On 28 October 2020, the European Securities and Markets Authority (ESMA) announced the priority issues that the assessment of listed companies' 2020 financial statements will focus on.
ESMA is an independent EU Authority that was established in 2011. ESMA’s mission is to enhance the protection of investors and promote stable and well-functioning financial markets in the European Union.
The European national enforcers of financial information monitor and review financial statements published by issuers with securities traded on a regulated European market and who prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) and consider whether they comply with IFRS and other applicable reporting requirements, including relevant national law.
The common enforcement priorities related to 2020 IFRS financial statements reflect the need to provide adequate transparency regarding the consequences of the COVID-19 pandemic, which are expected to affect several areas of the 2020 annual financial reports. The key areas are:
- the application of IAS 1 Presentation of Financial Statements with a focus on going concern, significant judgements and estimation uncertainty and the presentation of COVID-related items in the financial statements;
- the application of IAS 36 Impairment of Assets, where the recoverable amount of goodwill, intangible assets and tangible assets may be impacted by the deterioration of the economic outlook of various sectors;
- the application of IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures, including general considerations relating to risks arising from financial instruments, focusing on liquidity risk, and specific considerations related to the application of IFRS 9 for credit institutions when measuring expected credit losses;
- specific issues related to the application of IFRS 16 Leases, including explicit disclosures by lessees which have applied the Amendment to IFRS 16 providing relief to lessees when accounting for rent concessions.
The common enforcement priorities related to non-financial statements for the 2020 year end are:
- Impact of the COVID-19 pandemic on non-financial matters;
- Social and employee matters;
- Business model and value creation; and
- Risk relating to climate change.
Additionally, ESMA reminds issuers that, starting from the financial year 2020, annual financial reports shall be prepared in compliance with the European Single Electronic Format (ESEF). ESMA highlights that the entire annual financial report, i.e. including ad minima the audited financial statements, the management report and responsibility statement, shall be prepared in xHTML format. In addition, issuers preparing IFRS consolidated financial statements shall mark those up using Inline XBRL, starting with the primary financial statements (i.e. Consolidated statement of profit or loss and other comprehensive income, Consolidated statement of financial position, Consolidated statement of changes in equity and Consolidated statement of cash flows) for financial years beginning on or after 1 January 2020. More information is available on the ESMA special website to help issuers understand the requirements.
Finally, ESMA highlights that it is important to closely monitor Brexit negotiations and provide disclosures on the impact this will have on issuers’ activities and their financial and nonfinancial information.
ESMA and European national enforcers will monitor and supervise the application of the IFRS requirements outlined in the priorities, with national authorities incorporating them into their reviews and taking corrective actions where appropriate. ESMA will collect data on how European listed entities have applied the priorities and will publish its findings in a separate report.
A public statement on the enforcement priorities for 2020 is available here.
Sources: www.iasplus.com, https://www.esma.europa.eu/