ESMA enforcement priorities for 2020 ESMA enforcement priorities for 2020 ESMA enforcement priorities for 2020

Global IFRS Institute 

• Main areas of focus – COVID-19 impacts on presentation, impairment of assets and leases
• Other areas of focus – Non-financial information and alternative performance measures
• Other issues – Brexit and the European Single Electronic Format
• Find out more

The European regulator, ESMA¹, has issued a statement highlighting the areas that European national securities regulators will be focusing on when reviewing listed companies’ 2020 annual reports. The aim is to promote the consistent application of IFRS Standards and EU-specific reporting requirements.

Given the severe impact of the COVID-19 coronavirus pandemic, ESMA’s key priority is transparent and timely disclosure of information on the effects of the pandemic on a company’s financial performance, position and cash flows. ESMA also stresses the importance of non-financial information disclosures, with a renewed focus on social, employee and climate change matters.

Although the topics included in the statement are those deemed by ESMA to be most relevant at a European level, regulatory bodies outside Europe are also likely to focus on the same topics. These topics are not exhaustive, however, and national regulators may have additional areas of focus.
  

Presentation of COVID-19 impacts

ESMA emphasises the need for transparent, company-specific disclosures that enhance the users’ understanding of, and confidence in, the company’s financial statements.

Going concern

ESMA highlights the importance of providing sufficiently detailed disclosures on the company’s assessment of its ability to continue as a going concern when such an assessment involves significant judgement. Preparers are expected to consider all available information about the future – which is at least, but not limited to, 12 months from the reporting date. The level of detail would depend on the company’s specific facts and circumstances.

Preparers should disclose material uncertainties related to events or conditions that may cast doubt on the company’s ability to continue as a going concern and, even if management concludes that there are no material uncertainties, disclose significant judgements made in reaching the conclusion (a ‘close call’ scenario). ESMA expects the assumptions used in the going concern assessment to be consistent with those used in other areas of the company’s financial statements – e.g. IFRS 7 Financial Instruments: Disclosures information about exposures to liquidity and other financial risks.

For more information, see our article on COVID-19 going concern considerations. 

Significant judgements and estimation uncertainty

Preparers are expected to explain how COVID-19 has affected significant judgements and estimation uncertainty – e.g. the assumptions underlying the impairment of assets, the recoverability of deferred tax assets and fair value measurements.  Given the current market conditions, ESMA strongly recommends that companies provide information about the sensitivity of carrying amounts to the methods, assumptions and estimates underlying their calculations. 

COVID-19 presentation

ESMA calls for caution regarding any separate presentation of the COVID-19 impacts in the income statement because of their pervasiveness. Instead, it encourages preparers to disclose in the notes qualitative and quantitative information about impacts, including the methodology applied in their determination. It expects companies to choose a presentation that is not misleading and provides a clear and unbiased picture of the areas of the financial statements affected by COVID-19. 

Preparers are also reminded to provide adequate cross-references if the information on the impact is disclosed in multiple notes to the financial statements. 

For more information, see our article on COVID-19 income statement impacts.

IAS 36 Impairment of Assets

The recoverability of non-financial assets is a continuing concern. The adverse impact of COVID-19 may have resulted in the triggering of one or more impairment indicators in IAS 36. Consistent with its previous statement on half-yearly reports, ESMA continues to highlight the need to consider the effects of the COVID-19 pandemic in assessing any indicators of impairment for non-financial assets. 

ESMA reminds preparers that an impairment test performed for the last interim reporting period does not replace the requirement to perform another when there is an indication of impairment. It emphasises that the scale of reasonably possible changes in the key assumptions used in impairment testing may be larger than usual. It also reminds preparers that the annual impairment test for a cash-generating unit (CGU) to which goodwill has been allocated is performed at the same time every year.

For more information, see our article on non-financial assets.

IFRS 9 Financial Instruments and IFRS 7

IFRS 9 for credit institutions

ESMA expects preparers to reflect the significant uncertainty affecting the economic environment in the measurement of expected credit losses (ECL) in an unbiased way. Companies are reminded to use all reasonable and supportable information, including economic forecasts, that is available without undue cost and effort. 

Financial instruments risk disclosures

Adequate disclosure of risks arising from financial instruments, in particular liquidity risk and sensitivities to market risks, is essential. ESMA highlights that COVID-19 may have given rise to new significant financial risks – e.g. new liquidity risks arising from debt renegotiations – that did not exist before, or that were not previously considered significant. 

For more information, see our suite of articles on the impact of COVID-19 on financial instruments. 

IFRS 16 Leases

For more information, see our article on COVID-19 rent concessions.

Non-financial information

Given the pervasive impact on companies’ activities relating to non-financial matters, ESMA calls for transparency on the consequences of COVID-19 and the mitigating actions taken. 

Alternative performance measures

ESMA reminds preparers of the requirements in its guidelines on alternative performance measures (APMs), which are aimed at promoting the usefulness and transparency of these measures. ESMA also highlights its guidance released in April 2020 to help preparers apply these guidelines in the current environment. 

ESMA also highlights the following areas.

• Brexit – companies are expected to monitor negotiations and to disclose the impact of Brexit on their activities and their financial and non-financial information. Visit the KPMG Brexit homepage to find out more about the impacts on your business.
• European Single Electronic Format (ESEF) – listed companies are reminded that the new requirements are effective for calendar 2020 year ends. However, in the context of COVID-19, the EU Council has proposed allowing member states to postpone implementation by one year.

In addition to the guidance referred to above, the 2020 editions of our guides to annual financial statements include a COVID-19 supplement, illustrative disclosures and a companion disclosure checklist. With Insights into IFRS, our web tool on newly effective standards and our COVID-19 financial reporting resource centre, these form part of your reporting toolkit for the year end.