Thursday, November 01, 2018

Review of new IFRS standards in 2018 financials will be priority for European enforcement officials

By John Filar Atwood

How companies apply new reporting standards on financial instruments and revenue from contracts will be a priority for European enforcement authorities as they review 2018 financial statements, according to the European Securities and Markets Authority (ESMA). The group released its annual public statement on European common enforcement priorities, which is designed to promote the consistent application of IFRS and other financial and non-financial reporting requirements.

ESMA noted that the priorities reflect the relevance and magnitude of the change introduced by new reporting standards. They also take into account issues identified by national regulators through their enforcement activities.

IFRS 9 and 15. The public statement indicates that the 2018 enforcement priorities include the application of IFRS 15, Revenue from Contracts with Customers, and IFRS 9, Financial Instruments, for the first time in the 2018 IFRS financial statements. In addition, disclosure on the implementation and expected impact of IFRS 16, Leases, will be examined since it goes into effect in 2019.

EMSA Chair Steven Maijoor noted that ESMA expects issuers to provide a sufficient level of transparency on the application of new IFRS 15 and 9. In particular, he believes issuers should focus on the application and recognized impact of the new accounting models for revenue recognition and for impairment of financial assets.

ESMA’s public statement recommended that issuers focus on the identification and satisfaction of performance obligations, the disaggregation of revenue, and the disclosure of significant judgments related to recognition of revenue. For credit institutions, ESMA pointed to the application of the new expected credit loss model (ECL). It suggested that credit institutions give careful consideration to, and provide disclosure on, inputs used in the assessment of a significant increase of credit risk and in the determination of ECL.

Environmental disclosure. The public statement also highlights the requirements to disclose non-financial information, with a focus on environmental matters, and specific aspects of ESMA’s Guidelines on Alternative Performance Measures. Maijoor noted that environmental reporting is gaining momentum in Europe as part of a broader EU initiative to achieve a more sustainable financial system. He urged companies to provide investors with high quality disclosure in this area.

In the public statement, ESMA also highlighted the importance of providing disclosures on the possible impacts of Brexit. ESMA noted that the details of the exit scenario might become clearer by the date the 2018 annual financial reports, so issuers should provide sufficient transparency on its impact. This should include potential exposures and activities, as well as risks and sources of estimation uncertainty and the way these are managed by individual issuers, ESMA said.

ESMA and European regulators plan to monitor the application of the new IFRS requirements, and all other relevant provisions outlined in the public statement. National regulators should incorporate them into their reviews and take corrective actions where appropriate, ESMA stated. For its part, ESMA will collect data on how European issuers have applied the priorities, and plans to report on findings regarding the priorities in its report on the 2019 enforcement activities.