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Financial Reporting Supervision

Which entities come within the Authority’s financial statement review remit?

What is the EU Transparency Directive?

What is IAASA’s role under the EU Transparency Directive

  • IAASA’s role under the EU Transparency Directive is to examine the annual and half-yearly financial statements of entities whose securities (shares and debt) are admitted to trading on a regulated market. In IAASA’s case, such entities are primarily equity, debt and closed-ended investment funds whose securities are admitted to trading on the Main Market of the Irish Stock Exchange.

    IAASA is designated the authority as an independent competent authority for the purposes of Article 24(4)(h) of the EU Transparency Directive, i.e. for examining information prepared pursuant to the EU Transparency Directive’s requirements.

    Regulation 42(2)  of the Transparency (Directive 2004/109/EC) Regulations (S.I. 277/2007) provides that

    IAASA shall examine information drawn up pursuant to Regulations 4 to 8 by issuers whose home Member State is the State for the purpose of considering whether such information is in accordance with the relevant reporting framework’.

     

What is the scope of the EU Transparency Directive?

  • The EU Transparency Directive applies to issuers whose securities have been admitted to trading on a regulated market situated, or operating, within the EU.

    Securities include shares, bonds and other forms of securitised debt, derivative securities and units issued by closed-end investment funds.
     
    However, pursuant to Regulation 2 of the Transparency (Directive 2004/109/EC) Regulations 2007 (S.I.277/2007) (as amended), the scope of the Regulations does not extend to open-ended investment funds. Open-ended investment funds are funds which provide redemption facilities to unit holders. Closed-ended investment funds are fixed life funds and generally do not allow redemptions until fund liquidation.
     
    Similarly, securities listed on the Enterprise Securities Market (‘ESM’) of the Irish Stock Exchange are exempt from the requirements of the EU Transparency Directive as the ESM is not authorised as a regulated market under Part 6 of the European Communities (Markets in Financial Instruments) Regulations 2007 (S.I. 60/2007) ( the MiFID Regulations).

     

How has the EU Transparency Directive been transposed into Irish law?

What are issuers’ periodic financial reporting requirements?

  • Issuers are required to prepare and publish annual and half-yearly financial statements providing minimum specified material and with specified timelines.

    Issuers’ periodic financial reporting requirements, which come within the IAASA financial reporting examination remit and as laid down by Regulations 4 to 8 of the Transparency (Directive 2004/109/EC) Regulations 2007 (S.I. 277/2007) (as amended), are as follows:

    Annual financial reports

    Issuers are required to make public their annual financial reports not later than four months after the end of their financial year. Issuers are further required to ensure that their financial reports remain publicly available for at least ten years following publication. Issuers’ annual financial reports are required to comprise, at a minimum:

    1. Audited financial statements

    Where an issuer is required to prepare consolidated financial statements, the audited financial statements must be prepared in accordance with IFRS as adopted for use in the EU . Where an issuer is not required to prepare consolidated financial statements, the audited financial statements included in the annual financial report must be prepared in accordance with the national law of the Member State in which the issuer is incorporated;

    1. a Management Report

     

    1. a Responsibility Statement

    This is a statement made by persons responsible within the issuer to the effect that, to the best of their knowledge, the financial statements, prepared in accordance with applicable financial reporting standards, give a true and fair view of the profit/loss and assets, liabilities and financial position of the issuer and the undertakings included in the consolidation taken as a whole, and that it includes a fair examination of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

     

    Half-yearly financial reports

    Issuers of shares and, subject to certain exemptions, debt securities are required to make public their half-yearly financial reports not later than three months after the end of the first six months of their financial years. Issuers are further required to ensure that their financial reports remain publicly available for at least ten years following publication. Issuers’ half-yearly financial reports are required to comprise, at a minimum:

     

    1. Condensed financial statements

    Where an issuer is required to produce consolidated financial statements, the condensed financial statements must be prepared in accordance with IFRS as adopted for use in the EU . Where an issuer is not required to prepare consolidated financial statements, the issuer shall follow the same principles for recognition and measurement as when preparing annual financial reports and the condensed financial statements must include at least the following:

    1. a condensed balance sheet;
    1. a condensed profit and loss account; and
    1. explanatory notes.

     

    1. an Interim Management Report

     

    1. a Responsibility Statement

    This is a statement made by persons responsible within the issuer to the effect that, to the best of their knowledge, the financial statements, prepared in accordance with applicable financial reporting standards, give a true and fair view of the profit/loss and assets, liabilities and financial position of the issuer and the undertakings included in the consolidation taken as a whole and that it includes a fair examination of:

     

    1. important events that have occurred during the first six months of the year;
    1. the impact of those events on the condensed financial statements;
    1. a description of the principal risks and uncertainties for the remainder of the financial year; and
    1. in the case of issuers of shares, details of material related party transactions.

