Insights

On the 11 November 2020, the Malta Financial Services Authority (the “MFSA”) issued a circular to bring to the attention of issuers the latest interpretative communication by the European Commission on the preparation, audit and publication of the financial statements included in the annual financial reports drawn up in accordance with the European Single Electronic Format (“ESEF”).^[1]

The European Commission’s communication of the 6 November 2020 (the “Communication”) follows ESMA’s public statement of the 28 October 2020 on European common enforcement priorities for 2020 annual financial reports^[2] (the “Public Statement”) where, amongst others, ESMA reminds issuers that, starting from the financial year 2020, annual financial reports pursuant to Article 4 of the Transparency Directive^[3] shall be prepared in compliance with the ESEF. It is worth noting that in the Public Statement, ESMA notes that in the context of COVID-19, the Council has proposed to amend the Transparency Directive. This, to provide Member States with the option to postpone, by one year, the requirement for listed companies to prepare all annual financial reports in ESEF for financial years beginning on or after 1 January 2020. As it is still uncertain whether this postponement will actually materialise, ESMA encouraged issuers to continue to prepare for the ESEF obligation starting from the financial year 2020.

The aim of the Communication is to clarify existing provisions of European Union law which stem from the Transparency Directive, the Audit Directive^[4] and the Accounting Directive^[5] in the context of the ESEF Regulation^[6].

Below is a summary of some of the ESEF related questions addressed in the Communication and the answers provided by the Commission.

1. Are statutory auditors required to provide an audit opinion on whether the financial statements included in the annual financial reports comply with the relevant statutory requirements laid down in the ESEF Regulation?

The Commission replies that Union law requires statutory auditors to provide an audit opinion on whether the financial statements included in the annual financial reports comply with the relevant statutory requirements laid down in the ESEF Regulation, i.e. with the provisions of the ESEF Regulation that apply to financial statements.

2. Which statutory requirements laid down in the ESEF Regulation should statutory auditors check compliance with in order to provide their audit opinion?

In order to provide an audit opinion on whether the financial statements comply with the “relevant statutory requirements”, the Commission’s reply is that statutory auditors shall check the compliance of the issuers’ financial statements with the provisions of the ESEF Regulation that are applicable to the financial statements^[7].  The “relevant statutory requirements” found in the ESEF Regulation are the following:

1. All the financial statements that are included in the annual financial report shall be prepared in a valid XHTML format^[8];
2. For all consolidated financial statements that are drawn-up in accordance with IFRS as endorsed by the EU or with IFRS as adopted by the IASB:

• • the disclosures specified in Annex II of the ESEF Regulation shall be marked-up, where those disclosures are present in those consolidated financial statements;
  • all mark-ups, including the voluntary mark-ups of disclosures other than those specified in Annex II, shall meet the following requirements: the XBRL mark-up language shall be used, the elements of the core taxonomy specified in Annex VI of the ESEF Regulation with the closest accounting meaning shall be used, unless an extension taxonomy element is created in compliance with Annex IV of the ESEF Regulation and the mark-ups shall comply with the common rules on mark-ups.
  • For financial statements other than the IFRS consolidated financial statements:
  • all mark-ups included by the issuer on a voluntary basis or in compliance with national law shall meet the following requirements: the XBRL mark-up language shall be used and a specific taxonomy provided by the Member State in which the issuer is incorporated shall be used and the mark-ups shall comply with the common rules on mark-ups.

3. Shall the audit opinion on whether the financial statements comply with the relevant statutory requirements laid down in the ESEF Regulation be included in the audit report or in a separate report?

It is the Commission’s view that existing Union law does not specify whether the audit report should be included in the annual financial report or disclosed together with the annual financial report as a separate document. Under Article 4(4) of the Transparency Directive, the audit report “shall be disclosed in full to the public together with the annual financial report”. In the absence of specific rules in force at national or regulated market level and taking into consideration the technical possibilities on a case-by-case basis, issuers may apply their preferred option.

