Firms Grapple with Updated Reporting Standards

Nearly a quarter of investigated companies in 2015 failed to issue their financial statements in accordance with new regulations, according to an official report on the analysis of the European Securities and Markets Authority's (ESMA's) regulatory reqirements, published on March 29. 

According to the report, ESMA tested interim and/or annual financial results from 1,200 companies across the EU. In 273 cases, regulators had to take action due to inaccuracies in three main areas: the presentation of the financial statement, the impairment of non-financial assets, and the accounting for financial instruments.

No Surprise
These results come as no surprise since there is still a lot of confusion as to how the changes should be adopted. ESMA insists that the changes in the financial reports should follow all the guidelines published in October 2015. The regulator urges auditors and businesses to implement whatever changes are necessary to the process of information collection and its presentation.

These changes were confirmed to WatersTechnology and revolve around several areas, which can be reduced to one fundamental requirement: the simplification of methods and language. The new regulations do not necessarily dictate a change in the quantity of data provided. According to ESMA, the new accounting process should issue financial statements that will use clear and simplistic language. They should also be entity-oriented and should avoid any other disclosures that might "disorient" regulators. 

For ESMA, it is crucial for companies to implement—if they haven't done so already—the materiality process in their accounting methods. As it points out, materiality accounting ensures that the financial reports remain concise. ESMA also emphasizes the role of auditors in complying with the directives. "Auditors should encourage the issuers to focus on entity and be specific," ESMA officials say. "Issuing a financial report should follow these basic principles." The regulator says issuers should expect major impact on their reports as well as their IT systems.

Ahead of the long-awaited implementation of the IFRS 9 in January 2018, ESMA announced two directives to be issued.

"IFRS 9 is expected to have a significant impact on the financial statements of financial institutions, mainly because it will determine a material increase in the impairment losses, with effects on the performance, and require major changes in IT systems," the statement reads. "IFRS 15 is expected to have an impact on all companies because it refers to the recognition, measurement, and disclosure of the revenue of all listed issuers."

An ESMA spokesperson says the timeframe in when the announcements will be made has yet to be determined. "We expect them in the near future," the spokesperson adds. In the meantime, ESMA declined to explain the exact content of these directives, but it is understood that they will clarify certain issues with IFRS 9, which could help companies estimate their losses and adjust their systems to the new standards.

Without explaining how they should be done, ESMA expects these adjustments to be made as quickly as possible and they should be evident in the 2016 reports, as the regulator will be testing a sample of issuers again.  It is clear that there are still a lot of things to be done, not only by the issuers but also by the enforcers, who, as the report says, will be given further instructions on how to be more efficient in their evaluations.