When an entity’s own shares are repurchased, they are shown as a deduction from shareholders’ equity at cost. Any profit or loss on subsequent sale of the shares is shown as a change in equity.

LUX BANKING GAAP Own shares and own corporate units have to be disclosed as an asset and a non-distributable reserve of the same amount has to be set-up. Own shares are recognised at purchase price and are subsequently measured at lower-of-cost or market.

Dividends on ordinary equity shares

IFRS Presented as a deduction in the statement of changes in shareholders’ equity in the period when authorised by shareholders.

LUX BANKING GAAP The distribution of the result of the previous period has to be disclosed in the notes. Interim dividends are presented in shareholders’ equity as a deduction of the result of the period. If the interim dividend is paid after the statement of financial position date, the amount is recorded in “other liabilities” at year-end.

references: IFRS: IAS 32, IAS 39, IFRS 7, SIC-16, IFRIC 19. LUX BANKING GAAP: Art. 22, 34.

Equity


Derivatives

IFRS Specifies rules for the recognition and measurement of derivatives.

LUX BANKING GAAP No general recognition and measurement rules for derivative financial instruments, such instruments have to be recorded according to the prudence principle. Specific rules exist for derivatives whose value changes in response to foreign exchange rates, used for hedging or for trading, and for interest rate swaps hedging fixed-income securities from the investment portfolio.

Definition

IFRS A derivative is a financial instrument: • Whosevaluechangesinresponsetoaspecifiedvariableorunderlyingrate(forexample,interestrate);• Thatrequireslittleornonetinvestment;and• Thatissettledatafuturedate.

LUX BANKING GAAP Similar to IFRS as stated in Circular 01/32.

Initial measurement

IFRS All derivatives are recognised on the statement of financial position as either financial assets or financial liabilities. They are initially measured at fair value on the acquisition date.

LUX BANKING GAAP There is no recognition in the statement of financial position except for premium payments. Derivatives are recorded at nominal value as off balance positions. Extensive disclosure of financial derivative instruments is required.


IFRS Requires subsequent measurement of all derivatives at their fair value, with changes recognised in the income statement, except for derivatives used in cash flow hedges or net investment hedges. However, a derivative that is linked to and should be settled by delivery of an unquoted equity instrument whose fair value cannot be reliably measured is carried at cost less impairment until settlement.

LUX BANKING GAAP Any unrealised loss on trading derivatives has to be recognised in the income statement (prudence principle). Derivatives used for hedging purpose are described below.

Embedded derivatives

IFRS Requires separation (bifurcation) of derivatives embedded in hybrid contracts when the economic characteristics and risks of the embedded derivatives are not closely related to the economic characteristics and risks of the host contract. Option to value certain hybrid instruments to fair value instead of bifurcation the embedded derivative alive is provided in certain cases.

LUX BANKING GAAP Not specified. In practice, hybrid contracts are not separated between embedded derivatives and host contracts.

Derivatives and hedging

Chapter 7bis of the Law introduces the IFRS option to fair value all financial instruments (including derivatives) according to IAS 39, prior to CSSF approval. The LUX BANKING GAAP descriptions below are based on the current non-IFRS accounting principles.

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Criteria for hedge accounting

IFRS Hedge accounting is permitted, provided that an entity meets stringent qualifying criteria in relation to documentation and hedge effectiveness. Documentation of the entity’s risk management objectives and how the effectiveness of the hedge will be assessed is mandatory. Hedge instruments should be highly effective in offsetting the exposure of the hedged item to changes in the fair value or cash flows, and the effectiveness of the hedge is measured reliably on a continuing basis.

A hedge qualifies for hedge accounting if changes in the fair values or cash flows of the hedged item are expected to be highly effective in offsetting changes in the fair value or cash flows of the hedging instrument (prospective test) and “actual” results are within a range of 80% to 125% (retrospective test).

The “short-cut” method that assumes perfect effectiveness for certain hedging relationships involving interest-rate swaps is not allowed.

LUX BANKING GAAP Hedging transactions for foreign exchange risk are defined as transactions which are entered into in order to reduce or eliminate the risk arising from changes in foreign currency exchange rates to which an asset, a liability or an off-balance sheet item or a homogenous group of such items is exposed to.

Documentation of the hedge relationship has to be done at the beginning of the hedging transaction. There are no requirements for testing effectiveness of the hedge.

