Pursuant to the Law of 11 January 2008 on Transparency requirements for issuers (the “Transparency Law”), the CSSF is monitoring that financial information published by issuers, in particular their consolidated and non-consolidated financial statements, is drawn up in compliance with the applicable accounting standards.
In this context, the CSSF draws the attention of issuers and auditors on identified financial reporting topics they should particularly consider when preparing and auditing the IFRS financial reports for the 2019 year-end (the “2019 financial reports”).
As in previous years, the European Securities and Markets Authority (“ESMA”), together with the European national accounting enforcers, including the CSSF, identified European common enforcement priorities (the “ECEPs”) for the 2019 financial reports to which particular attention will be paid when monitoring and assessing the application of IFRS requirements.
In its communication, ESMA also underlines specific requirements relating to the sections of the annual financial report other than financial statements, for instance particular disclosures of non-financial information and specific aspects of the ESMA Guidelines on Alternative Performance Measure (the “Guidelines on APMs”).
When establishing its enforcement campaign, the CSSF assessed how to monitor these common priorities defined at European level, and communicated by ESMA, and also considered the need to identify further items of interest. The underlying analysis is based on the following criteria:
- the importance and relevance of these topics for issuers under the CSSF’s direct supervision;
- the experience and history of issues encountered by the CSSF during previous campaigns; and
- the importance of judgments and assumptions to be made by issuers in dealing with these topics.
Thus, the CSSF’s 2020 enforcement campaign will be governed by the following priorities:
Section 1: Priorities related to IFRS Financial Statements
a) Application of IFRS 16 Leases for lessees
IFRS 16 is mandatory for annual reporting periods beginning on or after 1 January 2019. This standard notably sets out how an issuer shall recognise, measure, present and disclose leases. IFRS 16 provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases except for short-term leases or leases for which the underlying asset is of low value.
In the context of the implementation of this standard, issuers are asked to pay particular attention to the following points:
- the determination of the lease term which may require significant judgement. In that context, issuers are recalled to consider the IFRS IC tentative agenda decision dated June 2019 on the lease term of cancellable or renewable leases2 and any future relevant discussion and decision;
- the determination of the discount rate(s). Here again, issuers should consider the recent discussion on the issue of the IFRS IC;
- the disclosure of significant judgements and assumptions made when applying IFRS 16 and notably in relation to the two above-mentioned points, for which the CSSF found that disclosure in the 2019 interim financial statements was largely incomplete and boilerplate; and
- the specific presentation requirements of items related to leases in the primary financial statements or in the notes where necessary. The CSSF reminds issuers that the carrying amount of right-of-use assets should be disclosed separately by class of underlying assets;
- the transitional disclosures. All issuers reviewed in 2019 stated that they applied the modified retrospective approach at the date of initial application. Most of them clearly disclosed the practical expedients used and the incremental borrowing rate then applied, but only a few provided fully compliant transitional disclosures. The CSSF urges issuers to provide an explanation of any difference between the operating lease commitments disclosed when applying IAS 17 Leases and the leases recognised under IFRS 16. Disclosures in a tabular format are considered good practice.
b) Follow up of the application of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers
ESMA and the CSSF will continue to focus on the application of IFRS 9 and IFRS 15 and the understandability of their related disclosures during the forthcoming examinations of the financial statements, and more particularly for credit institutions (IFRS 9) and industries in the corporate sector (IFRS 15). Application of IFRS 9 by credit institutions: In its priorities for 2020, ESMA identifies a number of areas that merit closer scrutiny, and based on its examinations of the 2018 financial statements of credit institutions, the CSSF concurs with the relevance of these subjects, which include:
- the determination of the expected credit losses (ECLs) and forward looking information;
- the assessment of significant increase in credit risk (SICR); and
- ECL disclosures: during its 2019 enforcement campaign, the CSSF has noted that there is still room for improvement, especially regarding disclosure of the inputs underpinning the scenarios (e.g. key assumptions, parameters). Indeed, the CSSF is of the view that providing only qualitative disclosures about ECL models is not sufficient to enable users to understand the nature and extent of the risks arising from financial instruments. The ECL provision is a source of estimation uncertainty and this means that a sensitivity analysis of changes in assumptions, parameters and credit risk models should be presented.
