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 a while ago published some extracts from its confidential database of enforcement decisions on financial statements, covering eight cases arising in the period from December 2021 to December 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, a renewable energy company, sold electricity under long-term power purchase agreements (PPAs). In 2021, the issuer entered into a business combination. As part of the business combination, the issuer acquired power production assets identified as three separate cash generating units (CGU), each one with attached contracts to deliver electricity under PPAs. In 2022, the issuer determined the recoverable amount of the three CGUs using the fair value less cost of disposal and recognized impairments in its annual financial statements in relation to all three CGUs. In addition, the issuer disclosed the input data (Level 3 measurement) in accordance with IFRS 13.
• In its interim financial statements for the first half of 2023 (H1/23 interim report) prepared under IAS 34 Interim Financial Reporting, the issuer recognized an additional impairment loss for these CGUs representing 72% of the issuer’s loss before taxes for the period. In the notes to the H1/23 interim financial statements on impairment, the issuer provided (i) high-level qualitative disclosures (i.e., a narrative description of operational challenges and delays in key operations of the three CGUs), (ii) the disclosure of the discount rate, and (iii) the sensitivity analysis for the discount rate used. The discount rate had not changed compared to the 2022 annual financial statements.

The enforcer (as ESMA likes to term it) considered that the disclosures provided regarding the impairments recognized in the H1/23 interim report weren’t sufficient for users of the financial statements to understand the changes in the issuer’s financial position and performance since the end of the last annual reporting period, as required by IAS 34.15, and required the issuer to provide further qualitative and quantitative disclosures regarding the changes in management’s key assumptions that gave rise to the recognition of impairments in the H1/23 interim report, along with relevant sensitivity analysis. Here’s some of what the report has to say:

• …based on the information provided in the H1/23 interim report, the reasons for the additional impairments recognized in the first half of 2023 were unclear, given that the only disclosed assumption (discount rate) had not changed compared to the 2022 annual financial statements. Upon request, the issuer identified several changes in management’s key assumptions related to the three CGUs (specifically, power production profile, price differences between bought and sold electricity, and other project uncertainties) which led to the recognition of the impairment losses in the CGUs. None of these changed assumptions were disclosed in the H1/23 interim report…
• While the determination of which disclosures from IAS 36 and IFRS 13 should be provided (in the notes to interim statements) may require judgement, the enforcer emphasized that scope for judgement is limited given that the disclosures in the interim financial statements should ensure that users understand the significant events or transactions that gave rise to the impairments recognized and their impacts compared to the last annual financial report.
• …The enforcer was of the view that for fair value less cost of disposal, especially if based on unobservable (Level 3) inputs, management’s key assumptions were highly relevant information for users of financial statements if changes in such assumptions have led to material impairments.

Although the report doesn’t make this point, all the above might seem especially relevant as the acquisition wasn’t even two years old, and based on the information provided seems to have been a chronically bad deal, such that a user might not be focused as much on specific assumptions and data points as on asking, broadly put, what the hell’s going on here? It’s not strictly relevant to the example that the issuer is a renewable energy company – it could just as well be described as a maker of widgets and candy bars – but since that’s specified, one’s mind inevitably turns to recent developments in that area, and to the inherent complexity of such arrangements (and their “other project uncertainties”). All of which bolsters the contention that changes in management’s key assumptions certainly constituted relevant information in this area. And no doubt in other areas of the financial statements as well….!

The opinions expressed are solely those of the author.