ESMA Issues IFRS Enforcement Priorities for the EU, Urges Auditors to Play Important Role

The consistent and coordinated enforcement of IFRS is a condition precedent to market discipline, said ESMA Chair Steven Maijoor, which in turn contributes to investor protection and financial stability. Further, The worldwide adoption of IFRS is a necessary but, on its own, an insufficient condition for global comparability.  In order to achieve true global comparability, emphasized the ESMA Chair in his London remarks, the standards have to be enforced. 

 Thus, ESMA has issued a set of common IFRS enforcement priorities in the EU, which is the first time EU enforcers have agreed on common enforcement priorities highlighting the areas on which all EU enforcers will focus when reviewing 2012’s financial statements.  These areas are: financial instruments; impairment of non-financial assets; defined benefit obligations; and provisions that fall within the scope of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets. 

ESMA issued the EU common enforcement priorities before the year-end so that companies and their outside independent auditors could and should take due consideration of them when preparing and auditing the IFRS financial statements for the year ending December 2012.  Chairman Maijoor urged outside auditors to play an important role in assuring investors about a company’s financial position and performance, which is more important than ever for all companies, and especially financial institutions. 

Since the beginning of the financial crisis, noted the Chair, transparency related to financial instruments is a top priority.  Issuers should provide disaggregated and expanded disclosures on material exposures to all financial instruments that are exposed to risk. ESMA expects relevant quantitative and qualitative disclosures reflecting the nature of the risk exposure, elements related to the valuation of the instruments as well as an analysis of the concentration of exposure to relevant risks. In addition,  there should be due assessment at the end of the reporting period as to whether there is evidence that a financial asset is impaired.  ESMA believes that issuers should be more transparent on how they assess the event or events triggering impairment.

With regard to impairment of non-financial assets, ESMA believes that the current economic situation increases the likelihood that the carrying amounts of assets might be higher than their recoverable amounts.  The market value of many listed companies has fallen below their book value, a situation potentially indicating impairment and thus the need for an impairment test.

ESMA considers that particular attention has to be paid to the valuation of goodwill and intangible assets with indefinite life spans, whenever significant amounts are recognised in the financial statements.  ESMA emphasized the need to use assumptions that represent realistic future expectations and would expect issuers to provide entity specific information related to assumptions used, when preparing discounting cash flows (such as growth rates, discount rate and consistency of such rates with past experience) and sensitivity analyses.