European Union : ESMA32-63-200 20th Extract from the EECS’s Database of Enforcement

Report

20th Extract from the EECS's Database of Enforcement

383

5 January 2017 I ESMA32-63-200

Table of Contents

1. Decision ref EECS/0216-01 - Qualitative disclosures of the risks arising from financial instruments 3

2. Decision ref EECS/0216-02 - Disclosure of significant judgements and assumptions in determining the existence of significant influence 4

3. Decision ref EECS/0216-03 - Disclosures relating to determination of value in use 5

4. Decision ref EECS/0216-04 - Recognition of losses on loans upon conversion to shares 6

5. Decision ref EECS/0216-05 - Presentation of equal and opposite gains and losses in the statement of profit or loss and other comprehensive income for the period 7

6. Decision ref EECS/0216-06 - Reclassification of capitalised milestone payments by a pharmaceutical company to the statement of profit or loss 8

7. Decision ref EECS/0216-07 - Legal requirements that prevent a shareholder from exercising its rights

   .............................................................................................................................................................. 10

8. Decision ref EECS/0216-08 - Determining whether an entity is an investment entity……………………11 IX.Decision ref EECS/0216-09 - Depreciation of vessels in the oil and gas industry 12

1. Decision ref EECS/0216-10 - Application of value in use methodology in impairment testing 14

2. Decision ref EECS/0216-11 - Recognition of onerous contract provisions 16

3. Decision ref EECS/0216-12 - Identification of cash-generating units……………………………………….17 XIII.Decision ref EECS/0216-13 - Purchase of a car fleet with an agreed buy-back agreement…………….19 XIV.Decision ref EECS/0216-14 - Recognition of deferred tax assets for unused tax losses……………….21

   The decisions included in this extract were taken by national enforcers in the period from March 2014 to June 2016. ESMA will continue publishing further extracts from the database on a regular basis, with the next extract expected to be published in the first half of 2017.

   List of abbreviations and acronyms used in this report

   CGU Cash-Generating Unit

   CU Currency Unit

   EEA European Economic Area

   EECS European Enforcers Coordination Sessions IAS International Accounting Standards

   IFRS IC International Financial Reporting Standards Interpretation Committee

   The European Securities and Markets Authority (ESMA) is publishing extracts from its confidential database of enforcement decisions on financial statements, with the aim of strengthening supervisory convergence and providing issuers and users of financial statements with relevant information on the appropriate application of the International Financial Reporting Standards (IFRS).

   According to its founding regulation, ESMA shall act in the field of financial reporting to ensure the effective and consistent application of European Securities and Markets legislation. In order to fulfil these responsibilities, ESMA organises the European Enforcers Coordination Sessions (EECS), a forum of 41 European enforcers from 28 Member States and 2 countries in the European Economic Area (EEA) with responsibilities in the area of supervision and enforcement of financial information.

   With responsibility for coordination of supervision of approximately 6 300 issuers listed on European regulated markets preparing IFRS financial statements, EECS currently constitutes the largest regional enforcers' network with supervision responsibilities for IFRS. Through EECS, European enforcers discuss and share their experience on the application and enforcement of IFRS. In particular, they discuss significant enforcement cases before and/or after decisions are taken in order to promote a consistent approach to the application of IFRS. In addition, EECS produces technical advice on the issuance of ESMA Statements and opinions on accounting matters which deserve specific focus. It also reviews accounting practices applied by European issuers to enable ESMA to monitor market developments and changes in those practices.

   In taking enforcement decisions, European enforcers apply their judgement, knowledge and experience to the circumstances of the cases that they consider. Relevant factors may include other areas of national law beyond the accounting requirements. Interested parties should therefore consider carefully the circumstances when reading the cases. As IFRS are principles based, there can be no one particular way of dealing with numerous situations which may seem similar but in substance are different. Decisions taken by enforcers do not provide generally applicable interpretations of IFRS; this remains the role of the IFRS Interpretations Committee (IFRS IC). These decisions are based on the IFRS requirements valid at the time of the IFRS financial statements and may be superseded by future developments in IFRS.

   The publication of selected enforcement decisions will inform market participants about which accounting treatments European enforcers may consider as complying with IFRS; i.e. whether the treatments considered are within the accepted range of those permitted by IFRS. Such publication, together with the rationale behind the decisions, will contribute to a consistent application of IFRS in the EEA.

   In accordance with the provisions of the ESMA Guidelines on the enforcement of financial information, cases submitted to the enforcement database are considered to be appropriate for publication if they fulfil one or more of the following criteria:

   • The decision refers to a complex accounting issue or an issue that could lead to different applications of IFRS;

   • The decision relates to a relatively widespread issue among issuers or within a certain type of business and, thereby, may be of interest to other enforcers or third parties;

   • The decision addresses an issue on which there is no experience or on which enforcers have inconsistent experiences;

   • The decision has been taken on the basis of a provision not covered by an accounting

standard.

1. Decision ref EECS/0216-01 - Qualitative disclosures of the risks arising from financial instruments Financial year end: 31 December 2015 Category of issue: Disclosures on financial instruments; qualitative disclosures on nature and extent of risks arising from financial instruments and sensitivity analysis disclosures. Standards or requirements involved: IFRS 7 Financial Instruments: Disclosures

   Description of the issuer's accounting treatment

2. In December 2015 the issuer purchased a portfolio of loans for CU 379M from a financial institution. The loans were acquired at a substantial discount to their nominal value of CU 1,700M reflecting their distressed state at the time of the acquisition. All of the loans were past due and were in default. The loans were secured on property assets of the borrowers.

3. The issuer disclosed that its objective in purchasing the portfolio of loans was to generate future returns for the issuer through a combination of:

   • Acquisition of collateral assets for inclusion as inventory in its development portfolio;

   • Disposal of collateral assets over time to achieve a redemption of a loan at a value greater than the acquisition cost; and

   • Income from the underlying property asset portfolio.

4. The loan portfolio was categorised as loans and receivables and after initial recognition the assets were measured at amortised cost using the effective interest method. The issuer did not provide the qualitative or the sensitivity analysis disclosures relating to the property market risk inherent in the acquired portfolio of loans.

5. The issuer indicated to the enforcer that it considered the disclosures in the financial statements to be sufficient for users to have an understanding of the nature of the loan portfolio and the related risks.

   The enforcement decision

6. The enforcer did not agree with the issuer's view. The issuer's financial statements should have described the issuer's objectives, policies and processes for managing property market risk and the methods used to measure that risk, together with a detailed description as to how the exposures to property market risk arose. In addition, the issuer should have also provided an appropriate sensitivity analysis for property market risk together with supplementary disclosures.

   Rationale for the enforcement decision

7. According to paragraph 33 of IFRS 7, an entity shall make qualitative discloses for each type of risk arising from financial instruments. In the specific case the value and the future cash flows of the