Hedge accounting Under IFRS detailed guidance is set out in IAS 39 dealing with hedge accounting. Under LUX BANKING GAAP, accounting for hedge transactions are specified for hedging of foreign exchange risk, but differ significantly from IFRS. In practice, rules specified for hedging of foreign exchange risk are also applied for hedging of interest or price risks.

Hedged itemsIn addition to the general criteria for hedge accounting, IFRS and LUX BANKING GAAP outline rules for the designation of specific financial assets and liabilities as hedged items. These are outlined hereafter:

IFRS LUX BANKING GAAP

Held-to-maturity investments cannot be designated as a hedged item with respect to interest rate risk or prepayment risk.

Fixed-income securities held in the investment portfolio can be designated as a hedged item with respect to interest rate risk. These securities can be valued at cost under certain conditions. If they are hedged with an interest rate swap, those conditions are less stringent than IFRS. The security and the swap have to be in a micro-hedging relationship thus eliminating interest rate and currency rate risks. The maturity for the security hedged and the swap must be the same (the maturity of the swap could be later than the maturity of the hedged item). The nominal amounts of the security and the swap have to be almost identical and denominated in the same currency. For hedging of fixed-income securities in the investment portfolio valued at the lower-of-cost-or-market, the hedging instrument has to be re-valued and any resulting net unrealised loss has to be provided for. Net unrealised gains are not considered.

If the hedged item is a financial asset or liability, it may be a hedged item with respect to the risks associated with only a portion of its cash flows or fair value provided that effectiveness can be measured.

Not specified. The hedged item has to expose the credit institution to a risk resulting from the changes of a market price.


IFRS LUX BANKING GAAP

If the hedged item is a non-financial asset or liability, it may be designated as a hedged item only for foreign currency risk, or in its entirety because of the difficulty of isolating other risks.

A borrowing can be used to hedge a fixed-income security in the investment porfolio (if same maturity, interest rate and nominal).

If similar assets or similar liabilities are aggregated and hedged as a group, the change in fair value attributable to the hedged risk for individual items must be proportionate to the change in fair value for the group.

Not specified.

A firm commitment to require a business cannot be a hedge item, except for foreign exchange risk, because the other risks that are hedged cannot be specifically identified.

Not specified.

Hedging an overall net position is not permitted. Fair value hedge accounting for a portfolio hedge of interest rate risk is permitted.

For foreign exchange risk, a hedged item can be an asset, a liability, or an off-balance sheet item or a homogenous group of such items. Although not specified, the same applies for interest rate risk.

Hedging instruments

IFRS Only a derivative instrument can qualify as a hedging instrument in most cases. However, a non-derivative (such as a foreign currency borrowing) can be used as a hedging instrument for foreign currency risk. Only instruments that involve a party external to the reporting entity can be designated as hedging instruments. A single hedging instrument can hedge more than one risk in two or more hedged items under certain circumstances. A written option cannot be designated as a hedging instrument unless it is combined with a purchase option and a net premium is paid.

LUX BANKING GAAP A non-derivative instrument can be used for hedging purposes. For instance, a fixed-income security in the investment portfolio can be hedged by a borrowing (with the same maturity, interest rate and nominal than the hedged instrument). Written options cannot qualify as hedging instruments.

Hedge relationships

IFRS Exposure to risk can arise from: • Changesinthefairvalueofanexistingassetorliability;• Changesinthefuturecashflowsarisingfromanexistingassetorliability;or• Changesinfuturecashflowsfromatransactionthatisnotyetrecognised.

IFRS recognises the following types of hedge relationships: • Afairvaluehedgewheretheriskbeinghedgedisachangeinthefairvalueofarecognisedassetor

liability; • Acashflowhedgewheretheriskbeinghedgedisthepotentialvolatilityinfuturecashflows;and• Ahedgeofanetinvestmentinaforeignentity,whereahedginginstrumentisusedtohedgethecurrency

risk of a net investment in a foreign entity.

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Fair value hedges Hedging instruments are measured at fair value. The hedged item is adjusted for changes in its fair value, but only due to the risks being hedged. Gains and losses on fair value hedges, for both the hedging instrument and the item being hedged, are recognised in the income statement.

Cash flow hedgesHedging instruments are measured at fair value, with gains and losses on the hedging instrument, where they are effective, initially deferred in equity and subsequently recycled to the income statement concurrent with the earnings recognition pattern of the hedged item. Gains and losses on financial instruments used to hedge forecasted asset and liability acquisitions may be included in the cost of the non-financial asset or liability as a “basis adjustment”. This is not permitted for financial assets or liabilities.

