ESMA 2018 key audit areas
ESMA set out the following key audit areas in 2018 (for 2017 annual and consolidated financial statements):
- Disclosure of the expected impact of the implementation of major new standards in the period of their initial application
- Specific recognition, measurement and disclosure issues of IFRS 3 “Business Combinations”
- Specific issues of IAS 7 “Statement of Cash Flows”
A detailed presentation of these key audit areas can be found on ESMA’s homepage.
Re 1: Disclosure of the expected impact of the implementation of major new standards in the period of their initial application
The key audit area relates to the notes disclosures under IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” on new standards not yet effective and their expected impact on future financial statements. This applies in particular to IFRS 9 “Financial Instruments”, IFRS 15 “Revenue from Contracts with Customers”, which become applicable as of 1 January 2018, and IFRS 16 “Leases”, which is mandatory for the first time from 1 January 2019.
Note: ESMA expects that the implementation projects (in particular for IFRS 9 and IFRS 15) will have been completed by the date of preparing the financial statements and thus that entity-specific quantitative and qualitative disclosures can be made concerning the impact and the options used.
Re 2: Specific recognition, measurement and disclosure issues of IFRS 3 “Business Combinations”
The report published by ESMA in 2014 on the review of the application of IFRS 3 “Business Combinations” retains its relevance due to the most recent enforcement activities. Therefore, particular attention must be paid to compliance with the standard in the treatment of intangible assets, adjustments during the measurement period, bargain purchases, mandatory tender offers, business combinations under common control, contingent payments and disclosures on fair value (e.g. consistent measurement parameters in the purchase price allocation and any subsequent impairment test).
Re 3: Specific issues of IAS 7 “Statement of Cash Flows”
For all reporting periods starting on or after 1 January 2017, information must be provided that enables users of financial statements to evaluate changes in financing activities. ESMA prefers the tabular format of presentation based on IAS 7 IE.E, where the development of “financial” liabilities is shown by means of cash and non-cash changes in the statement of reconciliation. Disclosures on the inclusion of certain components in cash and cash equivalents balances (e.g. overdraft facilities and balances from cash pool facilities) and on cash and cash equivalents balances with limited availability are also examined.
ESMA issues further Q & As on the Guidelines on Alternative Performance Measures
On 30 October 2017, ESMA (European Securities and Markets Authority) published further Questions and Answers (Q & As) on the Guidelines on Alternative Performance Measures issued in June 2015 (see also IFRS LINK March 2016 and May 2017). Listed companies must observe these Guidelines in their financial reporting as well as in ad hoc notices and/or in prospectuses. While the ESMA Guidelines do not constitute binding EU law and thus do not have any direct impact on the statutory enforcement procedure, the national Financial Reporting Enforcement Panels usually take these Guidelines into account provided they do not contravene national law.
Alternative performance measures include among others the ratios EBIT (Earnings before Interest and Taxes), EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) and ROCE (Return on Capital Employed).
The questions and answers on the Guidelines look at the definition of alternative financial ratios, the scope, exceptions, the definition of organic growth and handling fair value.
Note: The Q & As are available on the ESMA website.
ESMA: Enforcement decisions published
The national European enforcers audit the financial statements of companies with securities traded on a regulated market in Europe or in the process of admission to the market. The financial statements are prepared in accordance with the IFRSs and reviewed to determine the extent to which they comply with the IFRSs and other applicable reporting requirements, including the authoritative national legal requirements.
ESMA has developed a confidential database of enforcement decisions made by the individual European enforcers as a source of information in order to promote the appropriate application of IFRSs and thus provide companies using IFRS and their auditors with insights into the decision-making process of the European enforcers.
The following overview shows the most recent publications (up until 31 December 2017). The publications are available on the ESMA website.