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FEE Comments on CEBS Consultation Paper 30: Disclosure Guidelines – Lessons Learnt from the Financial Crisis

Core Content

The document is a letter from Hans van Damme, President of the Federation of European Accountants (FEE), addressed to Mr. Arnoud Vossen, Secretary General of the Committee of European Securities Regulators (CEBS). It outlines FEE's views on CEBS Consultation Paper 30, which focuses on disclosure guidelines derived from lessons learned during the financial crisis.

FEE supports CEBS' principles-based approach to disclosure, emphasizing that it should not amend, duplicate, or add to existing requirements, but rather enhance the quality of disclosures. They highlight the importance of Pillar 3 and IFRS disclosure requirements as global standards.

Main Points

1. Role of All Parties in the Financial Reporting Chain

• Management is responsible for preparing financial statements and ensuring accurate estimates and disclosures.
• Auditors play a crucial role in communicating with management and reporting to governance bodies (e.g., Audit Committee, Supervisory Board).
• Professional scepticism is essential when assessing management representations.
• Collusion by management can make fraud detection more challenging.

2. Going Concern Assessment

• Key focus for both management and auditors in 2009 year-end reporting.
• Management must assess the entity's ability to continue as a going concern.
• Liquidity risk is a significant concern due to the ongoing economic pressure.
• Auditors should examine the processes and assumptions behind disclosures related to going concern.
• IAASB alerts provide guidance on auditing fair value and going concern issues.

3. Fraud Risk

• Fraud is a serious issue in the current economic environment.
• It can lead to more significant impacts on volatile businesses.
• Management and those charged with governance share the responsibility for preventing, deterring, and detecting fraud.
• Auditors must remain vigilant and use professional scepticism.

4. Financial Instruments

• Recognition and measurement of financial instruments require special attention.
• Fair value measurement in illiquid markets is particularly challenging.
• Impairment losses are a major concern, especially for AFS instruments and assets measured at amortised cost.
• CESR survey (2009) showed that 80% of financial institutions had impairment losses in 2008.
• IFRIC 14 provides guidance on impairment of equity financial assets classified as AFS.

5. Impairment of Non-Financial Assets

• Impairment testing is crucial for entities with significant goodwill and intangible assets.
• Management must provide evidence to support impairment assertions.
• Auditors should assess the assumptions, cash flows, and discount rates used in impairment calculations.
• Internal consistency and sensitivity analysis are important for transparency and reliability.

6. Other Financial Reporting Issues

• Employee benefits (IFRIC 14)
• Recognition of deferred tax assets
• Valuation of investment property
• Use of appropriate discount rates
• Accounting for government aid
• Remuneration disclosures

These issues may also be relevant for non-listed and smaller entities, depending on their circumstances.

Key Information

• FEE is a regional organization of IFAC, representing over 500,000 professional accountants across 32 European countries.
• FEE has contributed to the debate on the financial crisis through multiple policy statements, including a recent one on 2009 year-end financial reporting.
• The 2008 Policy Statement remains highly relevant for 2009 audits due to ongoing risks.
• CESR Statement (2009) highlights that many companies failed to comply with IFRS 7 disclosure requirements.
• IAASB alerts provide guidance on auditing fair value and going concern issues in the current economic environment.
• FEE emphasizes the importance of ethical behavior, integrity, and professional competence in the accounting profession.

Closing Observations

The financial crisis has reinforced the importance of transparency, trust, and integrity in financial reporting and auditing. FEE believes the profession has a key role to play in promoting high-quality global standards and restoring market confidence. They are looking forward to discussing these issues further with CEBS in February 2010.

Attachments

• FEE Policy Statement "Issues for management and auditors for the 2009 year-end financial reporting"

References

• IFRS 7: Financial Instruments – Disclosures
• IFRIC 14: Employee Benefits
• IAS 39: Financial Instruments – Recognition and Measurement
• IAASB Staff Audit Practice Alerts on fair value and going concern
• CESR Statement on Application of Disclosure Requirements Related to Financial Instruments in the 2008 Financial Statements