The European regulator, ESMA, issued a public statement in October 2017 defining the enforcement priorities that European national regulators will have during their review of listed companies' IFRS financial statements for the financial year 2017.

ESMA's three key priorities

  1. Disclosure of the expected impact of implementation of major new standards in the period of their initial application
  2. Specific recognition, measurement, and disclosure issues arising from IFRS 3 Business Combinations
  3. Specific issues related to IAS 7 Statement of Cash Flows

The first priority is not surprising, given that there will be significant changes to current accounting practices as well as recurring issues during the examination of financial statements. In addition, ESMA expects that the issuers assess and disclose potential risks and impacts related to Brexit, if applicable. (Visit KPMG's Brexit homepage to find out more about the impacts).

In this blog we'll focus only on the first priority.

New standards in focus

IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers are in the focus of ESMA, as they both go into effect on 1 January 2018. IFRS 16 will become effective only as of 1 January 2019; however, issuers are permitted to apply IFRS 16 early—at the same time as they apply IFRS 15.

Result of the fact-finding exercise on financial statements for IFRS 9 and IFRS 15

In 2017 ESMA conducted a fact-finding exercise on 2016 annual financial statements and 2017 interim financial statements in order to gain an overview of the implementation status with regards to IFRS 9 and 15. Their expectations were not satisfied, particularly at the level of the quantitative impacts of the new standards.

Expectations for financial statements for the year ending 2017

The regulator is expecting that by the time the annual financial statements for the year ending 2017 are prepared, the issuers have substantially completed their analysis for IFRS 9, 15 and also for IFRS 16, if early adopted and will be aware of not only the qualitative but also quantitative impacts of the initial application on their accounts.

Further, ESMA expects that the disclosures include the following:

  • accounting policy choices expected to be applied (including the transition approach and use of practical expedients)

The regulator is expecting incisive, entity-specific descriptions of the changes introduced by the new standards including statements on the choices permitted by the standards and choices made by the entity in order to enable users to properly assess the impact.

Issuers are furthermore requested to avoid boilerplate disclosures, as they don't help analysts and investors to assess the impact.

  • the number and nature of the expected impacts in comparison with the recognition in previous years

Detailed recommendations

ESMA included detailed recommendations in the annex of the statement for specific sectors.

Please watch this space for our next articles on the detailed recommendations of ESMA for banking, insurance, and corporate sectors, as well as on IFRS 13.

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.