Hedges of net investments in foreign operations Similar treatment to cash flow hedges: The hedging instrument is measured at fair value with gains/losses deferred in equity, to the extent that the hedge is effective, together with exchange differences arising on the entity’s investment in the foreign operation. These gains/losses are transferred to the income statement on disposal or partial disposal of the foreign operation.

Fair value hedge accounting for a portfolio hedge of interest rate risk An entity may designate an amount of assets or liabilities in a given “time bucket”, scheduled based on expected re-pricing dates of a portfolio. The changes in the fair value of this hedged item are reflected in a single separate line item within assets or liabilities. The carrying amounts of the individual assets or liabilities in the portfolio are not adjusted.

LUX BANKING GAAP No such relationships are defined in LUX BANKING GAAP.

References: IFRS: IAS 39, IFRS 7, IFRIC 16. LUX BANKING GAAP: Art. 64, Chapter 7bis, Circular 01/32, Recueil.

recent developments

Discussions on hedge accountingAs part of its project to replace IAS 39 Financial Instruments: Recognition and Measurement, the IASB is also addressing hedge accounting. In its extraordinary Board meeting held in September 2009, the Board tentatively decided to simplify today’s hedge accounting requirements by replacing fair value hedge accounting with an approach that is similar to cash flow hedge accounting ; to further simplify the existing cash flow hedge accounting model to reduce complexity; to address general hedge accounting first before considering the implications on portfolio hedge accounting; and to consider separately any implications on hedge accounting for net investments in a foreign operation because there are also interactions with IAS 21 The Effects of Changes in Foreign Exchange Rates.


Foreign currency translation

Functional currency – definition and determination

IFRS Functional currency is defined as the currency of the primary economic environment in which an entity operates. If the indicators are mixed and the functional currency is not obvious, management should use its judgement to determine the functional currency that most faithfully represents the economic results of the entity’s operations by focusing on the currency of the economy that determines the pricing of transactions (not the currency in which transactions are denominated).

Additional evidence (secondary in priority) may be provided from the currency in which funds from financing activities are generated or receipts from operating activities are usually retained, as well as the nature of activities and extent of transactions between the foreign operation and the reporting entity. Specific rules exist for currency of hyperinflationary economy.

LUX BANKING GAAP Financial statements are established in the currency in which the share capital is expressed. Functional currency is not defined.

Transactions – the individual entity

IFRS Requirements regarding the translation of transactions by an individual entity are as follows:

• Translationoftransactionsdenominatedinforeigncurrencyisattheexchangerateprevailingonthedateof the transaction;

• Monetaryassetsandliabilitiesdenominatedinaforeigncurrencyaretranslatedattheclosing(year-end)rate;

• Non-monetaryforeigncurrencyassetsandliabilitiesaretranslatedattheappropriatehistoricalrate;

• Non-monetaryitemsdenominatedinaforeigncurrencyandcarriedatfairvaluearereportedusingtheexchange rate that existed when the fair value was determined;

• Incomestatementamountsaretranslatedusinghistoricalratesofexchangeatthedateoftransactionsoran average rate as a practical alternative, provided the exchange rate does not fluctuate significantly.

LUX BANKING GAAP Assets and liabilities denominated in foreign currencies are translated at the balance sheet’s date rate. It is permitted to translate investments in associates or affiliates, tangible and intangible assets which are not hedged at historical rates. Unsettled spot foreign exchange transactions are translated at the spot exchange rate prevailing on the balance sheet date.

Foreign exchange gains and losses resulting from spot transactions not hedged by forward transactions are accounted for in the profit and loss account. Unrealised foreign exchange losses have to be recorded, whereas unrealised foreign exchange gains can be taken to the profit and loss account. Unsettled forward exchange transactions are translated at the forward rate prevailing on the statement of financial position date for the remaining maturity. Unrealised exchange losses on un-hedged forward exchange contracts are recognised in the profit and loss account, whereas unrealised exchange gains are only recognised when realised.

Other accounting and reporting topics

Translation – consolidated financial statements When translating financial statements into a different presentation currency (for example for consolidation purposes) IFRS and LUX BANKING GAAP require the assets and liabilities to be translated using the closing (year-end) rate. Amounts in the income statement are usually translated using the average rate for the accounting period if the exchange rates do not fluctuate significantly (LUX BANKING GAAP also permits the use of the closing rate). The translation differences arising are reported in equity.

