22 July 2013

ESMA: Activity Report of the IFRS Enforcement activities in Europe in 2012

The report is based on the activities of the ESMA and accounting enforcers in the EEA (European enforcers). The main objective of ESMA’s European Enforcers Coordination Sessions (EECS) is to co-ordinate the enforcement activities in the EEA countries in order to increase convergence amongst European enforcers’ activities and contribute to fostering investor confidence.

The report provides a description of the existing enforcement system in Europe, the main activities that were coordinated at European level during 2012, ESMA’s cooperation with the international standard setter and third country enforcers on matters related to IFRS, and provides quantitative data on enforcement activities.

Enforcement activities in 2012 continued to focus on the effects of the financial and economic crisis. As a follow-up of the ESMA Statements and Opinion issued in 2011 in relation to exposure to Greek Government bonds, ESMA published a report on the review of accounting practices relating to the adequate recognition and measurement of impairments resulting from exposures to Greek Government bonds in the 2011 annual IFRS financial statements.

Identification of additional impact of the financial and economic crisis on financial institutions’ activities continued to be an important area monitored at European level and ESMA published a public statement on forbearance activities stressing the need for consistent application of the IFRS requirements relating to the impairment of financial assets modified due to financial difficulties of the borrower.

As a result of the poor economic outlook, there was a presumption that assets in many industries may generate lower cash-flows. ESMA undertook a review 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.

EECS activities have been intensified to bring more coordination and consistency of enforcement activities in Europe. In 2012, for the first time, ESMA together with European national enforcers identified and made public common enforcement priorities on financial reporting topics which were identified as particularly significant for European issuers for the preparation of the 2012 IFRS year-end financial statements.

IFRS enforcement activities at Member States’ level have increased in 2012 compared to the previous year and European enforcers reviewed more than 2 000 interim or annual IFRS financial statements and took around 500 enforcement actions. The conclusions of the enforcement activities shows that overall the quality of the IFRS financial statements continued to improve as a result of the significant experience gained by the preparers with IFRS application since the first time application in 2005. Nevertheless it was noted that there is still room for improvement in the quality of financial reporting in certain areas. Examples of areas requiring additional effort from issuers in order to comply 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.

ESMA together with the national competent authorities will reinforce the level of convergence of financial information supervision and enforcement activities reflecting the strong commitment to contribute to the consistent application of IFRS around the globe.

Full report

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