Financial Reporting Brief     

May 2018

This month’s article 'The Activities of the Enforcers – ESMA Report' comments on the recently released 2017 Report of the European Securities and Markets Authority (ESMA) and the areas of main focus.

The Activities of the Enforcers – ESMA Report

In recent weeks the European Securities and Markets Authority (ESMA) has published its report for year ended 31 December 2017 – ‘Enforcement and Regulatory Activities of Accounting Enforcers in 2017’.

Ex post examinations of issuers resulted in an action being taken towards 328 issuers in order to address material departures from IFRS. This represents an increase of 6%, compared to 2016. 

The action rate (issues subject to action per ex-post examination) also rose from 27% in 2016 to 32% in 2017. The main deficiencies identified were in the areas of (a) financial statement presentation, (b) impairment of non-financial assets, and (c) accounting for financial instruments. 

ESMA is responsible for the promotion of effective and consistent application of the securities and markets legislation with respect to financial reporting. It aims to foster supervisory convergence in Europe and thereby reduce regulatory arbitrage. Converged enforcement practices contribute not only to the integrity, efficiency and orderly functioning of the EU Single Market but can also have positive impact on financial stability. Guidelines for the Enforcement of Financial Information (EFI) requirements have been published by ESMA. 

EFI Guidelines

The EFI Guidelines define the objectives of enforcement, which provide the basis for the scope and characteristics of European enforcers. They also set out the principles to be followed throughout the enforcement process such as selection methods, examination procedures and enforcement actions. They strengthen the convergence of enforcement activities at European level. 

Responsibility for co-ordination of supervision of approximately 6,000 issuers listed on European regulated markets lies with the European-wide supervisors and enforcers through European Enforcers Coordination Sessions (EECS). EECS provide a forum for European enforcers to discuss, in particular, enforcement cases which are particularly complex or fulfil other submission criteria, before or after decisions are taken in order to promote a consistent approach in the application of IFRS.  EECS facilitates analysis and discussion of enforcement issues and offers an opportunity to benefit from the experience of other enforcers who have already encountered similar issues, and to gather useful input for the analysis of technical issues. EECS produces technical advice on the issuance of ESMA Statements and/or Opinions on accounting matters which deserve specific focus. It also looks at the application of accounting practices by European issuers and, where appropriate, identifies areas for consideration by the IASB. 

In 2017, 41 emerging issues were discussed at the EECS, together with 78 decisions submitted to the EECS by European enforcers of which 47 were discussed. IFRS 9 and IFRS 15 transition implementation issues were also discussed at EECS sessions. 

As of December 2017, the EECS database includes 1,043 decisions and 468 emerging issues. ESMA regularly publishes extracts from their decision database. 

Discussions on Significant Issues in 2017

Issues discussed by ESMA and its constituent European enforcers include: 

  • Consolidation methods – a number of issues and potential issues were discussed, including the scope of consolidation under IFRS 10 and the prerequisite that a third party must exist for the recognition of non-controlling interests;
  • Classification of liabilities as current or non-current – ESMA reminds issuers that in cases where there is a breach of covenant of a borrowing arrangement, or similar, the focus of the classification should be the legal rights of the entity at the reporting date and that a liability is current unless the borrower has the right to unilaterally defer settlement for at least 12 months. The manner in which ‘periods of grace’ are factored into a classification decision was also discussed. 
  • The application of IAS 12 ‘Income Taxes’ with respect to the expected consequences of the outcome of the UK withdrawal process (BREXIT) on the entity’s applicable income tax regime; 
  • The requirements to disclose information on capital in the IFRS financial statements of financial institutions, and adopting a consistent approach; 
  • Issues relating to IAS 38 ‘Impairment of Assets’.

ESMA – Other Activities

Some of the other areas that ESMA has been involved in are: 

  • Supporting the IASB’s Post Implementation Review on IFRS 13 ‘Fair Value’, ESMA issued in 2017 a thematic study on IFRS 13 based on the results of a desktop review of a sample of issuers and on the experience of European enforcers;
  • Publishing Q&As on the Alternative Performance Measures (APM) Guidelines both in January and in October 2017, solely to provide further explanation of the principles;
  • Participating in the accounting standard-setting process;
  • Finalising its work on the European Single Electronic Format (ESEF), and publishing guidance including the ESEF Reporting Manual.

Common Enforcement Priorities 

Each year ESMA publishes European Common Enforcement Priorities, which it is satisfied help to prevent misstatements and contributes to improving the consistency and quality of financial reporting in Europe. In carrying out its examination process of 2016 financial statements, ESMA analysed a sample of 204 issuers from 28 EEA countries, selecting issuers for which the enforcement priorities were of particular importance. 

The 2016 priorities were: 

1. Presentation of financial statements (IAS 1); 

ESMA assessed whether issuers have provided sufficiently good quality disclosures, in particular in relation to financial performance and financial position. ESMA believes that further guidance from the IASB on the definition of some sub-totals (such as operating profits and EBIDTA) with its consequent labelling would be desirable to address diversity in practice and to improve comparability of financial statements. It is also clear that consistency of use of lines and sub-totals could be improved. ESMA also considers that the inconsistency of accounting for reclassifications from other comprehensive income to the profit and loss account needs to be addressed by the IASB and until then the accounting policy adopted by issuers should be disclosed. ESMA notes that there is still room for further improvements in disclosures related to alternative performance measures (APMs) outside the financial statements. Segment information could be improved by the inclusion of entity-wide disclosures and certain additional reconciliations. There is also a perceived need for improved disclosure of judgements made by management in applying the aggregation criteria.

2. Distinction between financial liabilities and equity (IAS 32); 

European enforcers reviewed 44 issuers who issued instruments for which the distinction between a financial liability and an equity instrument was considered relevant and material. The analysis carried out by ESMA revealed that where significant analysis was required in the classification of financial instruments either as a financial liability or as an equity instrument, approximately 40% of issuers did not disclose the accounting policy and the analysis made in their classification.  Disclosure of the key characteristics of financial instruments were not always provided. This would include such matters as (a) contractual features giving rise to economic compulsion, (b) conversion dates and (c) call/ put options and triggering events for payments. 

3. Transitional disclosures for IFRS 9 for non-financial companies.

Fact-finding exercises carried out by ESMA showed that only a limited proportion of issuers provided both qualitative and quantitative disclosures on the expected impact of the new standards and that the quality of disclosures varied significantly.  ESMA called on issuers to provide users of financial statements with sufficient information to understand the impact that the future application of the new standards will have on the financial position and performance of the entity. 

Reports have been issued in similar vein by the Irish Auditing and Accounting Supervisory Authority (IAASA) and the UK Financial Reporting Council, on which we have commented in previous articles. 


ESMA will continue its work in overseeing issuers’ compliance with standards and thereby seeking to improve the quality and transparency of financial reporting.  Those involved in the preparation of financial statements and the financial reporting process would be well advised to be fully aware of the activities and plans of ESMA and the National enforcers. 

Although not directly impacted, entities not listed on  EU Regulated Stock Exchanges would be wise to maintain awareness of the issues considered to be priorities by the enforcers and the various comments and observations emanating from them as they are likely to be of broad significance.

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