Financial reporting enforcement – listed companies

 

Enforcement of financial reporting 

In its control of financial reporting in 2021, Finanstilsynet gave priority to following up accounting standards for the presentation of financial statements, impairment of assets, financial instruments and disclosures related to such instruments, and leases. The choice of prioritised areas was influenced by the pandemic. 
 
Finanstilsynet applies several criteria to select entities for review. Some entities are selected on the basis of signals given or by rotation, others on the basis of risk assessments. Risk-based analyses rely partially on data reported by companies via the Altinn internet portal. 
 
Finanstilsynet reviewed all or parts of the financial reporting of 14 entities. Particular attention was focused on issuers of shares and equity certificates but also on some bond issuers. Finanstilsynet also reviewed the audit reports of all listed companies. 14 cases were subject to closer scrutiny. Three of these have yet to be finalised. In addition, eight cases from previous years were brought to completion.  
 
Finanstilsynet received no reports from auditors indicating that the financial reporting of the issuers concerned failed to provide a true and fair view. Finanstilsynet received one report indicating that reporting from an issuer failed to give a true and fair view. 

The most important cases brought to completion in 2021 

Axactor SE 

In its supervision of Axactor SE's annual financial statements for 2019 and half-yearly financial statements for 2020, Finanstilsynet identified material errors and inadequate disclosures. Axactor was ordered to correct two errors in the company’s accounting treatment of acquired NPL portfolios in accordance with IFRS 9 Financial Instruments. Both errors are considered to be significant.

With respect to agreements whereby the company undertakes to purchase non-performing loans during a future period, so-called forward flow agreements, Axactor has taken note that the fair value was not measured in line with IFRS 13 Measurement of fair value and has changed its accounting practice with effect from the annual financial statements for 2020. Deficiencies and omissions pointed out in the company's presentation and disclosures have been rectified in subsequent periodic financial reporting.

Havila Shipping ASA 

In its supervision of Havila Shipping ASA’s annual financial statements for 2019 and half-yearly financial statements for 2020, Finanstilsynet pointed to material errors and inadequate disclosures. Havila Shipping was ordered to correct three errors in the company's impairment testing of ships in accordance with IAS 36 Impairment of assets. In Finanstilsynet’s opinion, the errors in the company's assessments of impairment losses had a material effect for both periods.  
 
Finanstilsynet has also pointed to major deficiencies in the company's disclosures. The company has taken note of this and has included additional disclosures in subsequent periodic financial reporting. 

Interoil Exploration and Production ASA 

In its supervision of the annual financial statements for 2019 and the interim financial statements for the first half of 2020, Finanstilsynet pointed to material errors and inadequate disclosures. The errors concerned exploration costs, fixed assets and loans. Nevertheless, the company did not report correct and complete adjustments and disclosures in its annual financial statements for 2020. Finanstilsynet decided to order Interoil to provide additional information in a public notification to the stock exchange concerning errors made in previous periods and improvements made in relevant disclosures.

Havilafjord AS 

Finanstilsynet pointed out that the company in its annual financial statements for 2019 did not disclose the terms and conditions for a loan to Havila Holding AS, in violation of IAS 24 Related Party Disclosures. The interest rate terms for this loan to a related party were not equivalent to those that prevail in arm's length transactions and significantly below Havilafjord's own funding rate for the listed bond loan. In its financial reporting, the company has not accounted for the loan to Havila Holding in accordance with lFRS 9 Financial Instruments. 
 
The company has corrected this error in its annual financial statements for 2020 and has, among other things, accounted for the interest rate differential, in accordance with market-based arm's length terms, as a distribution to Havila Holding.

Thematic review and follow-up of IFRS 16 Leases 

In 2020, Finanstilsynet conducted a thematic review of ten listed companies in connection with the entry into force of the new accounting standard IFRS 16 on 1 January 2019. The report from the thematic review was published in January 2021. The thematic review, which was based on the annual financial statements for 2019 and the interim financial statements for the first half of 2020, showed different practices among the companies.  
 
