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This article was first published in the September 2016 international edition of Accounting and Business magazine.

Disclosure practices vary across industries and countries. There is debate about how to achieve transparency and international comparability, and the analysis of disclosure practices and the potential economic consequences is a major accounting issue. 

This article provides an overview of some of the activities of the European Securities and Markets Authority (ESMA) and the European enforcers, when examining financial statement compliance with International Financial Reporting Standards (IFRS) by listed entities. ESMA identifies common enforcement priorities on an annual basis in order to guide enforcers. 

European enforcers examined the interim or annual financial statements of around 1,200 issuers, representing around 20% of all IFRS issuers. As a result, European enforcers took actions addressing material departures against 273 issuers. The main deficiencies were identified in the areas of financial statements presentation, impairment of non-financial assets and accounting for financial instruments. 

In 2015, ESMA analysed a sample of 189 issuers from 26 European Economic Area countries selected by European enforcers. The assessment related to: 

  1. the application of the accounting requirements on the preparation of consolidated financial statements
  2. the financial reporting by parties to a joint arrangement and related disclosures 
  3. the recognition and measurement of deferred tax assets. 

The sample was drawn from diverse sectors and from issuers with market capitalisations of less than €50m to greater than €750m. 


In its 2014 common enforcement priorities, ESMA included priorities relating to IFRS 10, Consolidated Financial Statements, and IFRS 12, Disclosure of Interests in Other Entities. The areas selected were those where the application of these standards was expected to cause issues for entities. These included sections where the use of judgment is required or where there were significant differences between the requirements included in IFRS 10 and the previous standard IAS 27, Consolidated and Separate Financial Statements

ESMA looked at a sample of 103 issuers who had » holdings in entities where the determination of control was highly judgmental and/or who had recognised material non-controlling interests in their 2014 consolidated financial statements. The results were interesting.

In 11.55% of cases, the issuers consolidated entities on which they had less than a majority of voting rights held. The existence of a shareholders’ agreement or a majority in the board of directors were some of the justifications given for the consolidation of the entities. Other justifications were the commercial dependence of the investees, the ability to direct the relevant activities or a combination of different reasons. Where an entity is consolidated with less than a majority of the voting rights, the issuers should comply with IFRS 12 by providing entity-specific information on the significant judgments and assumptions used. The objective of IFRS 12 is to require the disclosure of information that enables users of financial statements to evaluate the nature of, and risks associated with, its interests in other entities and the effects of those interests on its financial position, financial performance and cashflows. 

Where the disclosures required by IFRS 12, together with those required by other IFRSs, do not meet the above objective, an entity is required to disclose whatever additional information is necessary to meet the objective. However, 43% of the sample did not provide the required information to justify power over the investee and 58% did not provide the required information on the ability to use their power over the investee to affect the amount of the investor’s returns. 

Additionally, in 13% of cases, the issuer did not consolidate a material investee in which they held more than 50% of the voting rights. A significant number of these entities justified the non-consolidation on the grounds of the existence of a contractual agreement between shareholders establishing joint control or providing the control to other significant shareholders.

IFRS 12 requires a reporting entity to disclose information for each of its subsidiaries that have non-controlling interests that are material. Of the sample chosen, 56% had material non-controlling interests. However, there were disclosure elements missing from this sample such as information on the dividends paid and on the revenue and profit or loss of the subsidiaries. 

Approximately one-third of the issuers changed their consolidation method on complying with IFRS 10 for the first time, but 30% of these issuers did not disclose the changes in their accounting policies in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.


Following the review, European enforcers took enforcement actions against 20 entities. The entities either made public corrective notes, mainly relating to the application of the notion of control or corrections in future financial statements, which were mostly related to omissions of disclosures required by IFRS 12.

As regards the first application of IFRS 11, Joint Arrangements, and IFRS 12, in 2015, the assessment of compliance with these standards was undertaken on a sample of 54 issuers for which joint arrangements were material. Around 40% of the issuers had material joint operations with a significant majority structured through a separate vehicle. As a result, these entities should have provided entity-specific information on material joint arrangements. 

However, only 25% of the issuers disclosed sufficient information to enable the assessment of whether the parties had direct rights to the assets or direct obligations for the liabilities of the joint arrangement. In addition, the information needed to enable users to evaluate the nature, extent and financial effects of interests in joint operations was often found to be inadequate. 

The majority of these issuers changed their accounting policies following the first application of IFRS 11 and disclosed the impact of these changes in accordance with IAS 8. In addition, 30% of the issuers in the sample disclosed changes in the classification of joint arrangements from a joint-controlled entity (IAS 31, Interests in Joint Ventures) to a joint operation (IFRS 11), but only 25% of these issuers provided complete disclosure on the relevant factors, which caused the reconsideration of the relationship. Because of the examination of the 54 issuers, European enforcers took 10 actions, mainly related to the classification of joint arrangement or missing disclosures required by IFRS 11. 

The assessment on the application of the IAS 12 requirements relating to deferred tax assets and uncertain tax positions was based on a sample of 73 issuers with material-deferred tax assets or uncertain tax positions. 

Assumptions absent

A total of 66% of the issuers recognised material-deferred tax assets arising from unused tax losses but 31% of these did not disclose any information on the nature of the evidence supporting the recognition of the deferred tax assets. Even where issuers did, the assumptions used were not set out in 60% of cases. According to IAS 12, the existence of taxable temporary differences is merely an indicator, not actual evidence, that future taxable profits are probable. IAS 12 requires that there are future taxable profits. If the entity expects to incur further tax losses, the reversing taxable temporary differences will not give rise to taxable profit and the tax losses carried forward should not be recognised.

IAS 12, Income Taxes, states that the existence of unused tax losses is strong evidence that future tax profit may not be available. As a result, issuers should disclose the amount of the deferred tax asset and the evidence supporting its recognition where the entity has a recent history of losses. However, only 50% of the sample that had recognised deferred tax assets disclosed the main judgments used when assessing the time for recoverability. As a result of the examination of 73 issuers, enforcers took 10 actions. Actions have been taken against a quarter of the issuers included in the sample of 189. In many cases, actions cover several areas of the same set of IFRS financial statements. 

ESMA and European enforcers identified enforcement priorities in advance of the preparation, audit and publication of the 2015 IFRS financial statements. These focused on the impact of the financial markets conditions, the statement of cashflows and related disclosure, and the fair value measurement of non-financial assets and related disclosures. 

ESMA and European enforcers regularly discuss issues relating to the application of IFRS. Recently, they have discussed the application of the fair value measurement according to IFRS 13, Fair Value Measurement. Issues arose which related to the assumptions used when measuring non-financial assets and the determination of the notion of ‘highest and best use’. The number of accounting issues discussed by the enforcers before taking decisions increased significantly to 65 in 2015 as opposed to 47 in 2014.

Graham Holt is director of professional studies at the accounting, finance and economics department at Manchester Metropolitan Business School