Q&A CNC 19/016 – Accounting set-off of orders in progress and payments received on account of orders

Article 33 LRCS¹ establishes the general principle of non-offsetting between assets and liabilities or between expenses and income.

However, there are exceptions to this accounting principle that may result from the right to offset under the law².

In accordance with the accounting principle of non-offsetting, work and orders in progress by the undertaking are generally presented under the heading ‘D.I. Stocks / Inventories’ within assets, while payments received on account of orders are generally presented under the heading “C. Creditors” under capital, reserves and liabilities.

In accordance with European accounting law, Luxembourg accounting law has provided for an exception on this point. The balance sheet layout in Article 34 LRCS explicitly provides for an item entitled “C.3. Payments received on account of orders in so far as they are not shown separately as deduction from stocks”³, the wording of which is identical to that provided for in Directive 2013/34/EU⁴ and the former 4^th Directive 78/660/EEC⁵.

This explicit wording leads to the conclusion that it is possible for undertakings (optional) to offset the stock / inventory item corresponding to orders in progress against the liability item corresponding to payments received on account of those orders.

This analysis is confirmed by the preparatory parliamentary works which led to the adoption of the Law of 4 May 1984 (Section XIII LSC)⁶, which has now been repealed and replaced by Title II LRCS, but whose substance remains unchanged on this point.

Offsetting as referred to in point 2 has several implications for undertakings choosing to use this presentation method. In particular, undertakings opting for offsetting must:

• carry out a separate assessment of each contract⁷;
• make provisions, where applicable, for risks related to the continued execution of orders in progress, to the extent that these risks are not covered by value adjustments recognised in accordance with section 61 LRCS;
• present the debit balance under the heading ‘D.I. Stocks / Inventories’ when the amount of work and orders in progress exceeds the amount of advance payments received for a given contract;
• present the credit balance under the heading ‘C. Creditors’ when the amount of payments received on account of orders exceeds the amount of work and orders in progress for a given contract;
• disclose in the notes to the accounts, the accounting methods and measurement / valuation bases adopted for orders in progress and payments received on account of orders⁸;
• provide in the notes a breakdown of the gross amounts (un-offset))⁹.

It should be noted that if offsetting can be carried out in the balance sheet, these items (orders in progress and payments received on account of orders) must nevertheless be presented separately in the trial balance prepared in accordance with the Standard chart of accounts (PCN) to be filed with the Trade and companies register (RCS). The undertaking should therefore use, for example, accounts 312 ‘Contracts in progress – Goods’ and 431 ‘Down payment received within one year’ within the PCN, even if, in the balance sheet, the amounts entered in these two PCN accounts are grouped together under the same item “C.3. Payments received on account of orders in so far as they are not shown separately as deduction from stocks (inventories)”¹⁰.

Without calling into question the above, it should be noted that the use of the option to offset orders in progress against payments received on account is not neutral for external users of the accounts, as it results in a change in the presentation of the undertaking’s financial position.

In this context, it is important that the use of the offsetting option be respectful of the rights of shareholders and third parties to accounting information that gives a true and fair view of the undertaking’s assets and liabilities, financial position and net profit or loss. The members of the administrative or management bodies of the undertakings concerned must ensure, in particular, that the principle of consistency of accounting policies is complied with and they can be held liable in the event of misuse.

Disclaimer

This document – provided as a courtesy – is an unofficial translation of the French original document entitled “Compensation comptable des commandes en cours et des acomptes reçus sur commandes”. In case of discrepancy in interpretation, the French version shall prevail.

The “questions and answers” published by the “Commission des normes comptables (CNC)” (Accounting Standards Board):

• are of a general nature and do not refer to the specific situation of any natural or legal person;
• are intended to contribute to the development of accounting doctrine in accordance with Article 73(b) of the amended Law of 19 December 2002 on the trade and companies register, as well as on the bookkeeping and annual accounts of undertakings;
• only represent the opinion of the GIE CNC on a number of doctrinal and interpretative issues.

The administrative or management bodies of undertakings remain responsible in accordance with general law for any decisions taken based on this document.