ESMA is an independent EU Authority that was established on 1 January 2011. ESMA’s mission is to enhance the protection of investors and promote stable and well-functioning financial markets in the European Union.

The European national enforcers of financial information monitor and review financial statements published by issuers with securities traded on a regulated European market and who prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) and consider whether they comply with IFRS and other applicable reporting requirements, including relevant national law.

ESMA regularly publishes extracts from its internal database of enforcement decisions on financial statements, with the aim of providing issuers and users of financial statements with relevant information on the appropriate application of IFRS. Such publication, together with the rationale behind these decisions, will contribute to a consistent application of IFRS in the European Union.

Extracts from the database of enforcement decisions can be downloaded

Topics covered in the latest (23^rd) batch of extracts, covering the period from December 2016 to December 2018:

From the above mentioned enforcement decisions issued by ESMA in July 2019 we have selected two enforcement decisions, which may be applicable for a number of entities that report under IFRS.

1. Presentation of cash flows arising from changes in ownership interests in a subsidiary

Financial year end: 31 Dec 2016

Category of issue: Statement of cash flows

Standards or requirements involved: IFRS 10 Consolidated Financial Statements

IAS 7 Statement of Cash Flows

Description of the entity’s accounting treatment

The entity does not meet the definition of an investment entity in IFRS 10 and, therefore, consolidates its subsidiaries rather than accounting for them at fair value through profit and loss.

During 2016, the entity acquired additional shares in one of its subsidiaries. The cash flow relating to this 2016 acquisition was presented as ‘cash flows from investing activities’ in its statements of cash flows even though the change in the ownership interests in the subsidiary did not result in a change of control.

The entity considered that the presentation of acquisitions and/or disposals of shares, irrespective whether it leads to a change of control, as cash flows from investing activities in the statement of cash flows provides more relevant information for users, as such transactions are part of entity’s investment strategy.

The enforcement decision 

The enforcer did not agree with the issuer and required the issuer to present cash flows arising from changes in ownership interests in a subsidiary that do not result in a change of control as cash flows from financing activities in the statement of cash flows.

Rationale for the enforcement decision

Paragraph 42A of IAS 7 requires cash flows arising from changes in ownership interests in a subsidiary that do not result in a loss of control to be classified as cash flows from financing activities, unless the subsidiary is held by an investment entity as defined in IFRS 10.

Furthermore, paragraph 42B of IAS 7 clarifies that as changes in ownership interests in a subsidiary that do not result in a loss of control, such as the subsequent purchase or sale by a parent of a subsidiary’s equity instruments, are accounted for as equity transactions, unless the subsidiary is held by an investment entity as defined in IFRS 10. Accordingly, the resulting cash flows are classified in the same way as other transactions with owners, i.e. as cash flows from financing activities.

2. Disclosure of changes in liabilities arising from financing activities

Financial year end: 31 March 2018

Category of issue: Changes in liabilities arising from financing activities

Standards or requirements involved: IAS 7 Statement of Cash Flows

Description of the entity’s accounting treatment

The entity sells computers and multimedia equipment. In the entity’s financial statements, financial liabilities account for nearly 30% of the balance sheet total and have increased by 80% since the end of the previous annual reporting period.

The entity did not explain the changes in liabilities arising from financing activities, either in narrative form or by reconciling the changes in financial liabilities in the statement of financial position to the changes from financing cash flows and non-cash changes.

The enforcement decision 

The enforcer required the entity to explain changes in liabilities arising from financing activities.

Rationale for the enforcement decision

It was the enforcer’s view that, based on the information provided in the primary financial statements and in the notes, a user could not evaluate the changes in liabilities arising from financing activities both from cash items and non-cash items.

Paragraph 44A of IAS 7 requires disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including changes arising from both cash flows and non-cash changes.

The enforcer considered that one way to fulfil the disclosure requirement in paragraph 44A of IAS 7 is suggested in paragraph 44D of IAS 7, in the form of a reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities, including the changes identified in paragraph 44B. Where an entity discloses such a reconciliation, it shall provide sufficient information to enable users of the financial statements to link items included in the reconciliation to the statement of financial position and the statement of cash flows.

Further, the enforcer noted that the implementation guidance to IAS 7 also includes an illustration of how to present such a reconciliation (in the illustrative example E).

Source: www.esma.europa.eu

The article is part of dReport – August 2019, Accounting news.