     

    In addition, issuers are also required to comply with the Transparency Rules published by the Central Bank of Ireland when preparing annual and half-yearly financial reports.

Which Entities fall within IAASA's financial reporting examination remit?

  • Issuer constituency

    At 30 June 2017, IAASA’s known financial reporting examination constituency comprised 108 issuers made up of:
     
    (a) 30  equity issuers;
     
    (b) 14 closed-ended fund issuers; and
     
    (c) 64 debt issuers.
     
    These numbers exclude issuers registered in Ireland and listed on an EU regulated market outside Ireland where the Central Bank of Ireland has not been notified by the issuer that Ireland is that issuer’s home Member State. ESMA is currently working to resolve this issue.
     
    Known equity issuer constituency at 30 June 2017:
     
    1 Allied Irish Banks plc
    2 Aminex plc
    3 Aryzta AG
    4 Bank of Cyprus Holdings plc
    5 Bank of Ireland / Bank of Ireland Group plc
    6 CRH plc
    7 C&C Group plc
    8 Cairn Homes plc
    9 Dalata Hotel Group plc
    10 Datalex plc
    11 DCC plc
    12 FBD Holdings plc
    13 Glanbia plc
    14 Grafton Group plc
    15 Green REIT plc
    16 Greencore Group plc
    17 Hibernia REIT plc
    18 IFG Group plc
    19 Independent News & Media plc
    20 Irish Continental Group plc
    21 Irish Residential Properties REIT plc
    22 Kenmare Resources plc
    23 Kerry Group plc
    24 Kingspan Group plc
    25 Mainstay Medical International plc
    26 Paddy Power Betfair plc
    27 Permanent TSB Group Holdings plc
    28 Ryanair Holdings plc
    29 Smurfit Kappa Group plc
    30 UDG Healthcare plc
     
    Known closed-ended fund issuer constituency at 30 June 2017:
     
    1 Aberdeen Diamond Private Equity III plc (formerly: SVG Diamond Private Equity III plc)
    2 Aberdeen Private Equity Global Fund of Funds plc
    3 Carador Income Fund plc
    4 Crown Asia-Pacific Private Equity II plc
    5 Crown Asia-Pacific Private Equity III plc
    6 Crown Asia-Pacific Private Equity plc
    7 Crown Co-Investment Opportunities plc
    8 Crown Global Secondaries II plc
    9 Crown Global Secondaries III plc
    10 Crown Global Secondaries IV plc
    11 Global Fixed Income Realisation Limited
    12 Special Value Opportunities Feeder Fund
    13 Trimaran Fund II (Cayman) Limited
    14 Vietnam Phoenix Fund Limited (formerly: DWS Vietnam Fund Limited)
     
    Known debt issuer constituency at 30 June 2017:
     
    1 AerCap Global Aviation Trust
    2 Amethyst Structured Finance plc
    3 Annington Repackaging No 1 Ltd
    4 Argentum Capital SA
    5 ARMAsset-Backed Securities SA
    6 BBVA Global Markets BV
    7 Beechwood Structured Finance plc
    8 Boost Issuer plc
    9 Brokercreditservice Structured Products plc (formely: Gawling Company Limited)
    10 Brookfields Capital plc
    11 Carrington Holding Company LLC
    12 Comm 2001-J2 Mortgage Trust
    13 Coriolanus DAC (formerly: Coriolanus Limited)
    14 CrRHAmerica Inc
    15 DBinvestor Solutions 2 plc
    16 Delamare Finance plc
    17 Depfa ACS Bank
    18 Depfa Bank plc
    19 Eirles One Limited
    20 Eirles Three DAC (formerly: Eirles Three Limited)
    21 Eirles Two DAC (formerly: Eirles Two Limited)
    22 Eperon Finance plc
    23 Espaccio Securities plc
    24 Freshwater Finance plc
    25 Greenstreet Structured Financial Products plc
    26 Haitong Investment Ireland plc (formerly: Espirito Santo Investment plc)
    27 Ipanema Capital plc
    28 Irish Bank Resolution Corporation Limited
    29 Ishares Physical Metals plc
    30 Juturna (European Loan Conduit No16) plc
    31 Kalvebod plc
    32 Konstanz Finance Limited
    33 Land Securities Capital Markets plc
    34 Lunar Funding V plc
    35 Lusitano Mortgages No 1 plc
    36 Lusitano Mortgages No 2 plc
    37 Macquarie Structured Securities (Europe) plc
    38 Magellan Mortgages No2 plc
    39 Magellan Mortgages No3 plc
    40 Magnolia Funding Limited
    41 Main Capital Funding II Limited Partnership
    42 Mba Community Loans plc
    43 Morgan Stanley Asia Products Limited
    44 Nimrod Capital plc
    45 Opal Financial Products plc
    46 Pelican Mortgages No1 plc
    47 Premium Plus plc
    48 Profile Finance plc
    49 Recolte Securities plc
    50 Secured Multi Asset Repackaging Trust plc
    51 Silverstate Financial Investments plc
    52 Source Physical Markets plc
    53 Star Compass plc
    54 Stratus Capital plc
    55 Structured Investments Corporation
    56 Vermillion Protective Bond Portfolio plc
    57 Vespucci Structured Financial Products plc
    58 Vigado Capital plc
    59 Voyce Investments plc
    60 Wal-Mart Stores Inc
    61 Waterford Capital Investments plc
    62 Waves Financial Investments plc
    63 Wellesley Finance plc
    64 Willow No 2 Ireland plc
     

