As part of its activities, the European Securities and Markets Authority (ESMA) organizes a forum of enforcers from 38 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 cases arising in the period from December 2020 to January 2023, 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 operates in the animal health sector serving both the livestock and pet care markets. The issuer develops and sells veterinary drugs and non-medicinal products in Europe, the Americas and the Asia Pacific region.
• In the notes, the issuer only provided a disaggregation of revenue according to its geographical operating segments (Europe, Americas and Asia Pacific).
• Given the material impact of IFRS 15 for the issuer, the enforcer required the issuer to provide an analysis of the criteria used for the disaggregation of revenue in accordance with paragraphs 114 and B87-B89 of IFRS 15.
• The issuer argued that (i) the disaggregation of revenue other than by geographical segment, i.e., by market (livestock/pets), does not provide information that is relevant for users of financial statements, (ii) it has only one significant type of activity, animal health for which all revenues are generated, and (iii) cash flows arising from its activities are affected by the same economic factors.

The enforcer (as ESMA likes to term it) disagreed, concluding that the issuer’s disclosures related to revenue disaggregation in financial statements weren’t sufficient to meet the requirements of IFRS 15, and that the departure was a material one in the circumstances. It put together a pretty good case:

• In the enforcer’s view, the economic factors that drive revenue in each market (livestock/pet) were not identical. The enforcer noted that while revenue from livestock products primarily depends on the economics of livestock and agriculture (which can be significantly impacted by animal pandemics or changes in consumers’ eating habits), revenue arising from the sale of pet products depends on other factors (such as the purchasing power of pet owners).
• To support this conclusion, the enforcer noted that the issuer had disclosed in its prospectus the fact that both markets evolved differently during the year under examination (i.e., the revenue related to pet products grew 10%, while the revenue related to livestock decreased 4%).
• Furthermore, the enforcer noted that outside of the financial statements, in the management report, the issuer disclosed quantitative information on the portion of revenue arising from livestock products and the portion of revenue derived from pet products.  

In that regard, as cited by ESMA, IFRS 15 says that “when selecting the type of category (or categories) to use to disaggregate revenue, an entity shall consider how information about the entity’s revenue has been presented for other purposes, including…disclosures presented outside the financial statements (for example, in earnings releases, annual reports or investor presentations).” One would like to know why the issuer even bothered with the argument it made, given the demonstrated willingness to provide the disaggregated information elsewhere. Maybe it was all based in the extra audit expense attaching to such disclosures, and a futile attempt to save some money. Maybe the people who prepared the statements never talked to the people who worked on the management report; maybe some parts of the organization perceived a risk of competitive harm where others didn’t. Whatever the reason, it comes across now as being significantly regressive and ill-fated: the notion that an issuer operating in two different markets (albeit related ones) might deem any sort of breakdown of its revenue between those two markets to be not “relevant for users of financial statements” is rather breathtakingly high-handed in its assumption about the interests and capacities of users. Intuitively, one wouldn’t expect the two sectors to move in perpetual lockstep; the enforcer’s observations confirm that they don’t even come close to doing that.

I often muse though that rather than bothering to save such companies from their own eccentricity, the enforcer should offer an alternative, of continuing to omit the disclosure, but prominently and frequently reminding users that they’ve done so. If users indeed don’t consider the information relevant, then no harm would be done. Or on the other hand, users might respond in a way the company could presumably understand, by getting out, and leaving the stock for the dogs. Or, given that livestock and pet markets are by some accounts much the same thing, they could leave it for the chickens…

The opinions expressed are solely those of the author.