New extracts from the ESMA database of IFRS decisions

In July 2021, the European Securities and Markets Authority (ESMA) published further extracts from its confidential database of enforcement decisions taken by European national enforcers.

ESMA is an independent EU Authority that was established on 1 January 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 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.

ESMA regularly publishes extracts from its internal database of enforcement decisions on financial statements, with the aim of providing issuers and users of financial statements with relevant information on the appropriate application of IFRS. Such publication, together with the rationale behind these decisions, will contribute to a consistent application of IFRS in the European Union.

Extracts from the database of enforcement decisions can be downloaded here.

Topics covered in the latest (25th) batch of extracts, covering the period from November 2019 to July 2020:

From the above mentioned enforcement decisions issued by ESMA in July 2021 we have selected one enforcement decision, which may be applicable for a number of entities that report under IFRS.

Presentation of expenses related to COVID-19

Financial year end: 30 June 2020

Category of issue: Presentation of non-recurring expenses, Interim financial statements

Standards or requirements involved: IAS 1 Presentation of Financial Statements

Description of the entity’s accounting treatment

In its interim financial statements, the issuer presented some costs and expenses related to COVID-19 as non-recurring items. The issuer classified expenses such as exceptional bonuses of employees, logistic costs including cleaning, sanitising and other protective measures for employees, representing around a quarter of its recurring operating profit, as non-recurring items. Therefore, the issuer excluded these costs and expenses from its recurring operating results.

According to the issuer, COVID-19 related costs and bonuses meet its definition of non-recurring income or expense because they result from events or transactions that do not relate to the issuer’s ordinary activities in view of their nature, frequency or materiality.

The enforcement decision

The enforcer disagreed with the presentation of COVID-19 related costs specified by the issuer as non-recurring items, as this did not provide a fair, consistent and relevant presentation as required by paragraphs 17, 45 and 46 of IAS 1. Therefore, the enforcer required the issuer to present these costs and expenses in its primary financial statements within the costs of goods sold, selling expenses and overhead expenses depending on their nature.

Rationale for the enforcement decision

The enforcer considered that the issuer’s presentation of COVID-19-related items did not comply with the presentation requirements of IAS 1 for the following reasons:

  1. it was not clear if the COVID-19 effects in the financial statements of the issuer had been determined reliably. The COVID-19 pandemic impacted more than one line item of the profit and loss statement and thus it was not appropriate to isolate some of the costs and expenses in a single line and exclude them from the recurring operating income when other effects, which were positive, were presented in aggregate;
  2. the explanation provided by the issuer to classify some costs and expenses as linked to COVID-19 was not convincing. For instance, certain employee bonuses were classified by the issuer as COVID-19 related. However, these costs were also linked to an increase of the activity and efficiency of the issuer;
  3. it was not certain whether the effects of the COVID-19 pandemic would be limited to one period and not affect the performance of the issuer in future reporting periods. Therefore, classifying these costs and expenses as non-recurring was not appropriate.
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