The key observations from the thematic review are that companies generally provide few entity-specific and concrete disclosures on leases, and that several of the companies do not consider the materiality of the information provided. There are also wide variations in their assessment and calculation of the incremental borrowing rate, and inconsistencies were observed in the determination of the discount rate. When assessing the impairment of recognised right-of-use assets, one of the companies used IAS 17 Leases, which has been revoked. Little information is generally provided about leases in their interim financial reporting, and none of the companies had disclosed how they assessed possible indications of impairment of right-of-use assets as at 30 June 2020, despite major market changes as a result of the pandemic.

In 2021, Finanstilsynet reviewed disclosures concerning leases in the annual financial statements for 2021 for around 40 companies to follow up the findings in the thematic review. There is great variation in the quality and completeness of the disclosures. Finanstilsynet’s observations partly match the observations from the thematic review, especially when it comes to the lack of entity-specific and concrete disclosures. Finanstilsynet observes that the companies still largely reproduce the text in the standard. 

Survey of the audit committees’ work  

On the basis of amendments to the provisions of the Public Limited Liability Companies Act concerning audit committees, Finanstilsynet reviewed how audit committees fulfil the requirements and tasks following from the Public Limited Liability Companies Act during 2021. The target group for the survey was a selection of companies with shares listed on Oslo Børs or Euronext Expand as at 31 December 2020. The selection comprised 131 companies. The questionnaire used is available on Finanstilsynet's website.

The new provisions increase and clarify the tasks and requirements to be fulfilled by the audit committee and will entail a greater need for accounting and audit expertise among the audit committees’ members.

Thus far, Finanstilsynet has noted that the answers to the questions partly reflect that the amendments entered into force on 1 January 2021, and that there are wide variations in how far the companies have come in meeting the new requirements.

During 2022, Finanstilsynet will publish a report with observations related to the audit committees’ status and work to fulfil the new requirements and tasks set out in the Public Limited Liability Companies Act.

Audit committees and auditors' materiality levels 

In 2021, Finanstilsynet published a report on audit committees and auditors’ materiality levels.

Finanstilsynet has obtained information about the audit committees' work on materiality levels in connection with the reporting of financial information, as well as the materiality levels used by auditors when auditing a sample of public interest entities.  

The survey also covers how the auditor determines materiality levels and how the stipulated level affects the scope of the auditor's work.  
 
The survey shows that few audit committees have so far focused on how the auditor's materiality levels affect the quality (nature and scope) of the audit and the auditor's reporting. Furthermore, the survey shows that the materiality level set by the auditors is in accordance with the methodology used by the audit firms for all of the companies. 

Late publication of periodic financial reports 

In 2021, Finanstilsynet issued administrative fines to Interoil Exploration and Production ASA, Arribatec Solutions ASA and Polarcus Limited for late publication of annual financial statements.

Deficiencies in financial reporting 

In June 2021, Finanstilsynet published an overview of deficiencies in listed companies’ annual financial statements after reviewing the annual financial reports for 2020. Two companies had failed to publish a statement from persons within the issuer who are responsible for the financial statements and management report (statement of responsibility). 
 
In October 2021, Finanstilsynet published an overview of deficiencies in listed companies’ half-yearly financial reports. Eight companies had failed to publish a statement from persons who are responsible for the half-yearly financial statements and the half-yearly financial report (statement of responsibility). Finanstilsynet sent letters to four companies whose statement of responsibility was incomplete. These companies had not stated the full name or position of those responsible in the statement of responsibility. Furthermore, a company that had failed to refer to its half-yearly financial report in the statement of responsibility has been followed up. The companies have publicly disclosed the shortcomings pointed out by Finanstilsynet. 
 
Finanstilsynet observes that fewer companies have deficiencies in their annual and half-yearly financial statements for 2020 and the first half of 2021 than in the preceding period.

