Dr. Hanne Böckem
Partner, Audit, DPP
KPMG AG Wirtschaftsprüfungsgesellschaft
On 25 October 2023, the European Securities and Markets Authority (ESMA) published the European common enforcement priorities (ECEP) for the upcoming audit season. The financial reporting topics identified together with the European national enforcers, such as the Federal Financial Supervisory Authority (BaFin) in Germany, should be given particular consideration by capital market-oriented companies and their auditors when preparing and auditing their IFRS financial statements for 2023.
This year's European common audit priorities for the 2023 IFRS financial statements are
- Climate-related matters: ESMA continues to require consistency between information on climate-related matters in IFRS financial statements, with a focus on climate-related commitments and targets, such as greenhouse gas emission reductions and decarbonisation plans. It also emphasises the disclosure of information on the accounting policies applied to the recognition, measurement and presentation of emissions trading schemes and renewable energy certificates (including information on the main terms and nature of these schemes). Furthermore, it expects climate risks to be taken into account when assessing impairment of non-financial assets. With regard to the increasing use of power purchase agreements (PPAs), ESMA considers it necessary for issuers to provide details of the characteristics of the PPAs used (e.g. pricing terms, volume of energy contracted, objectives and duration) and the accounting treatment followed (e.g. whether they apply the ‘own use’ exemption under IFRS 9.2.4).
The IASB Educational Material "Effects of climate-related matters on financial statements", which deals with the existing requirements of IFRS accounting standards in connection with the effects of climate-related matters, should still be emphasised here. In addition, the ESMA report "The Heat is On: Disclosures of Climate-Related Matters in the Financial Statements" published yesterday provides numerous practical examples of how issuers can improve their disclosures on climate-related matters in IFRS financial statements.
- Macroeconomic environment: ESMA points out that the current macroeconomic environment (e.g. rise in interest rates and inflation) must not only be taken into account for the financial instruments recognised, but also has an impact on the risk position of issuers (e.g. (re-)financing risk and liquidity risk). Furthermore, it expects the current macroeconomic conditions (e.g. high interest rates, yields and vacancy expectations) to be reflected in the fair value measurement by the issuers (particularly in the level 3 inputs) and in the information disclosed in this regard.
ESMA also points out the importance of the new accounting standards to be applied in 2023:
- IFRS 17 Insurance Contracts, in particular transparency in the implementation of the standard
- IAS 12 Amendment International Tax Reform - Pillar Two Model Rules (however, application is still subject to EU endorsement)
ESMA has defined the following priorities with regard to non-financial information:
- Disclosures in connection with the EU Taxonomy: The ESMA report "Results of a fact-finding exercise on corporate reporting practices under the Taxonomy Regulation" with a focus on the assessment of the quality of the information disclosed for the reporting year 2022 should be highlighted here. In this context, ESMA points out, among other things, that issuers must use the latest reporting templates without any adjustment or amendment, which are specified in the Delegated Act under Article 8. ESMA also notes that too few companies adequately describe their so-called CapEx plans.
- Disclosure of climate-related targets, actions and progress: In view of the forthcoming application of the enhanced disclosure regime set out in the CSRD, ESMA points out that issuers should pay particular attention to the disclosure of their climate-related targets. It considers the disclosure of greenhouse gas emission reduction targets and the measures taken to achieve them to be a particularly important aspect. It also emphasises the role that the use of targets plays in explaining an issuer's path to more sustainable business models.
- Scope 3 greenhouse gas emissions: ESMA reiterates some important aspects in relation to the disclosure of Scope 3 greenhouse gas emissions, some of which were already emphasised in its 2022 ECEP Statement.
In relation to Alternative Performance Measures (APMs), ESMA reminds issuers that the APM Guidelines apply to those measures that are disclosed outside the financial statements (e.g. in the management report, ad hoc announcements and/or prospectuses) unless they are defined or specified in the applicable accounting standards. In this context, it is emphasised in particular that the definitions of adjustments must be sufficiently clear and that material items must be identified in the reconciliations to the nearest financial statement figure. The Questions and Answers, last updated in April 2022, provides assistance in this regard.
Finally, with regard to the European Single Electronic Format (ESEF), ESMA emphasises that the use of an element of the basic taxonomy always takes precedence over the use of an extension element.
The Public Statement is available on the ESMA website.