Application of IFRS 15 by corporate issuers:
While examinations undertaken in 2019 enabled the CSSF to see that there were often few significant impacts on the amount of revenue recognised, they also permitted the CSSF to note a number of areas of improvement in the application of IFRS 15 by issuers, also included in the ECEPs for 2019 financial reports:
- to improve disclosures by providing more detailed and entity-specific information about accounting policies on revenue recognition, significant judgements and estimates and contract balances. It notably concerns the identification of performance obligations and the timing of their satisfaction (point-in-time vs over time), the transfer of control of promised goods or services, whether the issuer acts as a principal or an agent under the contract, the determination of the transaction price and the amounts allocated to performance obligations; and
- to disaggregate revenue into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. For instance, in some cases, the CSSF has noted that more detailed revenue information is disclosed outside of the financial statements (e.g. website/management report and/or investor presentations). If issuers are providing revenue information for major product lines and geographical areas outside of the financial statements, then they need to consider whether additional categories for the disaggregation of revenue should be presented in the financial statements. When considering the level of (dis-) aggregation of revenue, the CSSF also reminds issuers to consider their activities and the economic factors that affect their contracts with customers.
Finally, ESMA and the CSSF draw issuers’ attention to the discussions of the IFRS IC on implementations and application issues on IFRS 15.
c) Specific aspects of application of IAS 12 Income Taxes
Paragraph 34 of IAS 12 states that a deferred tax asset (“DTA”) shall be recognised for the carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised. The CSSF draws attention to the ESMA Public Statement on IAS 12 Income Taxes ‘Considerations on recognition of deferred tax assets arising from the carry-forward of unused tax losses’. This Public Statement sets out expectations regarding the application of the requirements relating to the recognition, measurement and disclosure of DTAs arising from unused tax losses. The CSSF will continue to examine issuers’ judgements related to the recognition, measurement, re-measurement and disclosure of DTAs.
IFRIC 23 Uncertainty over Income Tax Treatments clarifies the accounting for uncertainties in income taxes. IFRIC 23 applies to the determination of taxable profit/loss, tax bases, unutilised tax losses, unused credits and tax rates in situations where, under IAS 12, there is uncertainty over income tax treatments. IFRIC 23 is effective for accounting periods beginning on or after 1 January 2019. ESMA and the CSSF expect issuers to provide transparent and entityspecific disclosure of their accounting policies regarding the recognition, measurement, presentation and disclosure of uncertain tax positions.
Finally, recent discussions of the IFRS IC on presentation of assets and liabilities related to these uncertain tax treatments in the statement of financial position should be considered by issuers.
d) Valuation of intangible assets acquired in a business combination
The identification, recognition, valuation and determination of the useful life of intangible assets is a challenging step for issuers, notably when they have been acquired as part of a business combination, considering the significant number of underlying assumptions used to measure such intangible assets. The determination of fair value may be particularly subjective for intangible assets for which there is usually no observable market, such as customer-related intangibles (customer relationships, customer lists, customer contracts and order backlogs) and marketing-related intangibles (brand names and internet domains).
As part of the ECEPs for 2017 IFRS financial statements, ESMA already reminded issuers of some specific measurement and disclosures issues stemming from IFRS 3 Business Combinations. At that time, the attention of issuers was notably drawn to disclose, where relevant, the significant judgements underlying the conclusion whether separation of intangible assets was deemed necessary.
Indeed, information on the assumptions and measurement techniques used in the valuation of material assets, liabilities and non-controlling interests acquired in a business combination is relevant for investors and could be provided in light of the requirements of paragraphs 125-129 of IAS 1 Presentation of financial statements, which require disclosure of sources of estimation uncertainty when a significant risk exists within the next financial period of a material adjustment to the carrying amount of assets. This disclosure requirement applies to some fair value measurements used in the business combination regardless of whether the measurement period is still open. In this respect, mere reference to external valuations does not provide sufficient transparency on the methodologies and inputs used and therefore does not help users of financial statements to understand the economics behind fair value measurements and evaluate their reliability.
The CSSF therefore encourages again the disclosure of valuation methods and assumptions used in the valuation of intangible assets acquired in a business combination, as such disclosure increases users’ understanding of the net assets acquired as well as enhances the transparency of significant management judgements and the quality of the fair value measurement.
Section 2: Topics related to other parts of the Annual Report
a) Non-Financial information
Since 1 January 2017, the Law of 23 July 2016 on disclosure of non-financial and diversity information (the “Law of 23 July 2016”), implementing the European Directive 2014/95/UE (the “NFI Directive”), requires certain large undertakings and groups to provide additional non-financial and diversity disclosures including a non-financial statement containing information on environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters.