Review of other financial information 

Alternative performance measures 

Finanstilsynet's review has included annual financial reports, interim financial reports, company announcements and prospectuses. Finanstilsynet would like to highlight the following observations:  

• Few companies have been observed to change or introduce new alternative performance measures as a result of the pandemic.  
• Alternative performance measures have been used where the labelling is not in accordance with the requirement for relevant and meaningful labels in the Guidelines on Alternative Performance Measures (the guidelines) established by ESMA. Finanstilsynet has observed both labels that do not adequately reflect the alternative performance measure’s content and labels that do not reflect the fact that the alternative performance measure is an adjusted accounting variable.  
• Finanstilsynet emphasises the importance of using unbiased alternative performance measures when describing the company’s development, financial performance and current position.  
• The companies must be aware that company announcements that include inside information and alternative performance measures are covered by the guidelines. For example, earnings release will in many cases be covered by the scope of the guidelines. 

The most important cases brought to completion in 2021 

Equinor ASA 

The control included Equinor's change of definition for adjusted earnings. 
 
Equinor's renewable energy activities were presented as a separate segment with effect from the first quarter of 2021. In this connection, the company changed the principle for how gains/losses from sales of assets are recognised in adjusted earnings for the renewable segment. 
 
Gains/losses on the sale of assets were previously excluded but were included in adjusted earnings for the renewable business with effect from the first quarter of 2021. In Finanstilsynet's assessment, adjusted earnings are not in accordance with the guidelines for the use of alternative performance measures after the definition was changed.  
 
Based on Finanstilsynet's preliminary assessment regarding this matter, Equinor decided, effective from the interim reporting for the third quarter of 2021, to revert to the principles used before the change implemented in the first quarter of 2021. 

Europris ASA 

Finanstilsynet's supervision covered the use of alternative performance measures (APMs) in the financial statements for the third quarter of 2020 and the annual financial statements for 2019. Finanstilsynet questioned the company's presentation of one of the APMs, which in Finanstilsynet's view includes sales that are not part of the company's business, although this is not evident from the APM label. Finanstilsynet also commented on the company's focus on APMs in its interim financial statements and deficiencies in its annual and interim financial statements in explaining the use of and providing information on the definition and reconciliation of several of the APMs used.  
 
Europris notified Finanstilsynet that the company will make changes and improvements in line with Finanstilsynet's assessments in upcoming reports. 

Stranded assets in reports from listed companies 

Finanstilsynet has followed up the report ‘Survey of companies’ sustainability reporting’, which was published in autumn 2020. Listed companies have been asked to provide additional information about their assessments concerning stranded assets. 
 
Several companies reported that they had identified assets that may be of reduced or no value before the end of their original expected life as a result of risks associated with climate change (stranded assets). Finanstilsynet has followed up the companies concerned by requesting further information on the assessments underlying their valuation of such assets.  
 
Key findings from the survey:  

• Few companies state that they take climate risk into account in their valuation of assets. 
• Few companies state that they have or may end up with stranded assets, and no information about such assets has been provided in the annual financial statements of companies stating that they have such assets. 
• Most of the companies ensure consistency between the information provided in their sustainability reporting and their annual financial statements. This is done by manually reviewing the annual financial statements. 

Communication and guidance 

As from the financial year starting on 1 January 2021, the annual financial statements from the companies shall be prepared in compliance with the European Single Electronic Format (ESEF). Finanstilsynet spent considerable resources in 2021 on providing guidance on the new regulations. 
 
Finanstilsynet arranged a seminar for companies listed on regulated markets in November 2021. The seminar mainly addressed the topics described above and was conducted as a webinar. It was seen by about 1 400 people. Such seminars are part of Finanstilsynet’s communication initiatives. In addition, all cases, surveys and reports from thematic inspections are published on Finanstilsynet’ website.