ESMA has announced enforcement priorities for 2024 financial statements

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 Economic Area (EEA).

The European national enforcers of financial information monitor and review financial statements published by issuers with securities traded on European Economic Area regulated markets who prepare their financial statements in accordance with IFRS accounting standards and consider whether they comply with IFRS accounting standards and other applicable reporting requirements, including relevant national law.

The European common enforcement priorities for 2024 corporate reporting are divided into three sections:

• Priorities related to IFRS financial statements
• Priorities related to sustainability statements
• Priority related to European Single Electronic Format (ESEF) reporting

Priorities related to IFRS financial statements

The common enforcement priorities related to the 2024 IFRS financial statements are:

Priority 1: Liquidity considerations

• Supplier finance arrangements (SFA): ESMA reminds issuers of the importance of liquidity risk disclosures. ESMA highlights, in particular, the new disclosure requirements in IAS 7 Statement of Cash Flows in relation to Supplier finance arrangements and their effects on the issuers’ exposure to liquidity risk.
• Covenants: ESMA reminds issuers of the clarifications and the new disclosures under IAS 1 related to non-current liabilities with covenants and the disclosures required by IFRS 7 regarding loans payable, in particular if there were defaults, breaches or renegotiations of loan agreements.
• Statement of Cash flows (SCF): ESMA also draws issuers’ attention to the following requirements where enforcers have, in the past, identified cases of non-compliance: (i) cash flows in the SCF must be presented on a gross basis, (ii) non-cash transactions cannot be presented in the SCF, and (iii) material non-cash transactions related to investing and financing transactions must be disclosed elsewhere in the financial statements.

Priority 2: Accounting policies, judgements, significant estimates

• General remarks: ESMA emphasises that disclosures of material accounting policies, judgements and sources of estimation uncertainty should be entity-specific and consistent with other information within the financial statements.
• Control, joint control and significant influence: ESMA notes that determining whether the issuer controls an entity (alone or jointly with other investors) or has significant influence over an investee may require significant judgement.
• Revenue from contracts with customers: ESMA among others notes that the assessment of whether issuers’ long-terms contracts (e.g. rental agreements) meet the definition of a contract with a customer may require significant judgement, therefore, issuers may need to disclose the judgements used when making this assessment.

Priorities related to sustainability statements

There are three common enforcement priorities related to the 2024 sustainability statements:

• Materiality considerations in reporting under European Sustainability Reporting Standards (ESRS)
• Scope and structure of the sustainability statement
• Disclosures relating to Article 8 of the Taxonomy Regulation

Priority related to European Single Electronic Format (ESEF) reporting

For the examination of 2024 annual financial reports that are subject to ESEF reporting requirements containing consolidated financial statements, ESMA and enforcers will be targeting the five areas of common ESEF filing errors found in the statement of financial position.

General considerations and reminders

The ESMA Statement also provides, in section 4, some general remarks on topics, highlighting the importance of connectivity between financial and non-financial information. Although these topics are not enforcement priorities for 2024, issuers should consider these additional points of attention.

A public statement on the enforcement priorities for 2024 is available here.

Sources: www.iasplus.com, https://www.esma.europa.eu/