ESMA enforcement priorities for 2022

Global Corporate Reporting Institute | IFRS Today

Highlights

– Implications of Russia-Ukraine conflict

– Challenges posed by the current macroeconomic environment

To promote the consistent application of IFRS^® Accounting Standards and EU-specific reporting requirements, the European regulator, ESMA¹, has issued its priorities for 2022 annual reports. In its statement, ESMA highlights the areas that European national securities regulators will focus on² when reviewing listed companies’ 2022 annual reports.

Climate-related matters continue to top the list of priorities for investors and other stakeholders. They also feature as one of ESMA’s top priorities, along with recognition of the uncertainties that companies are facing with geopolitical events (e.g. the Russia-Ukraine conflict) and the current macroeconomic environment.

For 2022 annual reports, ESMA emphasises:

the importance of financial and non-financial information on climate-related matters, calling for consistency across the annual report;
the need for transparent disclosures on the judgements and estimates that companies make in preparing their financial statements; and
in its other areas of focus, the need for disclosures on the transition to IFRS 17 Insurance Contracts and matters related to applying EU regulations.

The topics addressed in ESMA’s statement indicate an increasing focus on the front part of the annual report. Several of them may appear to be most relevant at a European level. However, regulatory bodies outside Europe are also likely to focus on similar topics relevant for companies that report under IFRS Accounting Standards.

Ramon Jubels

Partner, KPMG EMA Department of Professional Practice

KPMG in the Netherlands

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The triggers that determine ESMA’s enforcement priorities may change over time, but ESMA’s focus remains on transparency, consistency and connectivity in the annual report.

Ramon Jubels

Partner

KPMG EMA Department of Professional Practice

Climate-related matters

Climate-related matters continue to top the list of ESMA’s enforcement priorities. Although sustainability reporting standards are still under development, ESMA expects preparers to report material information on climate-related matters in their 2022 annual reports. ESMA also emphasises the need for consistency between information disclosed in the front part of the annual report (e.g. in the management commentary or MD&A) and the judgements and estimates made in the financial statements.

Front part of annual report: ESMA recommends that companies provide transparent information on how they will accomplish a transition plan, what resources they have allocated to do this and what their carbon neutrality commitments are. It also recommends that companies distinguish clearly between greenhouse gas (GHG) emission reductions by their own making and those that are offset by purchasing carbon credits.
Financial statements: ESMA reminds companies that they need to disclose whether and how climate-related matters have affected the significant estimates and judgements used in testing non-financial assets for impairment. It also reminds companies that some climate commitments may give rise to a liability. When providing disclosures on climate-related matters, ESMA continues to encourage companies to do so in a single note in the financial statements, or at least provide a mapping to help users.

Implications of Russia-Ukraine conflict

Further to its May 2022 statement on expectations relating to the Russia-Ukraine conflict, ESMA:

calls for companies to provide relevant disclosures on the impacts of the conflict on their financial performance, both in their financial statements and when presenting alternative performance measures (APMs). ESMA warns companies that separate presentation of these impacts may be misleading; and
expects companies to be mindful of specific facts and circumstances when making judgements related to the ability to exercise control, joint control or significant influence, and when assessing classification as either held-for-sale or a discontinued operation.

Challenges posed by the current macroeconomic environment

When preparing their annual reports, ESMA urges companies to:

consider the impacts of the current economic environment (including the effects of increasing interest rates, inflation and the COVID-19 pandemic) and related uncertainties; and
provide relevant disclosures.

It highlights going concern, impairment of non-financial assets, post-employment benefits, revenue from contracts with customers, onerous contracts and financial instruments as particular areas for companies to focus on.

Find out more

Our 2022 guides to financial statements will help you ensure your financial reporting provides the information that users need through clear, meaningful and specific disclosures. Along with Insights into IFRS^®, our table of newly effective accounting standards and our digital hubs (Uncertain times and Clear on climate reporting), these guides form part of your essential reporting toolkit for the end of the reporting period.