What is the scope of examinations undertaken by IAASA?

  • Depending upon risk factors identified and other relevant considerations, examinations undertaken by IAASA can be categorised as being:

     

    1. Unlimited scope examination of financial information

    The evaluation of the entire content of the financial information in order to identify issues / areas that need further analysis and to assess whether the financial information is compliant with the relevant financial reporting framework;

     

    1. Focused examination of financial information

    The evaluation of pre-defined issues in the financial information and the assessment of whether the financial information is compliant with the relevant financial reporting framework in respect of those issues;

     

    1. Follow-up examination of actions

    Ensuring that actions taken are appropriately acted on by the issuers against which the actions were taken;

     

    1. Thematic examination of financial information

    The evaluation of financial reporting practices adopted by a range of issuers in respect of one or more financial reporting matters. These examinations are desk-based and limited to examining publicly published information without issuer engagement; and

     

    1. Topical surveys

    These surveys, mandated by ESMA, comprise the examination of the financial reporting treatments applied by selected issuers based on parameters set by ESMA. These surveys are also desk-based and limited to examining publicly published information without issuer engagement. If, as a result of its findings from these surveys, IAASA subsequently engages with an issuer, that subsequent engagement is designated as a separate unlimited scope examination or focused examination as appropriate.

     

     

How does ESMA's Guidelines on enforcement of financial information impact on IAASA's examinations?

  • IAASA is committed to applying ESMA standards and Guidelines.

     

    In particular, IAASA is committed to applying the ESMA Guidelines on enforcement of financial information (ref. ESMA/2014/1293en).

     

    These Guidelines, which apply to all EU competent authorities, including IAASA, undertaking enforcement of financial information under the EU Transparency Directive, apply in relation to the enforcement of financial information under the EU Transparency Directive to ensure that financial information in harmonised documents provided by issuers whose securities are admitted to trading on a regulated market comply with the requirements resulting from the EU Transparency Directive.

     

    Competent authorities to which these Guidelines apply, which includes IAASA, comply by incorporating them into their supervisory practices. Responsibility for compliance with the provisions of the EU Transparency Directive remains with the designated competent authority. Competent authorities remain under the obligation to make every effort to comply with these guidelines.

     

    These Guidelines require that EU national accounting enforcers’ selection methodologies must include risk-based methodologies. IAASA’s selection of issuers’ periodic financial reports for examination is based on a mixed model, i.e. whereby risk assessments are supplemented by cyclical and random selections.

     

How is consistent enforcement of IFRS across the European Union achieved?

  • European accounting enforcement activities are co-ordinated through the ESMA-sponsored European Enforcers Co-Ordinations Sessions (EECS).

     

    The European Communities (International Financial Reporting Standards and Miscellaneous Amendments) Regulations 2005 (S.I. 116/2005) gives effect to Directive 2003/51/EC of the European Parliament and of the Council of 18 June 2003 (‘the IAS Regulation’).

     

    The IAS Regulation:

     

    1. requires that certain EU entities (i.e. those admitted to trading on a regulated market and having a requirement to prepare consolidated financial statements) prepare their consolidated financial statements in accordance with IFRS as adopted for use in the EU (i.e. IFRS as endorsed by the EU ); and

     

    1. makes reference to Member States’ requirement to take appropriate measures to ensure compliance with IFRS.

     

    To facilitate these requirements, ESMA established the EECS. EECS comprises:

     

    1. Member States’ securities regulators; and

     

    1. where Member States’ securities regulators are not charged with primary responsibility for the enforcement of financial reporting standards, the relevant enforcement body.

