A review by the European Union's markets regulator found continued shortcomings in companies' compliance with International Financial Reporting Standards (IFRS).

The European Securities and Markets Authority (ESMA) released a report detailing its own activities as well as other accounting enforcers within the European Economic Area. The other enforcers include bodies like Germany's Federal Financial Supervisory Authority, France's Financial Markets Authority, and the United Kingdom's Financial Conduct Authority and Financial Reporting Council.

In order to assess common enforcement priorities for the year, ESMA reviewed a sample of 185 IFRS statements from 2012, on which European enforcers took 46 enforcement actions. The authority said shortcomings included issuers' disclosures of management's approach to key assumptions and the sensitivity analysis of impairment of goodwill.

Of the 46 actions based on the 2012 priorities, 16 required public corrective notes or other public announcement and 30 required corrections in future financial statements. Notifications were sent to an additional 23 issuers without corrective action or public announcements being necessary, the report said.

Regarding impairment of non-financial assets, ESMA found that the IFRS regulation posed challenges to issuers. The review “illustrated that goodwill impairment losses were limited to a handful of issuers, concentrated in a very limited number of industries and identified shortcomings in relation to certain disclosures,” the report said.

For its 2013 review, ESMA kept measurement and disclosure of impairment of non-financial assets as part of its IFRS enforcement priorities due to past failings identified in those areas. The authority said it together with the national enforcers also would focus on monitoring the level of impairment of financial assets, and transparency in forbearance, liquidity risk, asset encumbrance, and fair value measurement.

ESMA's review of the Member State level found enforcement actions stayed steady in 2013. According to the report, European enforcers reviewed roughly 1,900 interim and annual IFRS statements and conducted about 500 enforcement actions. Of those, 1,050 were full reviews, representing about 14 percent of listed entities accounts in Europe. Again, impairment of non-financial assets was identified as a weakness. Other deficiencies noted by the agency included recognition and measurement of deferred tax assets, distinguishing between changes in accounting policies versus changes in accounting estimates, and recognition of financial liabilities.

                             

National enforcers select companies to review based on risk, random sampling, or rotation. The majority of enforcement actions consisted of corrections in future financial statements. Only in18 cases were entities forced to issue revised financial statements.

Also among ESMA's activities from last year was a review of the accounting practices of financial institutions in the EU. The review of 39 large European financial institutions from 16 countries, released in November, found that some of the disclosures were not specific enough to meet standards, lacked links between quantitative and narrative information, or could not be reconciled with primary financial statements. ESMA advised the financial institutions to pay attention to the review and continue improving the transparency of financial statements, especially in light of the upcoming assessment of the banking sector by the European Central Bank.

Also this week, the IFRS Foundation issued its 2013 annual report.

Michael Prada, chairman of the IFRS Foundation Trustees, said during 2013 the group continued to make progress in solidifying IFRS as the global accounting standard, and strengthened the “institutional underpinnings” of the foundation as the global standards-setter. Last year the foundation conducted a thorough review of IFRS adoption, covering 130 jurisdictions and 96 percent of the total capitalization of global financial markets. Of those jurisdictions, 81 percent require the use of IFRS for all or most publicly listed companies. Most of the other jurisdictions either permit or require IFRS for some companies.

Notably, in the United States, more than 450 foreign-based companies with a combined market capitalization of more than U.S. $5 trillion report to the Securities and Exchange Commission using IFRS, Prada said.

“The starting point for the IFRS Foundation was little more than 10 years ago – a point when nearly every country in the world maintained its own set of national accounting standards,” Prada wrote in the report. “Since that point, almost all those countries have invested considerable resources in developing and implementing plans to make the transition from national accounting standards to IFRS as the single set of high quality, global accounting standards.”

Among the trustees priorities going forward are supporting the IASB's convergence agenda with the U.S. Financial Accounting Standards Board, deepening cooperation with other national jurisdictions and international organizations, and enhancing long-term funding arrangements for the IFRS Foundation and maximizing operational efficiencies.

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