AGN Europe Conference Budapest Thomas Schinogl

Transcription

1 AGN Europe Conference Budapest Thomas Schinogl SMP Schinogl Müller & Partner Gesellschaft bürgerlichen Rechts Wirtschaftsprüfer Rechtsanwälte Steuerberater Certified Public Accountant Frankfurt am Main 1

2 Outline A. General 1. Who is the German Enforcer 2. Universe of Companies and those to be reviewed 3. Results from the enforcement Legal Changes in 2016 with respect to Enforcement 5. Examples of errors or identifications B. Specifics: What is reviewed C. Financial Performance Measures 2

3 AGN European Conference Budapest SMP Schinogl Müller & Partner Who is the German Enforcer Deutsche Prüfstelle für Rechnungslegung (DPR) (Financial Reporting Enforcement Panel) Every year in early January they make a presentation to invited auditors reporting on - the errors of the previous year and - the major topics expected to be reviewed in the current year General: Who Universe Results 2015 Changes 2016 Examples 3

4 Universe of Companies and those to be reviewed according 342b HGB All German companies subject to review: 615 German Corporations (AG): 447 German non-corporations: 127 (eg SE, GmbH, KGaA) Foreign companies with tradable securities: 41 General: Who Universe Results 2015 Changes 2016 Examples 4

5 AGN European Conference Budapest SMP Schinogl Müller & Partner Results from Enforcement 2015 In 2015 there were 12 Errors identified: Of which: 6 were corrected 2 were delisted 1 was audited again 2 are in a review by the German Supervisory Authority 1 did not present new Financial Statements due to insolvency In 2015 there were 23 Notifications: Of which: 17 were accepted and subsequently changed 8 not identifiable or immaterial in following year General: Who Universe Results 2015 Changes 2016 Examples 5

6 AGN European Conference Budapest SMP Schinogl Müller & Partner Legal Changes in Germany in 2016 Three main changes for the Enforcement Panel: - Covers only issuers that have Germany as their country of origin - Audits can also be initiated for the previous year - Consolidated financial statements are also covered The EU-auditors reform initiated a German Act for the Audit Reform (Abschlussprüfungsreformgesetz - AReG) effective 17 June 2016 with the following clarifications: - the audit also covers the bookkeeping - an initiated audit can be continued even if the listing of the shares/bonds is being withdrawn, especially if the reason for the audit is an error where there is public interest in knowing - renaming and restructuring of Chamber of Auditors and supervisory body (APAK - APAS) General: Who Universe Results 2015 Changes 2016 Examples 6

7 Rules for the selection of audits New rules were decided on December 15, 2016 Company universe split into risk groups First tier: specific risk (e.g. public interest, supervisory authority) 100% Abstract high risk, non specific 40% Second tier: (a) index companies every 4 to 5 years (b) other companies every 8 to 10 years (c ) the rest: 10 randomly selected, 3 of them audited General: Who Universe Results 2015 Changes 2016 Examples 7

8 AGN European Conference Budapest SMP Schinogl Müller & Partner Examples of errors and notifications in 2016 (1) Sale-and-lease back transactions (IAS 17) Incorrect classification between operating lease and finance lease due to incorrect judgment of the option to prolong the leasing contract Non-consolidation of SPV (IAS 27) Notes and MD&A ( 315 German Commercial Code, HGB) Missing report regarding the sale of real estate and the subsequent rent of a consolidated company Misleading reporting regarding financial covenants Acquisition of subsidiary (IFRS 3) Incorrect treatment of expected payments for bonuses of key personnel of the acquired subsidiary Missing capitalization of significant purchased client relations and distribution rights Missing discounting of the purchase price liability General: Who Universe Results 2015 Changes 2016 Examples 8

9 AGN European Conference Budapest SMP Schinogl Müller & Partner Examples of errors and notifications in 2016 (2) Goodwill Impairment test (IAS 36) Missing statements in the consolidated notes with respect to the testing of impairment of the goodwill No impairment test for PP&E or the CGUs although there was evidence that the assets could have been impaired Related party transactions (IAS 24) Misstatements with respect to the influence on a subsidiary Pensions (IAS 19) Losses due to new assurers calculations were shown in the P&L instead of OCI Authorized capital ( 315 HGB, IAS 1) Missing report on the authority of the board to issue new shares in the Consolidated MD&A Missing publication of the number of authorized shares both in the balance sheet and the consolidated notes General Who Universe Results 2015 Changes 2016 Examples 9

