As more and more US-based asset managers choose Luxembourg for their next alternative investment funds (AIFs), the question they invariably ask is whether they can keep the accounting principles they are using for their current structures: United States Generally Accepted Accounting Principles (US GAAP).
Many of these asset managers also run parallel funds alongside their bigger master funds in the US and Cayman Islands, further explaining the need for similar reporting frameworks for investors.
When asset managers choose special limited partnerships (SCSps), the Luxembourg law does not specify the accounting standards that these structures could use. Article 20 of the AIFM law for Luxembourg AIFs and the Directive, however, specifies that financial statements should be prepared in accordance with the accounting standards allowed in the home member state of the AIF. For Luxembourg that’s Lux GAAP (including the fair value option) and IFRS as adopted by the EU.
US GAAP vs. Lux GAAP
In practice, asset managers who require financial statements in accordance with US GAAP for their investors must prepare a supplementary set of financial statements in addition to the those prepared for statutory purposes. Many players argue that the administrative costs attached to this are not commercially viable as there are no material differences between the standards that could significantly impact the net asset value (NAV) of the AIFs.
But what are the main differences between net assets calculated in accordance with Luxembourg GAAP for Funds and US GAAP? To the surprise of many, apart from the amortization of the formation expenses (which under Lux GAAP can be amortized over five years, while under US GAAP it is expensed when incurred) and cut-off timing for transaction recording, there is very little difference between NAV calculations.
Of course, it’s a different story when it comes to disclosures in the financial statements. Under US GAAP there are significant additional information including:
- Statement of cash flows
- Financial highlights information
- Leveling of valuation
- Different presentation requirements in the statement of operations for master-feeder structures
The current practice in terms of investor reporting varies between asset managers. Many of them have resolved to include a reconciliation from NAV as per Lux GAAP to the US GAAP NAV in the financial statements. Others have even included additional disclosures and supplementary statements such as the statement of cash flows as required under US GAAP as well. Some players are keeping their traditional limited partnership agreement GAAP (LPA GAAP) reporting with supplementary financial statements for statutory purposes.
The road ahead
Fortunately, the journey doesn’t end here. Given substantial interest from asset managers, a draft law is on the table of the parliament to consider US GAAP (and other internationally recognized GAAP) as an allowed accounting standard in Luxembourg for AIFs. One can expect a vote before year end and an application as from the year ended 31 December 2021.
Need guidance or have more questions about US GAAP? Get in touch with KPMG’s Victor Chan Yin.
For a deeper dive into RAIFS, check out our comprehensive annual report as well as our overview of the legal and regulatory requirements for regulated and supervised investment vehicles.
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