11 November 2013

ESMA（欧州証券市場機構）スティーブン・マイヨール議長、アーンスト・アンド・ヤング主催のカンファレンスで演説、財務報告の品質向上の必要性を主張

Transparency

Transparency is one of the main and most important principles guiding securities regulators in their response to the financial crisis. This has in turn triggered many policy decisions aimed at reforming the financial system with pressure being applied to international bodies such as the International Accounting Standards Board (IASB) to accelerate their agenda.

Though there is a clear need for better regulation, and we fully support these initiatives, I think we should not create the impression that we can legislate for every possible scenario. The IASB cannot develop IFRS capable of capturing all the necessary disclosures for any company around the world.

Financial statements are seen as becoming irrelevant, too lengthy, too detailed and too burdensome for preparers to make. Perhaps more than legislative changes or more standards we need to develop a different mind-set.

Companies and auditors need to apply judgement on the basis of principle-based standards. Securities regulators and accounting enforcers are criticised for asking for more disclosures, the argument being that this is the reason for overly long reports that are inaccessible for investors. Our emphasis on disclosure is not because we believe that disclosure could replace the recognition and measurement principles, but because it allows issuers to provide investors with high-quality information within a principles-based environment.

A query from an enforcer is an invitation for an issuer to explain its judgements in omitting a disclosure and not necessarily an indication that it should be included in the financial statements. A principles-based environment can however only survive if clear and entity-specific disclosures, re-assessed at the end of each reporting period, bring relevant decision-useful information to investors by presenting the judgements that had most significant effects on the amounts recognised in the financial statements. If not, detailed prescriptive requirements would need to be developed and we all know that what is important today will not necessarily be so in the next financial year.

The only way to avoid this is for issuers to stop providing boilerplate information mimicking the standards. Clear and decision-useful information is what we need. In other words, genuine transparency.

ESMA issues on a yearly basis common EU enforcement priorities highlighting the areas on which all EU enforcers will focus when reviewing that year’s financial statements. We have done that for the first time in 2012 and we consider it as a very useful tool to communicate with market participants (preparers, auditors and investors).

Impairment of non-financial assets

ESMA published earlier this year a study showing significant shortcomings in areas related to the goodwill impairment test. In the 2012 economic context only one third of the issuers we examined recognised impairment losses, 80 per cent of those issuers are using value in use, and 20 per cent apply a terminal growth rate higher than 3 per cent - which is an interesting figure in the current economic environment!

Unfortunately we have not seen sufficient progress in the way companies report since then and impairment is still too often not sufficiently and correctly addressed in the financial statements. Investors need more information on the reasonableness of cash flow projections and key assumptions used by management in determining value in use. In our opinion investors also need a sense of the safety margins that an entity has and believe that meaningful sensitivity analyses are very useful information tools.

Defined benefit obligations

The continued numerous debt downgrades over the last year increased the debate on the existence of a deep market in high quality corporate bonds and to which market discounted post-employment benefit obligations should be referenced. ESMA asked the IFRS Interpretations Committee to clarify this issue. The IASB tentatively decided to amend IAS 19 – Post-Employee Benefits to clarify that the depth of the bond market should be assessed at the currency level (for the entire euro-zone: the euro) and not at the country level. Now, we expect issuers to use an approach consistent with this clarification and we believe this should be less problematic for this year end. We also think it is important that entities are presenting the actuarial assumptions used in their valuation and their sensitivity analyse s, which are particularly relevant for groups with large pension schemes.

Fair value

There have been numerous discussions with respect to fair value measurement issues as there seems, in general, to be a lack of transparency. Measurement bases cannot always be well understood from what companies present in their accounts. The IASB’s new standard (IFRS 13 – Fair Value Measurements) relevant for items measured at fair value by a company (such as real estate properties, so not only relevant for banks) will be helpful in this respect.

We think it is important that issuers apply this standard in the right way by providing enhanced disclosures and transparency on the valuation methodologies and the classification in the fair value hierarchy. We should not forget the debate that took place during the crisis on the fair value measurement hierarchy in the context of active/non-active markets and the use of inputs for level 3 measurements. The more unobservable data are included in the measurement of fair value, the more important it is for users to understand the underlying uncertainties. Including a description of the sensitivity to changes in unobservable inputs if a change in those inputs might result in a significantly different fair value measurement, is relevant information for investors.

Financial institutions

ESMA is about to publish a study for which we looked at the financial statements of 39 European financial institutions to assess comparability between institutions, overall transparency and compliance with IFRS requirements. Though there have been many efforts to improve the quality of financial statements, you will see that the lack of information, and divergences among issuers we have noted in some areas, are disappointing.

Three key messages for financial institutions and – not to forget: their auditors, are therefore:

1) We observed a wide variability in the quality of the information provided and identified cases where the information provided was not sufficient or not sufficiently structured to allow comparability among financial institutions. For example, regarding impairment of equity instruments classified in the so-called available-for-sale category, a number of institutions did not provide any information. Others provided ambiguous disclosures on how they applied ‘significant or prolonged criteria’ suggesting the use of a combination of significant and prolonged.

More than half of the financial institutions quantitatively disclosed what they consider significant or prolonged. However, ESMA found ranges from six to 36 months in relation to the time period and from 20 per cent up to 50 per cent in relation to the decline in fair value.

2) Although more financial institutions provided information on forborne financial assets compared to the 2011 IFRS financial statements, there is a need for more granular quantitative information on the effects of forbearance that would enable investors to assess the level of credit risk related to forborne assets and their impact on the financial position and performance.

3) More generally, we hope that issuers will enhance their disclosures on exposure to credit risk, its mitigation (e.g. by collateral, guarantees or credit default swaps), analysis of specific concentrations of credit risk and disclosure of impairment policies in order to enable investors to assess overall credit risk. There is still too much unclarity in the area of liquidity and funding risk, asset encumbrance and fair value measurement of financial instruments.

The report will be issued in the coming days and I believe that it contains many good elements to be considered when preparing the 2013 year-end accounts. Transparent financial statements providing a true and fair reflection of a financial institution’s position and performance will contribute to the ECB’s upcoming asset quality review. This is not to make any particular remark on what could come out of that exercise, but just to emphasise that even as banks have improved the quality of their accounts over the last year, there are still elements needing further improvement, with respect to measurement or disclosures, which are key for market confidence.

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It is ESMA’s view that endorsement of IFRSs should be entrusted to a body that operates by its constitution in the public interest and respects the following principles:

1. ensuring independence from private stakeholders’ interests which has been identified as a significant weakness of the current system. Of course, this independence does not preclude in any way extensive consultations of market participants as part of the regulatory process;
2. ensuring that all EU Member States are represented; and
3. ensuring proper interaction with existing European authorities playing an important role in the area of financial reporting.

You will be aware that Commissioner Michel Barnier asked Philippe Maystadt to compile a report on the governance framework around the EU endorsement mechanism. His report explores various options in relation to the body which should provide endorsement advice to the Commission, and recommends the use of the current EFRAG structure with some changes in terms of governance in order to transform it from a fully private body to a structure with some more prominent public interest elements. However, I believe it is important to ensure that its governance should be subject to more significant changes which should follow the principles I have just mentioned before. Therefore, we hope that the Commission will ensure that these principles will be taken into consideration when putting forward its proposals.

Finally, I would like to say that ESMA, in line with its mandate regarding financial reporting, must play an important role in financial reporting enforcement and we want to ensure that enforceability matters are considered as part of the standard setting process. Therefore, we look forward to seeing how in the proposed new framework we can fulfil that mandate.

Full speech

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