10 AGN European Conference Budapest SMP Schinogl Müller & Partner Examples of errors and notifications in 2016 (3) Construction contracts (IAS 11) Valuation of three contracts was too low although information for correct valuation was available Segment reporting (IFRS 8) In the consolidated notes there was no mention of revenues with third-party customers although they were more than 10 % of total revenues Report of expectations ( 315 HGB, DRS 20) Insufficient reporting of profitability because the profitability was shown on a cumulative basis for three years General: Who Universe Results 2015 Changes 2016 Examples 10

11 B. Specifics: What is being reviewed Balance sheet (+ consolidated) Income Statement (+ consolidated) Notes (+ consolidated) MD& A (+ consolidated) Corporate Governance Report (DCGK) Remuneration Report (Vergütungsbericht ) part of MD&A Dependency report 312 AktG (Abhängigkeitsbericht) Final Declaration (Schlusserklärung ) Declaration on the management of the company (Erklärung zur Unternehmensführung) Non-financial declaration (Nichtfinanzielle Erklärung) Specifics: What Remuneration Dependency Management Non-fin Examples 11

12 AGN European Conference Budapest SMP Schinogl Müller & Partner Vergütungsbericht (Remuneration Report) part of MD&A Legal requirements: 285 Abs. 2 Nr. 4 HGB, 315 Abs. 2 Nr. 4 HBG and DRS 17 state that in the Vergütungsbericht the basics of the remuneration have to be stated Enforcement: missing Vergütungsbericht, incorrect or missing information Specifics: What Remuneration Dependency Management Non-fin Examples 12

13 AGN European Conference Budapest SMP Schinogl Müller & Partner Abhängigkeitsbericht nach 312 AktG (dependency report) Legal requirements: 312 AktG (Stock Corporation Act) states that the management board of a dependent company that does not have a Subordination Agreement with the parent company has to prepare a report on the relationship with its related companies; this is a separate report that is not being publicly available; The dependency report ends with a final declaration that has to be included in the MD & A (related party transactions) Enforcement: will be reviewed if the final declaration in the MD & A is missing or incorrect or incomplete Specifics: What Remuneration Dependency Management Non-fin Examples 13

14 AGN European Conference Budapest SMP Schinogl Müller & Partner Abhängigkeitsbericht nach 312 AktG (dependency report) Issues reviewed: Shareholder structure indicating the need for dependency report Is the subsidiary subject to a Subordination Agreement (Beherrschungsvertrag) Indications for material related party transactions Review of necessary facts reported (IAS 21) correctly reported? If parts are missing or not correct: MD&A not correct! Specifics: What Remuneration Dependency Management Non-fin Examples 14

15 Erklärung zur Unternehmensführung (Declaration on the management of the company) Legal requirements: 289a and 315 Abs. 5 HGB, DRS 20 K 224 ff Declaration according 161 AktG (adherence to CGK-Corporate Governance Codex) Information to management practices Explanation to work of Management Board and Supervisory Board and members of all committees Definition of the intended portion of women in management board and supervisory board and the two levels below Information to the portion of women in Supervisory Board and the diversity of the board members All this has to be a separate chapter in the MD&A Enforcement: not the content but the existence Specifics: What Remuneration Dependency Management Non-fin Examples 15

16 Nichtfinanzielle Erklärung (Non-financial declaration) Legal requirements: 289 b - e and 315 b, c HGB n. F. Information required: Business Model Environmental issues Employee issues Social issues Human rights issues Corruption issues Information necessary to understand the business, the results etc All this has to be a separate chapter in the MD&A Enforcement: not the content but the existence Specifics: What Remuneration Dependency Management Non-fin Examples 16

17 Examples of noticed errors by the Enforcement Panel In the MD&A the final explanation regarding the Subordination Agreement is missing In the MD&A the basics of the remuneration system are missing Incomplete and therefore incorrect information regarding the total remuneration of the board members Incomplete and therefore incorrect information of the portion of women in board Specifics: What Remuneration Dependency Management Non-fin Examples 17

