Top 4 Mistakes in Financial Statements under LUX GAAP

At Nexly, we're on a mission to revolutionize the financial statement review process with AI-driven software.

Designed to assist auditors, accountants, and financial reporting professionals, our tool automates the financial statement review process by detecting errors and inconsistencies.

Our team tirelessly analyzes a multitude of financial statements across various investment fund structures to improve our software's error detection capabilities.

Recently, we scrutinized 200 financial reports from Luxembourg for the year ending 31 December 2022. Our focus was on Reserved Alternative Investment Funds (RAIFs) with financial statements prepared under Luxembourg's Generally Accepted Accounting Principles (Lux GAAP).

Here are the top four most common mistakes we found:

1. Inconsistencies Between Balances in Financial Statements and Notes

One of the most prevalent errors was the mismatch between balances in the financial statements and the accompanying notes. This often results from late adjustments or reclassifications that are not consistently applied across all sections.

2. Missing Significant Accounting Policies

New financial instruments introduced by funds often lead to overlooked accounting policies. When significant policies are missing, it creates gaps in the financial narrative and compliance framework.

3. Insufficient Details in Related Party Disclosures

We noticed several instances where related party notes were missing necessary details. According to the Luxembourg Company Law (Law of 10 August 1915), all transactions with related parties must be disclosed, including the amount, nature of the relationship with the related party, and any other information necessary for understanding the financial position of the RAIF.

4. Insufficient Details in Disclosures of Derivative Contracts

Many financial statements failed to meet the European Securities and Markets Authority’s guidelines on derivative contract disclosures (ESMA/2014/937EN). The fund’s annual report should include details on the following:

a. The underlying exposure gained through financial derivative instruments.

b. The identities of the counterparties involved in these financial derivative transactions.

c. The type and amount of collateral received by the fund to mitigate counterparty exposure.

The forward exchange contract, the most frequently observed derivative instrument, requires disclosure of the following details: the amount of currency bought, the amount of currency sold, the maturity date, unrealized loss/gain at closing, the counterparty, and the percentage of net assets at the year-end.

Learn how we can assist you

Avoiding these common errors is simple with our tool. Our software analyzes financial statements in PDF format, offering unparalleled support to auditors and financial reporting professionals. Schedule a demo today and see how our tool can revolutionize your review process.