     

    In counties such as Ireland, the UK, Germany, Iceland and Denmark, it is the relevant enforcement body, i.e. IAASA in the Irish context, which is the member of EECS. In most other jurisdictions, it is the securities regulator who is the EECS member.

     

    The role of EECS is to facilitate co-operation and co-ordination between European national accounting enforcers with a view to bringing about the consistent enforcement of IFRS across the EU. EECS on-going regular activities include:

     

    1. discussing accounting enforcement decisions taken by EU national accounting enforcers;

     

    1. discussing emerging issues currently under examination by EU national accounting enforcers;

     

    1. contributing to the confidential database of enforcement decisions;

     

    1. publishing, for the benefit of issuers and other interested parties, summaries of enforcement decisions posted to the EECS database;

     

    1. publishing (via ESMA) annual activity reports on the enforcement of IFRS in Europe, the purpose of which is to provide stakeholders with an overview of the monitoring and enforcement of IFRS across the EU;

     

    1. sharing and comparing practical experiences in the field of accounting enforcement such as selection, risk assessment, examination methodology, contacts with issuers and auditors, etc; and

     

    1. holding meetings with representatives of the IFRS Interpretations Committee (IFRS IC) in order to discuss complex issues identified by EECS members either for which there is no specific IFRS guidance or where widely diverging interpretations exist.

     

    EECS meetings aid discussion by European national accounting enforcers to:

     

    1. share the reasoning underpinning their enforcement decisions with their counterparts; and

     

    1. canvass their counterparts’ views on enforcement cases currently being dealt with, to achieve a consistent approach to enforcement across all EU Member States.

     

    To achieve this objective, EECS (via ESMA) has established a database of enforcement decisions taken by national accounting enforcers. The content of this database is confidential and available to EU national accounting enforcers and ESMA only.

     

    While the decisions taken by European national accounting enforcers do not constitute precedent and are not, therefore, binding on other enforcement authorities, the purpose of the database is to enable European national accounting enforcers to consider decisions taken by their counterparts on similar issues and to determine the extent, if any, to which they may be relevant to their own decision making (while recognising that the circumstances surrounding individual cases are rarely the same).

     

    EECS, in conjunction with ESMA, publishes enforcement decisions taken by EECS members. Such public information does not disclose the specific issuers or individual jurisdictions by name but, rather, is published on an anonymous basis for the purpose of informing interested parties including issuers, auditors, shareholders, analysts and regulators.

     

    ESMA Standards and Guidelines

    ESMA publishes mandatory Guidelines with which EU national competent authorities are required to comply. IAASA is committed to applying ESMA standards and guidelines.

     

    In particular, IAASA is committed to applying:

     

    1. ESMA Guidelines on enforcement of financial information (ref. ESMA/2014/1293en)

    These Guidelines, which apply to all EU competent authorities, including IAASA, undertaking enforcement of financial information under the EU Transparency Directive, apply in relation to the enforcement of financial information under the EU Transparency Directive to ensure that financial information in harmonised documents provided by issuers whose securities are admitted to trading on a regulated market comply with the requirements resulting from the EU Transparency Directive.

     

    Competent authorities to which these Guidelines apply, which includes IAASA, comply by incorporating them into their supervisory practices. Responsibility for compliance with the provisions of the EU Transparency Directive remains with the designated competent authority. Competent authorities remain under the obligation to make every effort to comply with these guidelines.

     

    1. ESMA Guidelines on Alternative Performance Measures (APMs) (ref. ESMA/2015/1415en))

    These Guidelines, which apply to APMs disclosed by issuers or persons responsible for the prospectus when publishing regulated information or prospectuses on or after 3 July 2016, apply in relation to APMs disclosed by issuers or persons responsible for the prospectus when publishing regulated information and prospectuses (and supplements). Examples of regulated information are management reports disclosed to the market in accordance with the EU Transparency Directive.

     

     The Guidelines do not apply to APMs:

     

    1. disclosed in financial statements;

     

    1. disclosed in accordance with applicable legislation which sets out specific requirements governing the determination of such measures. Therefore, the guidelines do not apply to measures included in prospectuses such as pro forma financial information, related party transactions, profit forecasts, profit estimates, working capital statements and capitalisation and indebtedness for which the specific requirements of the prospectus regime apply.

What are the considerations affecting risk assessment and selection?

  • In summary, IAASA’s risk-based approach to the selection of financial reports for examination considers the:

     

    1. risk of material misstatement in issuers’ financial reports; and

     

    1. potential impact of such a misstatement on the users of financial reports.

