Enforcement of the 2017 Financial Information Published by issuers subject to the transparency Law

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

In this context, the CSSF draws the attention of issuers and auditors on identified financial reporting topics they should particularly consider when preparing and auditing, respectively, the International Financial Reporting Standards (hereafter referred to as “IFRS”) financial statements for the year ending 31 December 2017.

As in previous years, the European Securities and Markets Authority (hereafter referred to as “ESMA”), together with the European national accounting enforcers (hereafter referred to as “enforcers”), including the CSSF, identified common enforcement priorities for the 2017 financial statements to which particular attention will be paid when monitoring and assessing the application of all IFRS requirements.

When establishing its enforcement campaign, the CSSF has assessed how to monitor these common priorities defined at European level and communicated by ESMA and considered the need to identify other items of interest. The underlying analysis is based on the following criteria:

• the importance and relevance of these topics for issuers under the CSSF’s direct supervision;
• the importance of judgements and assumptions to be made by issuers in dealing with these topics; and
• the experience and issues encountered by the CSSF during previous campaigns.

The campaign will thus be governed by the following priorities:

Disclosure of the expected impact of implementation of major new IFRS standards in the period of their initial application

ESMA highlights the need for high-quality implementation of the new IFRS standards, and communication of their expected impact on the financial statements in the period of their initial application, as required by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. This is likely to be particularly relevant for IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, which become applicable as of 1 January 2018 and IFRS 16 Leases which becomes applicable as of 1 January 2019, with early application allowed.

In 2017, ESMA has undertaken a fact-finding exercise on the 2016 annual financial statements and 2017 interim financial statements to assess the information issuers provided to users concerning the implementation of IFRS 9 and IFRS 15. While ESMA and the CSSF, for whom this was one of its 2017 enforcement campaign priorities, have noted that practice has varied concerning the specificity of the information provided, a number of informative qualitative disclosures on the implementation of the new standards have been identified.

Therefore, ESMA and the CSSF expect that the impacts of the initial application of the new standards will be known or reasonably estimable at the time of the preparation of the 2017 accounts. The CSSF will monitor that such disclosures are done with adequate qualitative and quantitative data.

Specific measurement and disclosure issues stemming from IFRS 3 Business Combinations

During its 2017 campaign, the CSSF already put a special focus on the key aspects of accounting for a business combination under IFRS 3, in particular on the recognition and measurement of assets acquired and liabilities assumed, implying the identification of intangible assets previously not recognised, and their measurement at fair value in accordance with IFRS 13 Fair Value Measurement.

This topic has been relayed at the European level as ESMA set it as one of its priorities for 2018. More particularly, ESMA urges issuers to ensure consistency between the assumptions used to measure intangible assets at fair value for the purpose of a purchase price allocation in a business combination and the assumptions applied for any impairment testing as well as for determining useful lives used for amortisation.

ESMA also draws the attention of issuers to certain requirements of IFRS 3, notably on (i) the adjustments to fair value during the measurement period where issuers have to disclose that fact and provide provisional amounts, but also the nature and amount of any measurement period adjustments recognised during the reporting period; (ii) the situations related to the existence of a bargain purchase, and the steps that need to be performed before a such gain can be recognised; and (iii) the analysis needed to identify whether part of the consideration received in a business combination qualifies as contingent consideration or as remuneration for post-combination services.

Accordingly, the CSSF will continue to monitor the compliance with these significant aspects of IFRS 3, including but not limited to judgements and estimates made by management and the most meaningful disclosures.

Specific issues of IAS 7 Statement of Cash Flows

The amendments to IAS 7 which are effective for annual periods beginning on or after 1 January 2017, require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash and non-cash transactions. Such information should present, when necessary, changes from financing cash flows, changes arising from obtaining or losing control of subsidiaries or other businesses, the effects of changes in foreign exchange rates and in fair values as well as other changes.

The CSSF’s examination in this priority will focus primarily on the respect of these additional presentation requirements.

