ESMA reviews disclosures of financial statements by financial institutions

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18 Nov 2013

The European Securities and Markets Authority (ESMA) has issued a report, “Review of Accounting Practices: Comparability of IFRS Financial Statements of Financial Institutions in Europe”, which provides an overview of financial institutions’ accounting practices in selected areas of financial instruments. In particular, it assessed the comparability and quality of the disclosures in 2012 IFRS financial statements from 39 major European financial institutions. The report also provides recommendations to enhance transparency of financial information.

The report focused on five key areas of financial statements when evaluating comparability and quality of disclosures: (1) structure and content of income statements, (2) liquidity and funding, (3) hedging and the use of derivatives, (4) credit risk, and (5) criteria used to assess impairment of equity securities classified as available-for-sale.

Overall, the report concluded that there are improvements needed to the disclosures provided by financial institutions. The report uncovered instances when there was insufficient information provided or not structured properly to allow comparability between financial institutions. Key findings from the review included:

  • “[D]ifficult to compare the income statements of the financial institutions, due to differences in their structure, the line items content and lack of comprehensive accounting policy disclosures.”
  • “[F]inancial statements did not include sufficient information on the use of derivatives.”
  • “[S]ignificant divergence in the application of the significant or prolonged criteria when assessing impairment of the equity securities classified as available-for-sale.”

Based on these findings, the ESMA recommends:

  • Additional guidance in IFRS on individual income statement line items would be beneficial.
  • Financial institutions should further develop their disclosure on contingent funding needs and assess potential impacts.
  • The quality of financial information should be improved by providing qualitative information on the use of derivatives for different purposes and clearly linking them with their classification in the financial statements.
  • Financial institutions should adapt their disclosures concerning credit risk so users can identify significant changes of the credit risk profile over time.
  • Financial institutions should provide additional granular quantitative information on the effects of forbearance.
  • More transparency on the risk of impairment by preparing separate disclosure of the amount of positive and negative available-for-sale reserve related to equity instruments is needed.

ESMA will discuss its recommendations with the IASB in areas where the ESMA believes additional guidance is needed to improve quality and transparency.

For additional information, please see (links to ESMA website):

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