     

    IAASA is committed to the application of ESMA standards and guidelines on enforcement of financial reporting. ESMA standards and guidelines require that selection methodologies must include risk-based methodologies. It is not, for example, permitted under ESMA standards and guidelines to adopt selection methodologies based purely on cycles or random selections.

     

    IAASA has adopted a mixed model, whereby selections of issuers’ financial reports for examination is based on risk assessments, supplemented by cyclical and/or random selections (thereby ensuring that issuers that might not be selected as a consequence of a risk-based approach nevertheless stand to be selected for examination).

     

    IAASA has determined that there are many risk factors, or combinations thereof, that should be considered in assessing the relative risk of an incidence of material misstatement in an issuer’s financial reports. These include, amongst others:

     

    1. financial structure and business/economic trends;

     

    1. financial position and ratios;

     

    1. industry specific issues;

     

    1. audit qualifications and related issues;

     

    1. corporate governance and control environment issues;

     

    1. incidence of related party transactions;

     

    1. incidence of business combinations and/or disposals;

     

    1. administrative, court and/or regulatory actions; and

     

    1. third party signals (e.g. complaints received by IAASA, media commentary, etc).

     

    In assessing the potential impact of a material misstatement on the users of financial reports, the following are among the factors that are considered:

     

    1. share trading activity and volatility in stock price;

     

    1. market capitalisation;

     

    1. number and nature of investors;

     

    1. nature of securities traded; and

     

    1. public profile.

     

    Where instances of non-compliance are identified in an issuer’s periodic financial report, the potential for that issuer’s subsequent periodic financial reports to be the subject of examination increases.

     

    IAASA has entered into Moemoranda of Understanding (MoUs) with the Central Bank of Ireland and the Office of the Director of Corporate Enforcement (ODCE). From time to time, IAASA receives referrals from these and other parties. The receipt of a referral from another statutory body is treated as a risk factor and is, therefore, incorporated into IAASA’s risk assessment and selection processes.

     

     

What is IAASA’s approach towards issues arising from examinations of periodic financial reports?

  • Having examined an issuer’s financial report, IAASA corresponds with the directors seeking further information and/or clarification. IAASA may meet with issuer representatives.

     

    When all information, clarifications and/or explanations necessary has been obtained, IAASA will make an assessment as to whether the periodic financial report is in compliance with the relevant reporting framework have been obtained.

     

    The range of outcomes to an examination are:

     

    1. no apparent instances of non-compliance has been detected and the examination is closed;

     

    1. less significant instances of instances of non-compliance are detected and undertakings are sought that such maters will be rectified in future periodic financial statements;

     

    1. significant instances of instances of non-compliance are detected and revised financial statements are prepared and published.

     

    In addition, the financial reporting decision may warrant publication in accordance with IAASA’s  Policy Paper on Publication of IAASA’s Financial Reporting Enforcement Findings.

     

    Having examined an issuer’s periodic financial report, it may appear that there are issues arising in respect of which further information and/or clarification is required. In such cases, IAASA corresponds with those charged with the issuer’s governance, i.e. the directors. In such correspondence, the matters arising are set out in detail and the issuer’s directors are requested to respond in writing, providing any information, clarification and/or explanations considered necessary.

     

    Where directors’ responses do not fully address the issue(s) raised or, as is frequently the case, directors’ responses require further elaboration and/or clarification, IAASA typically enters into further correspondence with the directors. In instances where it is deemed more effective to do so, IAASA holds face-to-face meetings with issuer representatives, until such time as all information, clarifications and/or explanations necessary to enable an assessment to be made as to whether the periodic financial report is in compliance with the relevant reporting framework have been obtained.

     

    When all information deemed necessary has been received, IAASA determines whether the particular financial reporting treatment adopted and/or disclosures provided are in compliance with the relevant reporting framework.

     

    It is important to note that not all matters raised with issuers’ directors suggest potential non-compliance with the relevant reporting framework.

     

    Rather, as considered necessary, IAASA seeks further information and/or clarification from issuers’ directors for the purpose of enabling it to better understand the basis for certain of their financial reporting judgments in preparing periodic financial reports, including their judgments relating to recognition, measurement, classification, presentation and disclosure.

     

    On receipt of such further information and/or clarification from issuers’ directors, matters raised by IAASA in initial correspondence may be closed without the need for re-statement, additional disclosure or other actions on the part of the issuer.

     

    Based on experiences to date, IAASA has found that those issuers that are most forthcoming with the requisite information, clarifications and explanations are those that bring their contacts with IAASA to a successful conclusion in the most efficient and expeditious manner.

     

Does IAASA publish the outcome of its financial statement examinations?