4. Are third-country issuers required to disclose an audit report that includes an audit opinion on whether the financial statements within the annual financial reports comply with the relevant statutory requirements laid down in the ESEF Regulation?

Under the Transparency Directive, third-country issuers are required to disclose annual financial reports drawn-up in accordance with all the requirements in the ESEF Regulation, together with an audit report prepared in accordance with the Audit Directive. As a result, the Commission believes that it is the responsibility of a third-country issuer to ensure that its auditors provide an audit opinion on whether the financial statements included in the annual financial report comply with the relevant statutory requirements laid down in the ESEF Regulation.

5. Shall issuers and/or statutory auditors use an electronic signature for signing the annual financial reports and/or the documents included therein and/or the audit reports, respectively?

Existing Union law does not prevent issuers or statutory auditors from using an e-signature for signing the annual financial reports, documents included therein or the audit reports respectively. The Commission is therefore of the view that in the absence of specific rules in force at national/regulated market level, issuers and/or statutory auditors may apply their preferred option including a handwritten or an e-signature. While Article 4(4) of the Transparency Directive explicitly requires issuers to disclose an audit report that is signed by the auditors responsible for auditing the financial statements, there is no explicit requirement at Union level as regards whether and how to sign the annual financial reports or documents included therein. However, requirements applying to signatures might be set out in national legislation.

6. Is the administrative, management or supervisory body of the issuer responsible for the compliance of the annual financial reports with the requirements of the ESEF Regulation?

The Commissioner emphasises that the issuer’s administrative, management or supervisory body is responsible for drawing up and disclosing the annual financial reports in compliance with the ESEF Regulation.

7. Are issuers required to include in their annual financial report a responsibility statement regarding the compliance of the annual financial report with the ESEF Regulation?

Union law does not prevent issuers from expressing, on a voluntary basis, for instance in the responsibility statement within the annual financial report, a specific statement regarding the compliance of the annual financial report with the ESEF Regulation. Article 4(2)(c) of the Transparency Directive requires that the annual financial report comprises “statements made by the persons responsible within the issuer, whose names and functions shall be clearly indicated, to the effect that, to the best of their knowledge, the financial statements prepared in accordance with the applicable set of accounting standards give a true and fair view […]”. In the absence of specific rules in force at national/regulated market level, the Commission concludes that issuers may apply their preferred option.

8. Are issuers allowed to disclose additional versions of the annual financial report that are not ESEF-compliant and/or that include ESEF-compliant financial statements for which the ESEF compliance was not checked by the statutory auditors?

Union law does not prevent issuers from disclosing (for instance on their website) additional versions of their annual financial reports that are non-ESEF compliant or that include ESEF-compliant financial statements for which compliance with ESEF was not checked by the statutory auditors. However, the Commission makes it clear that these additional non-ESEF compliant versions of the annual financial reports constitute nonofficial versions and that disclosing additional non-ESEF compliant versions of the annual financial report is not enough to comply with the Transparency Directive.

^[1] https://ec.europa.eu/finance/docs/law/201106-communication-esef_en.pdf

^[2] https://www.esma.europa.eu/sites/default/files/library/esma32-63-1041_public_statement_on_the_european_common_enforcement_priorities_2020.pdf

^[3] Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC

^[4] Directive 2006/43/EC as amended by Directive 2014/56/EU

^[5] Directive 2013/34/EU

^[6] Commission Delegated Regulation (EU) 2019/815 on the European Single Electronic Format (ESEF)

^[7] Guidance on how to check compliance with the relevant statutory requirements in the ESEF Regulation is included in the Guidelines on the auditors’ involvement on financial statements in European Single Electronic Format developed by the Committee of European Auditing Oversight Bodies, available at https://ec.europa.eu/info/files/191128-ceaob-guidelines-auditors-involvementfinancial-statements_en

^[8] Article 3 of the ESEF Regulation – which requires the preparation of the entire annual financial report in XHTML format – shall be read in conjunction with Article 4(2) of the Transparency Directive – which specifies that the annual financial report shall comprise inter alia the audited financial statements. A free validator for XHTML documents is available at http://validator.w3.org/.