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Tracking of translation differences in equity

IFRS Translation differences in equity are separately tracked and the cumulative amounts are disclosed. The appropriate amount of cumulative translation difference relating to the entity is transferred to the income statement on disposal of a foreign operation and included in the gain or loss on sale. For a partial disposal, the proportionate share of the related cumulative translation difference is included in the gain or loss. The payment of a dividend out of pre-acquisition profits constitutes a return on the investment and is regarded as a partial disposal.


Translation of goodwill and fair value adjustments on acquisition of foreign entity

IFRS Translated at closing rates.

LUX BANKING GAAP Not specified. In practice, translation at closing rates but historical rates can also be used.

Presentation currency

IFRS Assets and liabilities are translated at the exchange rate at the statement of financial position date when financial statements are presented in a currency other than the functional currency. Income statement items are translated at the exchange rate at the date of the transaction or, if the exchange rates do not fluctuate significantly, at average rates. Specific rules exist for currency of hyperinflationary economy.

LUX BANKING GAAP Financial statements are established in the currency the share capital is expressed.

references: IFRS: IAS 21, IAS 29. LUX BANKING GAAP: Art. 64, 99.


Earnings per share (EPS)

IFRS Earnings per share is disclosed by entities whose ordinary shares are publicly traded, and by entities in the process of issuing such shares.

LUX BANKING GAAP There is no requirement to disclose EPS. When applying for listing on the Luxembourg Stock Exchange, the credit institution should disclose EPS of ordinary earnings after tax. Subsequently there is no requirement to disclose EPS amounts.

Basic EPS

IFRS Basic EPS is calculated as profit available to common shareholders, divided by the weighted average number of outstanding shares during the period. Shares issued as a result of a bonus issue are treated as outstanding for the whole period. Bonus issues occurring after the period are also incorporated into the calculation. For rights issues, a theoretical ex-rights formula is used to calculate the bonus element. Comparative EPS is adjusted for bonus issues and rights issues.

LUX BANKING GAAP Not required.

Diluted EPS

IFRS For diluted EPS, earnings are adjusted for the after-tax amount of dividends and the impact resulting from the assumed conversion of dilutive potential ordinary shares; diluted shares are also adjusted accordingly for any assumed conversions. A conversion is deemed to have occurred at the beginning of the period or the date of the issue of potential dilutive ordinary shares, if later. There is no “de minimis” dilution threshold below which diluted EPS need not be disclosed.


Diluted EPS – share options

IFRS The “treasury share” method is used to determine the effect of share options and warrants. The assumed proceeds from the issue of the dilutive potential ordinary shares are considered to have been used to repurchase shares at fair value. The difference between the number of shares issued and the number of shares that would have been issued at fair value is treated as an issue of ordinary shares for no consideration (i.e., a bonus issue) and is factored into the denominator used to calculate the diluted EPS. The earnings figure is not adjusted for the effect of share options/warrants.


references: IFRS: IAS 33.

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Disclosures

IFRS For transactions with related parties there is a requirement to disclose the amounts involved in a transaction, the amount, terms and nature of the outstanding balances and any doubtful amounts related to those outstanding balances for each major category of related parties. There is no specific requirement to disclose the name of the related party (other than the immediate parent entity, the ultimate parent entity and the ultimate controlling party).

The compensation of key management personnel is disclosed within the financial statements in total and by category of compensation.

LUX BANKING GAAP Balances with affiliated undertakings and participating interests have to be disclosed for most important positions of the statement of financial position. No disclosure of profit and loss figures is required.

For members of the administration, managerial and supervisory bodies of the credit institution, the amount of the remuneration, loans and advances, other commitments and commitments relating to pensions have to be disclosed by category.

references: IFRS: IAS 1, IAS 24. LUX BANKING GAAP: Art. 66, 67, 68.

Related-party transactions The objective of the disclosures required by IFRS and LUX BANKING GAAP in respect of related-party relationships and transactions is to ensure that users of financial statements are made aware of the extent to which the financial position and results of operations may have been influenced by the existence of related parties. In IFRS, related-party relationships are generally determined by reference to the control or indirect control of one party by another or by the existence of joint control or significant influence by one party over another. Although related parties are not defined as such in LUX BANKING GAAP, the following categories should be considered as related parties: (i) affiliated undertakings (all entities which are in a relationship “parent-subsidiary” and those entities which are related to one of such afore-mentioned entities), (ii) participating interests (entities which are associates), (iii) members of the administration, managerial and supervisory bodies. The following related-party relationships defined under IFRS are not considered as related parties under LUX BANKING GAAP: • Individuals owning, directly or indirectly, an interest in the voting power of the

reporting entity that gives them significant influence, and close members of the family of such individual;

• Entities in which a substantial interest in the voting power is owned, directly or indirectly, by any person described above or over which such a person is able to exercise significant influence. This includes entities owned by directors or major shareholders of the reporting entity.

