Enforcement of the 2015 financial information published by issuers of securities subject to the Transparency Law

Pursuant to the law of 11 January 2008 on transparency requirements for issuers of securities (hereafter referred to as the “Transparency Law”), the CSSF ensures that the financial information published by those issuers, in particular their consolidated and non-consolidated financial statements, is drawn up in accordance with the relevant applicable accounting standards.

As issuers are now preparing and finalising their financial information for the 2015 fiscal year, the CSSF wishes to draw the attention of those issuers preparing their financial statements in accordance with the International Financial Reporting Standards (hereafter referred to as “IFRS”), as well as of their auditors, to a number of topics and issues that will be the subject of specific monitoring during its enforcement campaign planned for 2016.

1. European Common Enforcement Priorities

As in previous years, the European Securities and Markets Authority (ESMA), together with national accounting enforcers, including the CSSF, identified financial reporting topics which will be specifically monitored during their enforcement campaign. These priorities encompass:

• the impact of the financial market conditions on the financial statements;
• the statement of cash flows and related disclosures; and
• the fair value measurement and related disclosures.

ESMA issued on 27 October 2015 a public statement which defines these European common enforcement priorities¹. This document is also available on the CSSF website under Enforcement of financial information.

2. Other points of attention identified by the CSSF

In addition to these common priorities defined at European level and communicated by ESMA, the CSSF considers it useful to identify other items of interest based on the following criteria:

• the importance of this topic for issuers under its direct supervision;
• the current relevance of the topic in question;
• the experience and history of issues encountered by the CSSF during previous campaigns;
• the importance of judgement and assumptions made by issuers in dealing with the topic.

Therefore, the CSSF has decided to also include in its 2016 enforcement campaign the following topics:

a) IFRS standards on consolidation

The newly issued or amended standards relating to consolidation (in particular IFRS 10 “Consolidated Financial Statements”, IFRS 11 “Joint Arrangements” and IFRS 12 “Disclosure of Interests in Other Entities”) are mandatory since 1st January 2014 in the European Union. Thus, the work conducted in 2015 by the CSSF on the application

of these standards in the financial statements of controlled issuers has stressed the existence of some specific issues, such as:

• the growing importance of judgement in determining control according to IFRS 10, especially when the analysis of other facts and circumstances is necessary;
• the investment entity’s status and its impact on the consolidation of data and the adequacy of disclosures about, notably, the fair values; or
• the potential difficulty in classifying joint arrangements as either joint operations or joint ventures based on existing rights and obligations and the impact on the accounting for these transactions. Indeed, to assess its rights and obligations, the entity shall consider the structure and legal form of the arrangement, the terms agreed between the parties in the contractual arrangement and, where applicable, other facts and circumstances.

These issues make it particularly important to disclose relevant information in the financial statements, including significant judgements and assumptions used, in accordance with IFRS 12. Therefore, the CSSF considers it necessary, once again, to carefully analyse how these standards are applied by issuers under its supervision.

b) Deferred tax assets according to IAS 12 “Income taxes”

Another point of attention identified by the CSSF concerns the recognition and measurement of deferred tax assets. The economic environment of recent years may have led entities to scale back their performance and in some cases to generate tax losses carried forward and deductible temporary differences. In this respect, the CSSF will particularly analyse the deferred tax assets recognised following these deductible tax losses as well as the existence and valuation of future taxable profits. It will focus on the information provided on the judgements made for the recognition of these deferred tax assets, as required by IAS 12.

c) The quality of disclosures in financial statements

The CSSF has communicated on numerous occasions that, considering the requirements of IFRS, the materiality and specificities of the information provided in the financial statements should be taken into account in order to foster the relevance of the information disclosed against an essentially exhaustive approach. Indeed, this latter approach does not allow, or only marginally, the identification of the key elements necessary for an understanding of the financial position, financial performance and cash flows of the entity and can sometimes bring said entity to give less or little useful information on these aspects.

There are many initiatives taken by the IASB and some European and national authorities on this issue. Thus, in October 2015, ESMA has published a statement aimed at improving the quality of disclosures provided in the financial statements² (This document is also available on the CSSF website under Enforcement of financial information. In addition, the IASB, as part of its project “Disclosure Initiative” to improve the information provided in the financial statements, has already issued an amendment to IAS 1 “Presentation of Financial Statements” which despite its mandatory application as from 1st January 2016 may be applied anticipatively. The amendment clarifies that an entity shall decide, taking into consideration all relevant facts and circumstances, how it aggregates information in the financial statements and not reduce the understandability of its financial statements by obscuring material information with immaterial information, among others. The IASB project also includes a reflection on the concept of materiality whose project “Practical Guide IFRS – Application of materiality to the financial statements” was released in October 2015.

Regardless of these projects or amendments, the CSSF considers that the existing IFRS (IAS 1 “Presentation of Financial Statements”, IFRS 7 “Financial Instruments: Disclosures” and IAS 34 “Interim Financial Reporting” in particular) already ensure the relevance and specificity of the information to be provided by issuers in their financial statements and therefore intends to pay special attention to this issue this year.

More information on inspections and findings by the CSSF within the framework of its mission under Article 22 (2) h) of the Transparency Law are given under Enforcement of financial information and in its annual report.