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ESMA publishes review of accounting for Greek sovereign debt

  • ESMA (European Securities and Markets Authority) (dark gray) Image

26 Jul 2012

The European Securities and Markets Authority (ESMA) has published a review of the accounting for Greek Government Bonds (GGB) in Europe. The review focuses on IFRS Financial Statements for the year ended 31 December 2011 and considered a sample of 42 European financial institutions with significant exposures to GGB.

The review found a good level of consistency regarding the level of impairment losses. However, the review also found that issuers fell short of meeting IFRS disclosure requirements in particular in relation to transparency of gross exposure, maturities, valuation methodologies and fair value levels used, as well as the impact of impairment on profit or loss. The main findings were:

  • The impairment amount and in most cases the net exposure were reported. However, only a few issuers disclosed gross exposures, maturities or explanations of yearly variations, which made it difficult for investors to assess the real effect of GGB on the financial performance over the period. ESMA also found that some information presented through other channels (e.g. press releases) did not make it into the finanical statements.
  • The valuation methodology used for GGB was disclosed by most issuers but lacked in quality. Especially, adjustments made to market prices in order to determine level 2 values were not explained. Also, reasons leading to the choice of a fair value level were not always explained.
  • Impacts of shadow accounting in connection with insurance activities were generally not disclosed.
  • Disclosures on credit default swaps (CDS) related to GGB lacked transparency and did not provide sufficient information to allow users to understand the impact of these holdings on exposures at the reporting date.
  • Reclassifications of GGB from one category to another were not always mentioned explicitly and informatione was only provided in an aggregated manner. More reasons for reclassifications and disaggregated amounts showing which country’s sovereign debt had been reclassified should have been disclosed.

As a result of these findings, ESMA will pay attention to the quality of country-by-country disclosures and more generally to the granularity of information provided on significant sovereign exposures. ESMA will continue to monitor further developments related to financial instruments accounting and in particular for sovereign debt in the 2012 IFRS financial statements.

In connection with the publication ot the report  Steven Maijoor, ESMA Chair, said:

 

While the report only focused on the accounting treatment of Greek sovereign debt and related instruments, I would emphasise that the principles we have highlighted in relation to disclosure and transparency are applicable more generally, and should be applied to any material exposures to financial instruments that become subject to enhanced risk.

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