Under IFRS, if the relationship is one based on control, certain disclosures are always required, regardless of whether transactions between the parties have taken place. These include the existence of the related-party relationship, the name of the related party and the name of the ultimate controlling party.


Issue IFRS

General requirements

Format Segment reporting is based on operating segments and the way the chief operating decision-maker evaluates financial information for the purposes of allocating resources and assessing performance.

Scope Entities whose debt or equity instruments are traded in a public market and entities that file, or are in the process of filing, financial statements with a securities or other regulator for the purposes of issuing any class of instrument in a public market.

Identification of segments

General approach Based on the internally reported operating segments.

Aggregation of similar operating segments Specific aggregation criteria are given to determine whether two or more operating segments are similar.

Thresholds for reportable segments Revenue, results or assets are 10% or more of all segments. If revenue of reported segments is below 75% of the total, additional segments are reported until the 75% threshold is reached.

Measurement

Accounting policies for segments Those adopted for internal reporting to the chief operating decision-maker for the purposes of allocating resources and assessing performance.

Segment reportingIFRS 8 aligns the identification and reporting of operating segments with internal management reporting. Segment reporting under IFRS 8 should highlight the information and measures that management believes are important and are used to make key decisions. It should also provide a better link between the financial statements and the information reported in management accounts. The standard converges IFRS with US Accounting Standard SFAS 131 ‘Disclosure about Segments of an Enterprise and Related information’. In LUX BANKING GAAP segment information must be provided on a reduced extent. The Law requires disclosure of income broken down by geographical markets, to the extent that these markets differ substantially from one to another. Concentration of credit risk has to be disclosed by geographical zone and by economic sector.IFRS requirements are reflected in the table below.

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Issue IFRS

Main disclosures

Factors used to identify reportable segments

Disclosure required includes basis of organisation (for example, based on products and services, geographical areas, regulatory environments) and types of products and services from which each segment derives its revenues.

Profit and assets for each reportable segment

Required.

Components of profit of each reportable segment

Required if included in the measure of segment profit or loss reviewed by the chief operating decision-maker, or are otherwise regularly provided to the chief operating decision-maker, even if not included in that measure of segment profit or loss:

• Third-partyrevenues;

• Inter-segmentrevenues;

• Interestincome;

• Interestexpense;

• Depreciationandamortisation;

• MaterialitemsorincomeandexpensedisclosedinaccordancewithIAS1;

• Shareofresultsfromequityaccounting;

• Incometaxexpense.

Material non-cash items other than the depreciation and amortisation.

Liabilities of reportable segments Required if regularly reported to the chief operating decision-maker.

Other items to be disclosed by reportable segment

Investments accounted for by equity method and additions to certain non-current assets (principally PPE and intangible assets) where included in the assets reported to the chief operating decision-maker or are otherwise regularly reported to the chief operating decision-maker.

Major customers Total revenue is disclosed, as well as the relevant segment that reported the revenues, for each external customer greater than or equal to 10% of consolidated revenue.

Geographical information Third-party revenues from and certain non-current assets (principally PPE and intangible assets) located in country of domicile and all foreign countries (in total and, if material, by country) are disclosed.

Third-party revenues Also disclosed for each product and service if this has not already been disclosed.

Reconciliations of segment to the corresponding totals of the entity

Reconciliations of total segment revenue, total segment measures of profit or loss, total segment assets, total segment liabilities and any other significant segment totals is required.

references: IFRS: IFRS 8 LUX BANKING GAAP: art. 68


Discontinued operations IFRS contains requirements for the measurement and disclosures of “discontinued” operations. Discontinued operations are not specified in LUX BANKING GAAP.

Issue IFRS

Definition A component of an entity (operations and cash flows that can be clearly distinguished operationally and for financial reporting) that has either been disposed of or is classified as held for sale and represents a separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale.

Envisaged timescale Completed within a year, with limited exceptions.

Starting date for disclosure From the date in which a component has been disposed of or, if earlier, is classified as held for sale.

Measurement Lower of carrying value or fair value less costs to sell.

Presentation A single amount is presented on the face of the income statement comprising the post-tax profit or loss of discontinued operations and the post-tax profit or loss recognised in the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation. An analysis of this amount is required either on the face of the income statement or in the notes for both current and prior periods.

