As the regulator of Luxembourg’s financial sector, the CSSF performs annual enforcement campaigns to check whether the financial information provided by the issuers of securities complies with relevant reporting framework, e.g. IFRS. The 2019 campaign examining financial information from 2018 was carried out as both unlimited scope examinations (evaluation of all the financial information of an issuer) and focused scope examinations (evaluation of pre-defined topics, e.g. the enforcement priorities announced each year). The examination covered 26 percent of the issuers, which represents an average four-year rotation period for each issuer.
Unlimited scope reviews
In total, 16 percent of the issuers were examined under the 2019 unlimited scope review, of which 73 percent report according to IFRS. Unsurprisingly, concerning IFRS alone, the majority of findings –meaning cases where accounting treatments were not IFRS compliant – relate to one area whose importance is often neglected and underestimated: the overall presentation of financial statements (IAS 1/IAS 34). After that, there were several findings on impairment of assets (IAS 36), financial instruments (IAS 32, IAS 39, IFRS 7 and IFRS 9), fair value measurement (IFRS 13 but also IAS 40) and statement of cash flows (IAS 7). A significant number of findings also related to the alternative performance measures (APMs), which were examined for conformity with ESMA Guidelines on APMs, effective as of 2016.
Overall 2019 enforcement findings
As expected, the overall focus of the 2019 campaign was on the new standards (IFRS 9, 15 and 16), but IAS 36 and APMs received some attention as well due to the significant number of findings from unlimited scope reviews, as mentioned above. Let’s take a closer look at the main issues and findings.
All three new standards have one recurring finding in common: “boilerplate, generic, not entity specific disclosures” of accounting policies (e.g. classification categories and measurement of financial instruments) and/or assumptions and judgements used by the entity (e.g. determining the lease term, including the assessment of extension and termination options, and the discount rate).
Looking specifically at IFRS 15, there is one chronic issue across all of the businesses: insufficient or inappropriate disaggregation of revenue. The entities also failed to provide, if applicable, enough information to understand the relationship between disaggregated revenue, as required by IFRS 15, and revenue disclosed for reportable segments.
As previously discussed, IFRS 9 enforcement focused mainly on banking issuers. Of the several findings, all of them encountered the same stumbling block: expected credit loss (ECL). You can probably already guess the issues: confusing, incomplete or missing disclosures of key inputs in the calculation (e.g. how forward-looking information was considered; see the full CSSF report) and unclear information on ECL movements. Nevertheless, the CSSF also reviewed the non-banking issuers and pointed out that while using the provisional matrix as permitted, information on credit risk exposure should be included as well.
Surprisingly, apart from the issues mentioned above (judgements and assumptions), the implementation of IFRS 16(1) was mostly satisfactory. The CSSF reminded the issuer of the necessity of proper transitional disclosures and even the application of specific disclosures for lessees (e.g. maturity analysis of lease liabilities; see the full CSSF report).
Impairment of assets under IAS 36 is a challenge, especially due to the high level of judgement. The key here is to provide cash flow projections based on reasonable and supportable assumptions. As the CSSF revealed, this was unfortunately not the case for several issuers. Additionally, the evolution of capital expenditure was often not in line with the evolution of revenues and there were misstatements in the discount rate calculations.
And finally, the CSSF is focusing on APMs, which issuers are still failing to properly explain, reconcile and disclose – while giving them more prominence than measures stemming from the financial statements, the opposite of what they should be doing.
What can we take away from this?
The fact that these non-compliance findings stem mostly from the new standards is logical. A lack of experience and precedent makes them challenging. However, if we look closer, what are the key issues? The judgements, assumptions, accounting policies and overall presentation and disclosures of information relevant to the reader of the financial statements (IAS 1).
So, pay close attention to this particularly standard and remember: The information can be deemed materially misstated if it is obscured,(2) e.g. vague, unclear, scattered, hidden or inappropriately aggregated/disaggregated.
(1)The CSSF reviewed 2019 interim disclosures of 13 issuers impacted by IFRS 16 as lessees
(2)Amendments to IAS 1 and IAS 8 on Definition of Material, effective as of 1 January 2020.