IAASA’s Observations

Dec 03, 2018
IAASA’s Observations document highlights key topics management, directors and audit committees should consider when preparing and approving 2018 financial statements.
IAASA published its 2018 Observations document, the eleventh such document, last September. The document aims to assist in the production of high-quality financial reports by emphasising some key financial reporting topics to be considered by management, directors and audit committees when preparing, approving and auditing financial statements.

IAASA’s Financial Reporting Quality function examines the annual and half-yearly financial statements of equity issuers, debt issuers and closed-end fund issuers to ensure that they are compliant with the relevant financial reporting framework. IAASA’s financial reporting supervision remit is limited to Irish companies trading on the regulated markets of European stock exchanges (issuers). However, the Observations document may be relevant to a broader range of companies when preparing year-end financial statements.

The matters included in IAASA’s Observations document derive from a variety of sources including, but not limited to:

  • The risk rating assessment for individual issuers from IAASA’s risk matrix, which is used to select specific reports for examination;
  • The outcome of overviews performed on preliminary announcements and annual/half-yearly financial reports;
  • Topical issues such as supplier funding arrangements, new IFRS guidance and media commentary;
  • Issues identified at the European Enforcers Co-ordination Sessions (EECS), which is organised by the European Securities and Markets Authority (ESMA). EECS is a forum for European accounting enforcers;
  • Peer issues – matters identified in an entity’s periodic financial report that may be relevant to a wider group of issuers; and
  • Financial reporting issues identified by IAASA’s audit inspection teams.
The primary audience for IAASA’s Observations document is the preparers of financial statements. However, it should also help users of those financial statements to understand the significant judgements and estimates made by management in their preparation.

Financial reporting environment

Entities face unknown economic, political and social threats and uncertainties because of Brexit and heightened protectionist policies, particularly in the USA. The UK is leaving the European Union on 29 March 2019. The details of any Brexit agreement may be clearer by the time entities are finalising their 2018 annual financial reports during the first quarter of 2019.

Brexit will affect different entities in different ways and to different extents. Depending on the terms of any Brexit agreement, entities’ ability to conduct business on existing terms may be disrupted (e.g. supply chain, access to the single market, access to the Customs Union, the impact of cross-border and cross-channel trade, and the impact of euro-Sterling exchange rate volatility). Against this ongoing uncertainty, impacted issuers should monitor the likely impact Brexit will have and consider disclosing the financial reporting implications.

Some comments on the key topics covered in the Observations document are set out below.

Impact of recently issued standards 

The quality of disclosures of the impact of new accounting standards effective for the first time in 2018 (IFRS 9 and IFRS 15) in issuers’ 2018 half-yearly reports has been variable. Similarly, the quality of disclosures regarding IFRS 16 (effective 2019) has been mixed. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors sets out the required disclosures for the initial application of an IFRS [IAS 8.28] and for a new IFRS that is not yet effective [IAS 8.30-31].

The Observations document highlights the requirement to disclose the impact of the initial application of IFRS 9 Financial Instruments. These include the requirements to disclose re-classifications of financial assets and financial liabilities upon initial application of IFRS 9 and a reconciliation of the impairment allowances under IAS 39 Financial Instruments: Recognition and Measurement and under IFRS 9 disaggregated by measurement category [IFRS 7.42I-42S].

IFRS 15 Revenue from Contracts with Customers is effective for accounting periods beginning on or after 1 January 2018. IFRS 15 requires entities to disclose more information about contracts with customers and to disclose disaggregated information about revenue.

IAASA indicates that, as the application date of IFRS 16 Leases and IFRS 17 Insurance Contracts nears, entities are required to provide more qualitative and quantitative information about their impact.

Significant judgements and sources of estimation uncertainty 

IAS 1 Presentation of Financial Statements requires disclosure of significant judgements [IAS 1.122] and sources of estimation uncertainty [IAS 1.125]. IAASA expects entities to:
  • Clearly distinguish these two separate requirements; and
  • Avoid the temptation to provide an extensive list of such items that do not meet the IAS 1 criteria.

Complex customer and supplier arrangements and factoring

These arrangements can vary greatly from entity to entity, both in terms of their nature and impact. IAASA encourages disclosure of such arrangements and, in particular, the cash flow treatments thereof.

Identifiable intangible assets

In applying IFRS 3, issuers should consider whether intangible assets should be separately recognised and disclosed on the basis of the separability criterion of IFRS 3 [IFRS 3.B33].

Alternative performance measures

Entities’ compliance with ESMA’s Alternative Performance Measures Guidelines has been varied. IAASA reminds entities to endeavour to fully comply with the guidelines and, in particular, to provide explanations where an alternative performance measure is changed or is no longer presented.

Consistency of key assumptions

IAASA calls on entities to “‘sense check” the consistency between the key assumptions used for the fair value measurement of intangible assets acquired in a business combination with the subsequent intangible asset assumptions used elsewhere in the financial statements.

Individual intangible assets

Entities with material individual intangible assets should ensure that the disclosure requirements of IAS 38 Intangible Assets, dealing with the disclosure of information about material individual intangible assets, are provided in full [IAS 38.122(b)].

The Observations report can be downloaded at www.iaasa.ie.

Maurice Barrett is Senior Financial Reporting Manager in IAASA’s Statutory Reporting Quality Unit.