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AFM: Focus on income taxes (IAS 12) and cash flow statement (IAS 7) in supervising financial reporting

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Pursuant to the Act on the Supervision of Financial Reporting (Wet toezicht op de financiële verslaggeving, Wtfv), the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) is responsible for supervising the financial reporting of Dutch listed companies with regard to financial years commencing on or after 1 January 2006.

In anticipation of the actual supervisory activities, the AFM performed pre-supervision audits of the financial reporting by Dutch listed companies in relation to the financial years 2004 and 2005. The purpose of this pre-supervision – both for the companies and for the AFM – was to improve financial reporting and to gain supervision experience.

Based on the findings laid down in these two pre-supervision reports, the AFM, in actually supervising the 2006 annual accounts, will pay specific attention in the coming year to the application of IAS 12 (Income Taxes) and IAS 7 (Cash Flow Statement).

The AFM published its findings on the 2004 annual accounts at an earlier stage. In addition to the foregoing, the main findings of the pre-supervision regarding the financial year 2005 are as follows:

  • The desktop reviews resulted in fewer requests for information in comparison with the pre-supervision for the financial year 2004.
    This might be an indication of better compliance with the applicable reporting requirements, and thus of an improvement in the quality of the financial reporting. It must be observed, however, that – unlike the 2004 annual accounts – the 2005 annual accounts were not selected on the basis of a risk analysis. The annual accounts selected in 2004 were not included in the selection for 2005. Furthermore, it must be borne in mind that the 2005 annual accounts were assessed in accordance with IFRS, whereas the AFM had applied the Guidelines for Annual Reporting as the assessment framework for the 2004 annual accounts.
  • Most companies found it difficult to provide the substantive written answers in time.
    The term applied by the AFM is ten working days, which will – in principle – also be applied for supervision purposes. If the company can advance good reasons as to why it needs a longer response time, the company and the AFM may deliberate about a reasonable term. In this event the company should show a sufficient degree of cooperation, while sufficient account should be taken of the aforementioned statutory term of six months in agreeing a different term.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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