Luxembourg: CSSF Releases Its Enforcement Priorities

Last Updated: 12 January 2018
Article by Stephan Lego-Deiber

Most Read Contributor in Luxembourg, August 2018

In accordance with the enforcement priorities published by the European Securities and Market Authority (ESMA) in October 2017, the Commission de Surveillance du Secteur Financier (CSSF) has now communicated as well on what its main areas of focus will be during its enforcement campaign.

Particular focus will be put on the law of 23 July 2016 and IFRS 8—more details below.

In its press release, the CSSF highlights the priorities as defined by ESMA:

  • disclosure of the expected impact of implementation of major new IFRS standards in the period of their initial application
  • specific measurement and disclosure issues stemming from IFRS 3 Business Combinations
  • specific issues related to IAS 7 Statement of Cash Flows

For more on the first priority, read our blog post about ESMA's enforcement priorities.

IFRS 3 Business Combinations

One of the CSSF's priorities will be consistency between the assumptions applied to the fair valuation of intangible assets to allocate the purchase price in a business combination, and the assumptions used for both impairment testing and useful life determination.

The Luxembourg regulator will also monitor whether the following items are made clear, as required by IFRS 3 (also as highlighted by ESMA):

  • any adjustments to the fair value during the measurement period where issuers have to disclose that fair value and to provide provisional amounts
  • the nature and number of any measurement period adjustments recognised during the reporting period
  • any bargain purchase situation, and, for such situations, the steps to be performed before a gain can be recognised
  • what analysis is needed to identify whether part of the consideration received in a business combination qualifies as contingent consideration or as remuneration for post-combination services

The CSSF will focus on compliance with the above-mentioned aspects on IFRS 3, including but not limited to monitoring the estimates, judgements, and relevant disclosures made by the management.

Additional information on cash flows

Amendments to IAS 7 have been effective since 1 January 2017, and the CSSF will focus on these changes which concern, in particular, additional disclosures on the changes arising from cash and non-cash transactions.

In addition to the priorities identified and released by ESMA, the CSSF will review the compliance of issuers on IFRS 13, IFRS 8, and the requirements of the Law of 23 July 2016.

Are you in compliance with IFRS 13's requirements?

In July of 2017 ESMA issued a report following a thematic study of IFRS 13. It examined the 2015 financial statements of 78 European issuers in order to determine compliance with IFRS 13, and how comparable the issuers' statements were to one another. IFRS 13 has been applicable since 2013. The International Accounting Standards Board (IASB) also conducted a post-implementation review—read more about it in our article IFRS 13: feedback, guidance, and the way forward.

ESMA found that the information IFRS 13 requests is lacking, making the following observations:

  • Disclosures are often too general and boilerplate, or the information is not sufficiently disaggregated.
  • Disclosures on fair value estimates and explanations of the rationale behind are often not sufficiently entity-specific.
  • Disclosures are often being done for situations where the market price does not reflect fair values or the subsequent processes in relation to calibration and adjustments.
  • The information on debit value adjustment (DVA) and funding value adjustment (FVA) is often poor, and explanations of the rationale and key determinants for value adjustments are at times weak.

Due to the importance of transparency and the extended disclosure requirements of fair value measurement to all stakeholders—and perhaps remembering the financial crisis of a few years ago—the CSSF has decided to follow up on the main breaches and omissions as revealed by the study in order to ensure compliance with IFRS 13.

Non-financial and diversity information should be meaningful

The Law of 23 July 2016, which implements European Directive 2014/95/EU with regards to the disclosure of non-financial and diversity information by certain large undertakings and groups, became effective on 1 January 2017. Due to different national and international frameworks being in existence, the European Commission published guidelines on the Directive in June 2017, representing a non-binding methodology meant to help issuers have relevant, useful, and comparable disclosures.

The CSSF plans to monitor whether issuers provide meaningful information and are consistent in their adaptation.

Lessons learned: IFRS 8

Regarding IFRS 8 Operating Segments, the CSSF still detects discrepancies in the identification of operating segments by issuers that operate within the same sector. Having concerns that comparability among reports, and Europe-wide convergence on IFRS, is thus hindered, the CSSF has put this area on its agenda for the enforcement campaign and will review operating segment information disclosed in accordance with IFRS 8.

Ultimately, the key messages from ESMA and from the CSSF are: do not to disclose information that is incomplete, and be as entity-specific as possible in order to provide meaningful and relevant information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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