18 C. Presentation of financial performance measures Why is this an enforcement issue: The earnings power of a company is of importance for investors In the financial reporting there are often reports of non-gaap measures, i. e. key numbers that are not defined in IFRS or other regulations, some even specified by each company differently Often these company specified key numbers are showing a better picture of the company than the IFRS numbers do Relevant because of IASB initiative for better communication Disclosure initiative of IASB, IAS 1 amendments ESMA guidelines for Alternative Performance Measures (APM) since July 2016 Financial Performance: Why 18

19 Overview: Presentation of Financial Performance Information in the Financial Statements that is not required by IFRS Items in Balance Sheet and Income Statement Segment Reporting Movements in Other Comprehensive Income Earnings Per Share (EPS) ESMA Guidelines to Alternative Performance Measures (APM) Fin. Performance: F/S Items Segments OCI EPS ESMA 19

20 AGN European Conference Budapest SMP Schinogl Müller & Partner Information in Financial Statements that is not required by IFRS Key issue: the entire information in the Financial Statements has to comply with IAS 1 even though the information may not be required or defined by IFRS Examples: Fair presentation (IAS 1.15): if Financial Performance Measures are presented in the Financial Statements that are not required or defined by IFRS they are not allowed to exclude only negatively impacting influences but have to be presented fairly The presentation of the Income Statement has to be either according the total cost method or to the cost of sales method, depending on which is more relevant (IAS 1.99) Fin. Performance: F/S Items Segments OCI EPS ESMA 20

21 Items in Balance Sheet and Income Statement -Additional items, headings and subtotals are necessary if they are relevant for the understanding of the financial statements of the company -Subtotals only for IFRS-conform numbers -Comprehensible presentation and names -Consistency -No greater prominence in presentation than IFRS defined items (IAS 1.55, 1.55A, 1.85, 1.85A) -No separation of extraordinary items in I/S (IAS 1.87) -Items that reflect the content (e.g. non-recurring, operating profit) -No disguising of material information through immaterial information (IAS 1.30A) -Cross-references and explanations (IAS and 1.113) Fin. Performance: F/S Items Segments OCI EPS ESMA 21

22 AGN European Conference Budapest SMP Schinogl Müller & Partner Enforcement of primary IFRS-Financial Statements through Enforcement Panel Required by IFRS: Revenues (IAS 18), minimum requirements for I/S (IAS 1.82), profit/loss for period (IAS 1.8 ff), Earnings per Share (IAS 33), OCI Not required by IFRS but in conformity with IFRS : allowed Subtotals that are directly related to IFRS numbers, e. g. Gross margin, operating margin, EBIT, additional captions with clear names (IAS 1.85, 1.85A, 1.971) Not in conformity with IFRS: not allowed Company specified numbers like adjusted EBIT, adjusted profit, separation of non-recurring items (IAS 1.87), additional captions like EBITDA (but these may be shown in other parts of the statements (e.g. in MD&A) Fin. Performance: F/S Items Segments OCI EPS ESMA 22

23 Errors in primary IFRS-Financial Statements Error: The consolidated Financial Statements show two different sets of I/S, both titled as according to IFRS. This is misleading and therefore against IAS 1.10(b) and IAS Notifications by Enforcement Panel: Separation of non-reurring items: Showing non-recurring items separately is not in conformity with IAS 1.86 and IAS 1.29; only material expense categories may be shown in separate line items. EBIT before non-recurring items shall not be shown (IA S1.87, IAS 1 BC 60, 61) Fin. Performance: F/S Items Segments OCI EPS ESMA 23

24 Errors in primary IFRS-Financial Statements Error: The I/S presents a mixture of Cost of Sales format and the Total Expenditure format : other capitalized own work and cost of sales, depreciation not separated by functions. Against IAS 1.99 and IAS Notifications by Enforcement Panel: Separation of depreciation from PPA: Presenting depreciation separately for capitalized own work and not split according to functions is not in conformity with IAS Fin. Performance: F/S Items Segments OCI EPS ESMA 24

25 Errors in primary IFRS-Financial Statements Further Notifications by Enforcement Panel: No segment reporting in the I/S: IAS 1.81 ff, segment reporting should be in the notes No netting of interest expenses and interest income, IAS 1.32 and IAS 1.82 Additional postings: the book value of Intangible assets being developed has to be shown separately, IAS and 1.55 Fin. Performance: F/S Items Segments OCI EPS ESMA 25

