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10.6 Luxembourg Inventory Valuation Methods (FIFO, Weighted Average)

Luxembourg Allowed Methods​

Luxembourg allows:

  • FIFO (First-In, First-Out)
  • Weighted Average
  • Specific Identification (for appropriate items)

Luxembourg does NOT allow:

  • LIFO (Last-In, First-Out) - not permitted

FIFO in Luxembourg​

Requirements:

  • Must be applied consistently
  • Must be disclosed in financial statements
  • Must be reasonable and supportable
  • Must comply with PCN requirements

Advantages:

  • Simple to understand
  • Matches physical flow for perishables
  • Ending inventory reflects current costs
  • Accepted internationally

Disadvantages:

  • In rising prices: Higher net income (more taxes)
  • Doesn't match current costs to current revenues

Weighted Average in Luxembourg​

Requirements:

  • Must be applied consistently
  • Can use periodic or perpetual (moving average)
  • Must be disclosed
  • Must comply with PCN

Advantages:

  • Smooths cost fluctuations
  • Moderate effect on income
  • Simple to calculate (periodic)
  • Accepted method

Disadvantages:

  • Moving average (perpetual) more complex
  • Doesn't reflect current costs as well as FIFO

Choosing a Method​

Factors to Consider:

  • Type of inventory (perishable vs. non-perishable)
  • Price volatility
  • Industry practices
  • Tax implications
  • System capabilities
  • Consistency requirement

Luxembourg Recommendation:

  • Most businesses use FIFO or weighted average
  • Choose based on business needs
  • Must be consistent
  • Must be disclosed

Disclosure Requirements​

Financial Statements Must Disclose:

  • Valuation method used
  • Any changes in method
  • Justification for changes
  • Impact of method on financial statements

Example Disclosure: "Inventory is valued at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (FIFO) method."

Luxembourg Compliance Note​

Inventory valuation in Luxembourg must:

  • Use allowed methods (FIFO, weighted average, specific identification)
  • Be consistent (can't change without justification)
  • Be disclosed in financial statements
  • Comply with PCN Class 3 requirements
  • Support inventory values with documentation
  • Be reasonable and supportable

Think It Through​

Why is LIFO not allowed in Luxembourg? What are the implications of this restriction?