The European Securities and Markets Authority (ESMA) has published a report providing an overview of the monitoring, compliance, and enforcement actions taken in respect of International Financial Reporting Standards (IFRS) for the year ended 31 December 2012.
According to the report, European enforcers performed full reviews of around 1,050 interim and annual accounts (compared to 850 in 2011) covering around 17 % of listed entities' accounts in Europe (12% in 2011). In addition, 1,200 accounts were subject to partial review, representing a coverage of 20% of the population of listed entities (16% in 2011).
The reviews resulted in revised financial statements being issued in 35 cases (18 in 2011). In around 160 cases (150 in 2011) public corrective notes or announcements were required, and in about 300 instances, corrections to future financial statements were needed (420 in 2011).
ESMA said that financial reporting areas requiring additional effort for compliance with IFRS include application of the classification criteria for assets held for sale; determination of the discount rate for the calculation of defined benefit obligations; classification and measurement of financial instruments; assessment of goodwill impairment; distinction between a change in an accounting policy and an accounting estimate; and disclosures about the risks and uncertainties or judgments and estimates used in preparation of IFRS financial statements.
Enforcement activities for 2012 again focused on the impacts of the financial and economic crisis. In particular, ESMA observed that as a result of the poor economic outlook, there was an inherent presumption that assets in many industries were expected to generate lower cashflows, leading to pressure on carrying values of assets for many entities, in particular goodwill.
ESMA undertook a review of over more than 200 issuers with significant amounts of goodwill and found out that impairment of goodwill was 'limited to a handful of issuers and that in many cases disclosures related to key assumptions or sensitivity analyses were not entity-specific and thus not useful for investor decision making purposes'.
In an additional effort to strengthen enforcement, the ESMA has launched a consultation on guidelines on the enforcement of financial information published by listed entities in the European Union.
The guidelines aim to strengthen and promote greater supervisory convergence in existing enforcement practices within the EU. They establish the principles to be followed in the enforcement process, by clearly defining enforcement and its scope; the expected characteristics of the enforcer; acceptable selection techniques and other aspects of enforcement methodology; the types of enforcement actions that may be available to enforcers; and how enforcement activities are coordinated within ESMA.
The guidelines also propose that the coordination of European enforcers by ESMA should involve the development of coordinated views on accounting matters prior to national enforcement actions, the identification of common enforcement priorities and common responses to the accounting standard-setter to ensure consistent application of the financial reporting framework.
Steven Maijoor, ESMA Chair, said: 'ESMA believes that in order to achieve a proper and rigorous enforcement there is a need for a common EU approach to the enforcement of financial information disclosures.'
The closing date for responses to this consultation is 15 October 2013 and ESMA expects to publish the final guidelines in 2014.
Details of the consultation are HERE