Fair value measurement and disclosure requirements provided for by IFRS 13

At the end of 2016, ESMA launched a thematic study on IFRS 13 with the purpose of gathering evidence on the implementation of IFRS 13 in order to feed the International Accounting Standards Board’s (hereafter referred to as “IASB”) process on the post implementation review of IFRS 13.

This ESMA thematic review has been undertaken in the first quarter of 2017 through both the identification of enforcement actions taken by enforcers and detailed information on the application of IFRS 13 on the basis of a desktop review of the 2015 financial statements of a sample of 78 European issuers. This review addressed the following key topics: (i) fair value disclosures, (ii) unit of account, (iii) impact of a decrease in market activity on the assessment of an active market and orderly transactions; and (iv) valuation adjustments to measure fair value of derivative positions.

ESMA published the results of its review in a report in July 2017. While overall, the results show that the requirements of IFRS 13 have generally been well incorporated in the financial statements, there is room for improvement in the level of compliance and comparability in the application of its requirements. The main breaches and omissions that have been noted are to be found in the following areas:

• Disclosure effectiveness: Issuers generally comply with the minimum specified disclosure requirements but tend to provide either too generic and boilerplate or insufficiently disaggregated information;
• Application of the unit of account: Issuers should provide more entity-specific disclosure on how they estimate fair value and explain the rationale for their approach;
• Level of market activity and fair value: ESMA encourages issuers to disclose the processes followed and the specific situations where they have concluded that quoted prices or transaction prices, further to a decrease in the level of market activity, did not represent fair value; and
• Valuation adjustments for derivatives: While issuers widely provide information on Credit Value Adjustment (“CVA”), some issuers fail to comply with the appropriate level of information on Debit Value Adjustment (“DVA”) and Funding Value Adjustment (“FVA”). Furthermore, information on inputs and methodologies used to calculate these adjustments is provided in limited cases.

In order to address an appropriate follow-up of this thematic study, and to ensure that the requirements of IFRS 13 are well incorporated in the 2017 annual financial statements, the CSSF will continue to monitor the progress on those subjects and take appropriate enforcement actions whenever material misstatements are identified.

Actions from the post-implementation of IFRS 8 Operating Segments

In July 2013, the IASB completed the post-implementation review of IFRS 8. The final report concluded that the benefits of applying the standard were as expected and that the overall standard achieved its objectives and has improved financial reporting.

However, the IASB identified a number of issues that could be considered for improvement, and released in March 2017 an Exposure Draft on Improvements to IFRS 8 which provides further guidance and clarification on the application of this standard. Separately, as a result of its previous enforcement reviews, the CSSF is still observing differences between operating segments identified by issuers in a same industry or sector. This could affect the comparability and the IFRS convergence in Europe.

For these reasons, the CSSF will particularly scrutinise this area during its 2018 enforcement examination campaign and will, if necessary, take actions to improve the quality of disclosures.

Disclosure of non-financial and diversity information in the management report

Since 1 January 2017, the requirements of the Law of 23 July 2016 on disclosure of non-financial and diversity information for certain large undertakings and groups, implementing the European Directive, entered into force and require some issuers to provide additional disclosures including:

• A non-financial statement containing information on environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters; and
• A description of the diversity policy applied in relation to an entity’s administrative, management and supervisory bodies with regard to aspects such as, for instance, age, gender, or educational and professional backgrounds.

While different national and international frameworks exist, the European Commission further released in June 2017 the Guidelines on non-financial reporting, a non-binding methodology with a view of facilitating relevant, useful, and comparable disclosure of non-financial information by undertakings.

There is actually no imposed way to comply with these requirements and it is the responsibility of issuers to identify, based on their business model, what is relevant to understand their developments in that field. Therefore, the CSSF will ensure that concerned issuers provide information which is useful and meaningful to users of financial statements and will monitor in general how issuers adapt consistently to this new legislation.

More information on inspections and findings by the CSSF within the framework of its mission under Article 22 (1) of the Transparency Law are given under the section Enforcement of financial information of the CSSF website and in its annual report.