26 Segment Reporting ESMA notes: Segment reporting is based on management approach Segment reporting has to be consistent with other publications by the company (e.g. press notifications, MD&A, presentation for analysts Reconciliation (IFRS 8.21 and 8.28) Information to revenues by product/service line (IFRS 8.32), geographical areas (IFRS 8.33) or major customers (IFRS 8.34) Fin. Performance: F/S Items Segments OCI EPS ESMA 26

27 Segment Reporting Management approach: review of the management reporting to the board, is the information in the segment report actually used by management? With respect to defining the segments (IFRS 8. 5 ff), with respect to results (IFRS 8.25) Comprehensibility, transparency: are the factors of the entity s reportable segments identified (8.22), is a reconciliation to the IFRS numbers provided (IFRS 8.28), is an explanation of the measurements of segment profit or loss, assets and liabilities for each reportable segment provided (IFRS 8.27) Consistency: are the adjustments (positive and negative) applied consistently? Are they in conformity with other information published by the company? Notes: information about product and services included (IFRS 8.32)?, information about geographical areas (IFRS 8.33), information about major customers (IFRS 8.34) Fin. Performance: F/S Items Segments OCI EPS ESMA 27

28 Errors in segment reporting Errors: the segment reporting differs from the segments used for internal management reporting, this is contrary to IFRS 8.5 and 8.11, 8.25 Missing information in the Notes about the extent of the company s reliance on major customers (those with revenues more than 10% of the entity s revenues), (IFRS 8.34) Notifications: the operating segments have to be explained transparently (IFRS 8.22 ff), reconciliations of the total of the reportable segment s revenues to the entity s revenues (IFRS 8.28), information about other business activities and operating segments that are not reportable shall be combined and disclosed in an all other segments category (IFRS 8.16) Fin. Performance: F/S Items Segments OCI EPS ESMA 28

29 Movements in Other Comprehensive Income (OCI) Differentiation between items that shall be reclassified subsequently to profit or loss when specific conditions are met (e.g. currency differences for discontinued foreign entities) and Items that shall not be reclassified into the I/S (profits or losses from revaluations of pension liabilities) Analysis of OCI for each equity component in the statement of changes in equity (IAS 1.106A) Explanation of each material component of the accumulated OCI Disclosure of income tax consequences in connection with financial instruments classified as equity (IFRS IC discussion) Fin. Performance: F/S Items Segments OCI EPS ESMA 29

30 Other Comprehensive Income Is the disclosure in the OCI-section in the B/S and the I/S and the notes consistent with IAS 1? Separate disclosure of OCI for at-equity participations (Change in IAS 1.82A) Were certain events correctly presented in the OCI section or in the I/S Were material events properly identified and disclosed Fin. Performance: F/S Items Segments OCI EPS ESMA 30

31 Earnings per Share (EPS) EPS is the only IFRS-defined performance indicator Basic and diluted EPS have to be presented in the statement of OCI with equal prominence for all periods, (IAS 33.66) Adjusted EPS numbers can only be presented in the Notes, the calculation has to be based on the weighted average number of ordinary shares, (IAS 33.77) Disclosure in the Notes: the amounts used as the numerators in calculating basic and diluted EPS, and a reconciliation of those amounts to profit or loss attributable to the parent entity, (IAS 33.70) Fin. Performance: F/S Items Segments OCI EPS ESMA 31

32 Errors in the Calculation and Errors: Presentation of EPS At the end of the reporting period there was a capital increase for the calculation of EPS the new shares were used as the denominator instead of the pro-rata temporis number; incorrect as to IAS and 33.21(a). In calculating the basic EPS for the ordinary shares only the expected dividend for the preference shares was deducted; the total distribution of the remaining profit to ordinary shares and preference shares was not taken into account; incorrect as to IAS 33.A14 (b). Fin. Performance: F/S Items Segments OCI EPS ESMA 32

33 Earnings per Share Notifications of Enforcement Panel: Adjusted EPS numbers voluntary additional information to adjusted EBIT and adjusted EPS are exclusively allowed in the Notes or the MD&A (IAS 1.49 and IAS and IAS 1 BC 103) Dilutive potential ordinary shares potential ordinary shares shall only be treated as dilutive when their conversion to ordinary shares would decrease EPS (or increase loss per share) from ordinary operations (IAS 33.41) Fin. Performance: F/S Items Segments OCI EPS ESMA 33

34 34