The CSSF reminds that last year it has carried out an examination of relevant publications for 2017 and provided observations and recommendations. This year, the CSSF performed another examination of such publications for 2018 and intends to release its results soon.
The ECEPs for the 2019 financial reports highlight some general considerations to improve the application of the NFI Directive:
- the focus on disclosures of material information, both in terms of impact of these matters on the issuer’s activity and the impact of these activities on non-financial matters;
- the provision of a fair and balanced view of the outcome of their policies, meaning that difficulties and issues should also be disclosed; and
- the completion of disclosure of relevant Key Performance Indicators (“KPIs”) by information on any progress made with reference to previous reporting periods and any relevant targets which may enable users to effectively assess the issuer’s performance; and
- the disclosure of the frameworks they have relied upon, where applicable, and provide relevant information, for example whether these frameworks have been complied with in whole or in part, explaining which disclosures were selected and why.
As part of the specific topics included in the enforcement priorities for 2020 in relation to non-financial information, an emphasis is also set on environmental matters and climate change. Thus, in June 2019, the European Commission published guidelines on reporting climate-related information, which in practice consist of a new supplement to the existing guidelines on non-financial reporting. This supplement, whose recommendations are aligned with those of the Task-Force for Climate Related Financial Disclosures, should help issuers in providing a relevant depiction of the financial consequences of climate change, thereby also improving the integration between financial and non-financial disclosures.
The CSSF and ESMA remind issuers of the continued relevance of matters relating to the environment and, particularly, of the challenges posed by climate change.
b) Alternative Performance Measures (“APMs”)
As a consequence of the implementation of IFRS 16, some issuers modify or include new APMs in their communication documents. In accordance with paragraphs 41 to 44 of the Guidelines on APMs, consistency should be adopted when defining or calculating APMs. Issuers are reminded that whenever they need to redefine, replace or even stop using some APMs, they should explain these changes, the reasons why they result in more reliable and relevant information and provide restated comparative figures.
Section 3: Other point of attention for 2020 Annual Financial Reports
European Single Electronic Format (“ESEF”)
As from 1 January 2020, issuers on EU regulated markets shall prepare their annual financial reports (AFRs) in a European single electronic format. The objective is to make reporting easier for issuers and to facilitate accessibility, analysis and comparability of AFRs.
Therefore, all issuers subject to the requirements of the Transparency Directive should publish their AFRs in XHTML, a human readable standard which can be opened with any standard web browser. Where AFRs include IFRS consolidated financial statements, issuers shall mark-up those consolidated financial statements using XBRL tags (thanks to the Inline XBRL technology).
A two-year implementation phase is foreseen where only the marking up of the primary financial statements is required. As such, the primary financial statements need to be completely and in detail tagged using XBRL tags. The notes to the consolidated financial statements can be marked up on a voluntary basis but need at least to be “block” tagged. AFRs for financial years beginning on or after 1 January 2022 should be tagged in detail throughout the complete AFR, i.e. the primary financial statements and the notes to the consolidated financial statements.
As ESEF Regulation is a binding legal instrument, the European Commission specifies that ESEF-compliant reports are to be audited.
In order to provide guidance and to assist issuers on the preparation of AFRs in Inline XBRL (“iXBRL”), ESMA has published the ESEF Reporting Manual. The ESEF Reporting Manual provides issuers, amongst others, with guidance on the use of languages, the use of elements available in the IFRS taxonomy but not included in the ESEF taxonomy, the selection of appropriate elements to mark-up disclosures and on anchoring of extension elements. Broadly it illustrates common issues that may be encountered when creating iXBRL documents and explains how to resolve them. ESMA furthermore has published some video tutorials on ESEF in order to support issuers when implementing ESEF and preparing their iXBRL reports. The lately published video tutorial addresses some questions and answers which have been raised by market participants and which the CSSF encourages issuers to consider when preparing their AFRs in iXBRL.
The CSSF also wants to highlight that the ESEF Regulation will not change the filing obligations under the Transparency Directive. AFRs prepared in iXBRL will continue to be filed with the CSSF. The CSSF, being the competent authority following Article 22, paragraph (1) to ensure that the provisions of the Transparency Law are applied, will ensure that the provisions contained in the ESEF Regulation are applied.
Further information and the detailed provisions of the ESEF can be found on ESMA’s website.
More information on inspections and findings by the CSSF within the framework of its mission under Article 22 (1) of the Transparency Law can be found on the CSSF’s website under Enforcement of financial information and in its annual report.