Ending date of disclosure Until completion of the discontinuance.

Disclosures • Descriptionofdisposalgroup;

• Expectedmannerandtimingofdisposal;

• Factsandcircumstancesleadingtosaleordisposal;

• Gainorlossrecognisedonclassificationasheldforsale;

• Revenue,expenses,pre-taxresult,taxandcashflowsforcurrentandpriorperiods;and

• Segmentofdisposalgroup.

Comparatives Statement of comprehensive income re-presented for effects of discontinued operations but not statement of financial position.

LUX BANKING GAAP Major profit and loss account impact from discontinued operations or sale of non-current assets should be disclosed in the notes and, if unusual, should be presented as extraordinary result.

references: IFRS: IFRS 5.

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Post balance sheet events

Adjusting events after the statement of financial position date

IFRS Adjusting events that occur after the statement of financial position date are defined as events that provide additional evidence of conditions that existed at the statement of financial position date and materially affect the amounts included. The amounts recognised in the financial statements are adjusted to reflect adjusting events after the statement of financial position date.

LUX BANKING GAAP Not defined, but practice is similar to IFRS.

Non-adjusting events after the statement of financial position date

IFRS Non-adjusting events that occurred after the statement of financial position date are defined as events that are indicative of conditions that arose after the statement of financial position date. The nature and estimated financial effects of such events are disclosed to prevent the financial statements being misleading.

LUX BANKING GAAP Not defined, but practice is similar to IFRS. Non-adjusting post balance sheet events have to be described in the Directors’ report.

Announcement of a dividend relating to the financial year just ended

IFRS This is a non-adjusting event.


references: IFRS: IAS 10. LUX BANKING GAAP: Art. 51, 70.


Interim financial reporting

Stock exchange requirements

IFRS IFRS does not require public entities to produce interim statements, but encourages interim reporting - see “Additional guidance” below.

LUX BANKING GAAP There is no regulation for interim financial reporting in the Law. But for entities which are listed on the Luxembourg Stock Exchange, an interim financial report has to be done for the first six months of the year and has to be issued at the latest two months after the end of the interim reporting period.

additional guidance Additional guidance under IFRS includes the following: • Consistent and similar basis of preparation of interim statements, with previously

reported annual data and from one period to the next; • Use of accounting policies consistent with the previous annual financial statements,

together with adoption of any changes to accounting policies that it is known will be made in the year-end financial statements (for example, application of a new standard);

• Preparation of the interim statements using a “discrete approach” to revenue and expenditure recognition - that is, viewing the interim period as a distinct accounting period, rather than part of the annual cycle. Incomplete transactions are therefore treated in the same way as at the year-end. Impairment losses recognised in interim periods in respect of goodwill, or an investment in cities, an equity instrument or a financial asset carries at cost, are not reversed;

• Summarised statement of comprehensive income (including segment revenue/profit), statement of cash flows, statement of financial position, statement of changes in equity and selected notes; and

• A narrative commentary. Comparatives for the statement of financial position are taken from the last annual financial statements. Quarterly interim reports contain comparatives (other than for the statement of financial position) for the cumulative period to date and the corresponding period of the preceding year.

references: IFRS: IAS 34.

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DP Discussion Paper

ED Exposure Draft

FASB Financial Accounting Standards Board (U.S.)

IAS International Accounting Standards

IASB International Accounting Standards Board (U.S.)

IFRIC International Financial Reporting Interpretation Committee

IFRS International Financial Reporting Standards

LAW Luxembourg Banking Accounting Law (law of 17 June 1992 as amended)

SIC Standing Interpretations Committee

Glossary


The following other publications on International Financial Reporting Standards and corporate practices have been published by PwC and are available from PwC Luxembourg or on the Internet site www.pwc.com/lu/ifrs

Other Publications from PwC on International financial reporting

www.pwc.com/lu/ifrs

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Contacts

To find out how we can help you make the change to International financial reporting Standards or for assistance with your technical queries, please contact our IfrS specialists:

Marc Minet [email protected] +352 49 48 48 6113

For any further information about our firm or our services please contact the PwC Marketing & Communication department:

[email protected] PricewaterhouseCoopers S.à r.l 400, route d’Esch B.P. 1443 L-1014 Luxembourg

Telephone +352 49 48 48-1 Facsimile +352 49 48 48-2900

www.pwc.com/lu

Marianne Weydert [email protected] +352 49 48 48 2567

Fabrice Goffin [email protected] +352 49 48 48 2529

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