A European example of lack of clarity in disclosing corrections of accounting errors
As part of its activities, the European Securities and Markets Authority (ESMA) organizes a forum of enforcers from 30 different European jurisdictions, all of whom carry out monitoring and review programs similar to those carried out here by the Canadian Securities Administrators. ESMA recently published some extracts from its confidential database of enforcement decisions on financial statements, covering twelve decisions taken in the period from June 2015 to February 2017, “with the aim of strengthening supervisory convergence and providing issuers and users of financial statements with relevant information on the appropriate application of IFRS.” There’s no way of knowing whether these are purely one-off issues or more widespread, but some of them certainly have some relevance to matters discussed within Canadian entities once in a while. Here’s one:
- The issuer is a financial institution which presented, in its 2014 consolidated annual financial statements, a maturity analysis of financial liabilities on an undiscounted basis and by remaining contractual maturity as at December 31, 2014 together with comparative information as at December 31, 2013.
- In the maturity analysis table, selected comparative data (for year-end 2013) had been restated as compared with that presented in the issuer’s 2013 annual financial statements. These included deposits by banks that were restated by more than EUR 3bn, derivative liabilities restated by more than EUR 90m and the total column restated by more than EUR 250m.
- In the notes to the issuer’s 2014 annual financial statements, the issuer indicated that it had made some reclassifications for the amounts in the maturity analysis of the financial liabilities in order to enhance comparability, but did not provide any further disclosure as to the nature of the reclassifications.
- The 2013 comparative amounts contained in the 2014 half-yearly consolidated financial statements, had also been restated and the issuer indicated in the notes that the restatements were made to improve comparability with the period presented.
The enforcer (as ESMA likes to term it) disagreed with the issuer’s treatment, assessing “that the restatement of comparatives, both in the annual and interim financial statements, related to the correction of a prior period error and that the disclosure requirements have not been complied with, in full, and therefore requested additional disclosure in future financial statements.” In the enforcer’s view, “irrespective of the fact that the restatements did not relate to amounts presented on the primary financial statements, they related to material prior period errors as due to their nature and magnitude they could have influenced the decisions of users. The enforcer regarded disclosures related to the maturity of ‘deposits by banks’ and funding as key information for users of the financial statements.”
It’s certainly clear in IAS 8.41 that errors requiring correction might arise in respect of matters of disclosure, not just those of recognition and measurement and presentation. Still, it’s no surprise if issuers often assess adjustments to disclosure as not requiring the same clarity of explanation. Such a view might be based in a very basic impression that “no one reads the notes anyway,” and that for the few specialists who do, they’ll work through the changes for themselves, and there’s no need to make the statements longer for everyone else by belaboring the matter. The counter-argument, of course, is that whether or not most users look at the notes, they’re entitled to do so if they choose, on the assumption that the information they contain is relevant and faithfully represented. And situations will certainly exist where the information in the notes might significantly affect one’s perception of the numbers in the primary statements (which, after all, are inherently just a summary, subject to a myriad of governing conventions, assumptions, and varying possible futures). To take an extreme illustrative example, there’s no way of knowing from the balance sheet alone whether a total for “non-current liabilities” relates to a single amount due within two years, or to a varied series of discounted payments spreading over forty years – plainly, knowing whether it’s one or the other (or being misinformed on the matter) would vastly affect one’s sense of current liquidity, risk management, strategy and so on.
I’ve certainly known of situations where a company used a bland, non-specific statement about comparatives being “reclassified” to paper over situations which should more properly have been described as error corrections (or perhaps as changes in accounting policies, depending on the circumstances) – as in ESMA’s example though, that’s never been as likely to happen when a key performance measure is affected (one suspects that some companies like to include a note referring to the existence of immaterial reclassifications to comparative figures regardless of whether they’ve actually made any, as a perceived form of cover against things they may have missed). Among other things, labeling an adjustment to previously reported numbers as a reclassification is less likely to spark any regulatory alarm bells about possible deficiencies in the entity’s internal control over financial reporting. This would be another problem with placing a regulatory priority on digging into such glitches…
The opinions expressed are solely those of the author