How Does the Enforcement of IFRS Reporting Affect Transaction Reporting?
International Financial Reporting Standards (IFRS) comprise the accounting rules that relate to the financial statements of public companies. IFRS governs how these companies prepare their financial statements and what information is contained in them. This ensures transparency and consistency in financial reporting, making it easier to compare public companies against each other globally.
While it may seem that IFRS and regulatory transaction reporting serve different purposes, they are somewhat connected, and the enforcement of IFRS reporting can affect transaction reporting. Regulatory regimes such as the Markets in Financial Instruments Regulation (MiFIR), European Market Infrastructure Regulation (EMIR), Securities Financing Transactions Regulation (SFTR) and the Central Securities Depositories Regulation (CSDR), focus on trade-level disclosures. The enforcement of IFRS through audits, supervisory scrutiny and compliance processes can help to ensure data accuracy and consistency for regulatory transaction reporting.
What are the Benefits of IFRS Accounting Standards?
IFRS is a globally recognised set of accounting standards developed by the International Accounting Standards Board (IASB) to provide a common language for financial reporting. This level of consistency and uniformity across global markets enhances investor confidence and makes it easier to compare public companies for the purpose of efficient capital allocation.
The enforcement of IFRS refers to the processes and mechanisms that ensure public companies adhere to these standards when preparing their financial statements. This is important for three main reasons:
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- Transparency – by mandating clear and consistent financial reporting, enforcement helps investors to understand the financial performance of a company and make an informed decision
- Accountability – by reducing the information gap between companies and investors, the company is held to higher levels of accountability in its reporting
- Efficiency – by applying IFRS enforcement across jurisdictions, investors and analysts can easily compare the profitability or financial health of one company against another
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The enforcement of IFRS offers a significant advantage over individual national accounting standards by providing a consistent, globally recognised framework for financial reporting. Under national requirements, companies operating across borders had to constantly evaluate the differing requirements of each jurisdiction in which they operated. Even small differences in regulatory regimes could lead to significant differences in financial outcomes. IFRS eliminates this fragmentation and improves data integrity globally.
How Does IFRS Enforcement Affect Transaction Reporting in Regulatory Regimes?
While IFRS focuses on the financial statements of public companies, the enforcement of IFRS can affect the transaction reporting of EU regulatory regimes in several ways. Robust compliance with IFRS will ensure the integrity of data being used for EMIR, MiFIR, SFTR and CSDR.
EMIR
EMIR mandates the reporting of OTC and exchange-traded derivative contracts to authorised trade repositories (TRs) as well as outlining clearing, risk mitigation and collateral requirements. Under EMIR, firms must report a range of data points, including mark-to-market valuations and collateral updates. Mark-to-market valuations must reflect fair value methodologies that are aligned with IFRS, and the margin requirements for collateral updates often originate from risk management systems used in accounting.
IFRS enforcement dictates the consistency in how firms value their derivatives contracts, harmonising the information that firms submit to TRs.
MiFIR
MiFIR is an EU regulation that mandates transparency and trade reporting requirements to protect investors in European financial markets. Under Article 26 of MiFIR, investment firms are required to report accurate details of derivatives transactions in financial instruments to their relevant competent authorities no later than the close of the next working day (T+1).
MiFIR reporting captures transaction details including the value and size of the transaction as well as the execution date and time. The enforcement of IFRS ensures that financial instruments are recognised and accurately classified which aligns accounting records with the MiFIR transaction reports.
SFTR
SFTR is an EU framework that mandates the reporting of all securities financing transactions to TRs, to ensure greater transparency of securities lending markets and reduce systemic risk. SFTR reporting applies to repurchase agreements (repos), securities lending and borrowing and margin lending and is a crucial framework for the protection and stability of securities markets.
IFRS enforcement ensures firms are better positioned to accurately track collateral and valuation methods, which reduces reporting discrepancies. Although IFRS is not directly linked to SFTR, the consistent application of fair value principles and robust risk disclosure under IFRS supports the accuracy and integrity of securities financial transaction reports.
CSDR
CSDR aims to harmonise securities settlement processes by ensuring consistent requirements for central securities depositories (CSDs) across EU member states. The primary objectives of CSDR are to enhance settlement efficiency and safeguard market participants through the use of a unified regulatory framework.
The Settlement Discipline Regime (SDR) is a key component of the CSDR and introduces measures to prevent and address settlement failures. These measures include cash penalties for late settlement and mandatory buy-ins for transactions that fail to settle. While CSDR primarily focuses on the operations of CSDs and settlement processes, it also has implications for financial reporting. By requiring firms to maintain accurate records of internalised settlements, this aligns with IFRS by promoting high-quality financial reporting practices. The consistency of IFRS enforcement is important for the accuracy of financial data which forms a key role in supporting regulatory oversight through the application of CSDR reporting requirements.
IFRS and regulatory transaction reporting frameworks may serve different functions, but they are connected through the reliance on the quality and consistency of the underlying financial data. Strong IFRS enforcement supports greater accuracy and transparency in regulatory reporting and helps firms to meet their obligations under EMIR, MiFIR, SFTR and CSDR.
