ESMA Public Statement – European Common Enforcement Priorities for 2020 Annual Financial Reports

On 28 October 2020, the  European  Securities  and  Markets  Authority (ESMA) issued its annual Public  Statement defining the European common enforcement priorities for 2020 annual financial reports (AFRs) of listed companies. The purpose of the Public Statement is to set out the different areas which ESMA and other regulators will look out for when monitoring and assessing the application of relevant accounting requirements relative to 2020 financial reports of listed companies. The Public Statement splits these areas into 3 categories:

  • Section 1 – this section sets out the common enforcement priorities related to IFRS financial statements for the 2020 year-end, which are:
    1. IAS 1 – Presentation of Financial Statements;
    2. IAS 36 – Impairment of Assets;
    3. IFRS 9 – Financial Instruments and IFRS 7 – Financial Instruments: Disclosures; and
    4. IFRS 16 – Leases.
  • Section 2 – this section sets out the common enforcement priorities related to non-financial statements for the 2020 year-end, which are:
    1. The impact of the COVID-19 pandemic on non-financial matters;
    2. Social and employee matters;
    3. Business model and value creation; and
    4. Risk relating to climate change.
Section 1 on priorities related to IFRS Financial Statements

The 2020 priorities relative to IFRS Financial Statements (as set out above) may be summarised as follows:

(1)        IAS 1 Presentation of Financial Statements:-

  • The provision of sufficiently detailed disclosures on going concern assumptions, especially for those issuers whose liquidity conditions have been most significantly impacted by COVID-19. Material uncertainties relating to events or conditions that may cast significant doubt over an issuer’s ability to continue as a going concern shall also be disclosed.
  • The provision of sufficiently detailed disclosures on significant judgements and estimation uncertainty, particularly owing to the fact that, due to COVID-19, the range of reasonably possible assumptions underlying judgements and estimates in other areas of the financial statements may be rather wide – thus potentially impairing the ability of investors to make informed decisions. Issuers are further advised to explain the manner in which COVID-19 has affected significant judgements and estimation uncertainty, and how this has impacted different items of their prepared financial statements.
  • The presentation of COVID-19 related items in a clear and unbiased manner. ESMA advises issuers to stray away from including any separate presentation of the impact of COVID-19 in the profit and loss statement, as this may not faithfully represent an issuer’s current and future overall financial performance and could therefore lead to misleading interpretations.

(2)        IAS 36 Impairment of Assets:-

  • The provision of adequate transparency as to the estimates and key assumptions underlying the impairment assessment, particularly in view of the fact that the adverse impact of COVID-19 may effectively trigger one or more impairment indicators. ESMA encourages issuers to focus on the operational and financial hypothesis, and further expects them to explain: (i) if, and when, they consider the return to pre-crisis cash-flow levels realistic; and (ii) what time horizon was considered in relation to post-COVID-19 scenarios.
  • In order to reflect the increased level of uncertainty, ESMA has also advised issuers to consider modelling multiple possible future scenarios when estimating the future cash flows of a cash-generating unit, if this provides more relevant information to depict possible future economic developments.

(3)        IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures:–

  • The careful preparation of disclosures relative to risks arising from financial instruments and, in particular, those relating to liquidity risk and the sensitivities to market risks, which may indeed have been exacerbated by the onset of COVID-19, including risks emanating from significant amounts of new debt, debt renegotiations, new financial arrangements or the breach of debt covenants.
  • Vis-à-vis credit institutions, ESMA recommends the disclosure of the basis on which support measures such as debt moratoria have been granted to borrowers or debtors, and their effects on the financial statements; particularly, whether and how such measures have impacted the assessment of significant increase in credit risk, the definition of credit-impaired assets and its practical implementation in the banking sector.

(4)      IFRS 16 Leases:– The provision of specific disclosures by lessors granting rent concessions (particularly in relation to those sectors in which the impact of COVID-19 has been most felt) reflecting the risk that the current market conditions may result in significant changes in the assets subject to operating lease agreements, as well as other disclosures by lessees in accordance with IFRS 16.

Section 2 on priorities related to Non-Financial Statements

In its comments regarding the impact of COVID-19 on non-financial matters, it is noted that ESMA considers the pandemic to have had a pervasive effect on environmental considerations, social and employee matters, respect for human rights, anti-corruption and bribery matters. In view of this, ESMA has called on issuers to provide adequate transparency on the consequences of, and mitigation measures taken in relation to, the COVID-19 pandemic when preparing their non-financial statements.

In relation to social and employee matters in particular, ESMA’s Public Statement emphasises the importance of improved disclosure of issues relative to inclusion and diversity, and the manner in which these are addressed as part of the issuer’s policies concerning its employees. It is further specified that health crises such as COVID-19 tend to increase the relevance of providing transparency in relation to employee-related matters; particularly, health and safety. Hence, issuers should disclose any and all policies put in place for the benefit of their employees, as well as provide further information as to how these will be adopted in practice. Moreover, in view of the increasing onus on remote working, ESMA’s Public Statement encourages issuers to disclose matters relative to the resilience of their IT infrastructure; namely, what preventative measures have been put into place in order to combat the risk of cyber-attacks.

This section also addresses expected disclosures on business model and value creation (including the impact of the pandemic over the short, medium and long term), as well as risks related to climate change, and the corresponding mitigating measures adopted.

Section 3 on other considerations related to Alternative Performance Measures (APMs)

In this section, ESMA reminds issuers of its guidance (issued in April 2020) on how to apply its 2015 Guidelines on APMs in the context of the COVID-19 pandemic, including the manner in which they should present the impact of the pandemic on their operations for the purpose of complying with the said Guidelines on APMs.

Additional Remarks

In furtherance to the above, ESMA’s Public Statement reminds issuers of the fact that as of the financial year 2020, AFRs shall be prepared in accordance with the European Single Electronic Format (ESEF), subject to a proposed option to postpone by one (1) year put forward by the European Council in the context of the COVID-19 pandemic. To date, however, this option has failed to materialise.

Additionally, ESMA has also highlighted the importance of monitoring Brexit negotiations, and providing disclosures on the expected impact on the activities of issuers and their financial and non-financial information.