ESMA enforcement priorities for 2024

Global Corporate Reporting Institute | IFRS Today

Highlights

– Financial reporting – Driving clarity on presentation and disclosures

– Sustainability reporting – Facing new challenges

To promote the consistent application of financial reporting and the newly effective sustainability reporting requirements, the European securities regulator, ESMA¹, has issued its priorities for 2024 annual reports.

This year, as companies prepare their first set of sustainability reports under the newly effective European Sustainability Reporting Standards (ESRS), the focus is shifting. A number of financial reporting areas aimed at driving clarity on presentation and disclosures remain on the watch list; however, sustainability reporting is the main focus. Regulators around the world will be watching how companies report under ESRS, with many more jurisdictions having made arrangements or pledges to implement sustainability reporting requirements in the coming years.

ESMA also highlights the need for consistency in the annual report and the importance of similar governance over both sustainability reporting and financial reporting.

Ramon Jubels

Partner, KPMG EMA Department of Professional Practice

KPMG in the Netherlands

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As European companies apply the new sustainability reporting requirements for the first time in 2024, ESMA is shifting its focus. Although some key areas of financial reporting remain on ESMA’s watch list, it plans to pay specific attention to sustainability reporting, taxonomy disclosures and digital reporting.

Ramon Jubels

Partner

KPMG EMA Department of Professional Practice

Financial reporting – Driving clarity on presentation and disclosures

ESMA’s 2024 enforcement priorities highlight the following topics relating to IFRS^® Accounting Standards.

ESMA’s area of focus	ESMA’s priorities
Newly effective requirements in 2024	Supplier finance arrangements: new disclosure requirements under IAS 7 Statement of Cash Flows for supplier finance arrangements and their impact on the issuers’ exposure to liquidity risk. For further details, see our article. Classification of loans with covenants: revised guidance on the classification of loans with covenants as current vs non-current, and the new disclosure requirements under IAS 1 Presentation of Financial Statements and IFRS 7 Financial Instruments: Disclosures about loans payable, in particular if there were defaults, breaches or renegotiations of loan agreements. For further details, see our article.
Statement of cash flows	Gross basis: cash flows in the statement of cash flows need to be presented on a gross basis. Non-cash transactions: these cannot be presented in the statement of cash flows. Material non-cash transactions related to investing and financing transactions need to be disclosed elsewhere in the financial statements. Bank borrowings: generally classified as financing activities, except for some bank overdrafts. *Clarity on accounting policies and judgements*: the financial statements need to be clear on the accounting policies and judgements made regarding the classification of cash flows and/or components of cash and cash equivalents.
Accounting policies, judgements, significant estimates	ESMA emphasises that disclosures of material accounting policies, judgements and sources of estimation uncertainty need to be company-specific and consistent with other information within the financial statements. The following areas are included in ESMA’s key highlights. Control, joint control and significant influence: determining control or significant influence over an investee may require significant judgement, particularly when factors other than the voting rights need to be considered. Clear and detailed disclosures under IFRS 12 Disclosure of Interest in Other Entities about the significant judgements made when assessing control, joint control and significant influence are important. Revenue from contracts with customers: clarity on: judgements on whether a long-term contract meets the definition of a contract with a customer, and whether the issuer acts as principal or as an agent – e.g. when operating online shopping platforms or providing services such as software licences; uncertainties about the amount and timing of the outflows of economic benefits and the major assumptions in relation to future events; and backlogs and forecasts used when measuring the progress towards complete satisfaction of a performance obligation.

Sustainability reporting – Facing new challenges

As the first year of mandatory reporting under the Corporate Sustainability Reporting Directive (CSRD) arrives for the largest companies, ESMA’s enforcement priorities complement and build on their earlier statement on the focus areas for first-time reporting under ESRS.

ESMA’s area of focus	ESMA’s priorities
Materiality assessment	A thorough materiality assessment is required to determine relevant disclosures under ESRS. ESMA highlights the importance of: using EFRAG² implementation guidance and, where possible, quantitative information for their assessment; being transparent about the process followed when completing the materiality assessment, including: whether and how there was engagement with stakeholders; and how the assessment connects with due diligence performed on the impacts on affected stakeholders; and ensuring that company-specific disclosures provide sufficient relevant information to meet the needs of users. ESMA highlights that companies should only include these disclosures when they are material and meet the qualitative characteristics of information.
Structure and scope	The reporting entity for the sustainability statement is generally the same as the financial statements, inclusive of value-chain considerations if required. ESMA highlights that companies should confirm that the same companies are included, and that data for the whole group should be included when a metric is material at group level. ESMA encourages companies to apply the detailed structure for the sustainability statement included in ESRS 1 General requirements, which may be a change for companies (and be particularly relevant for companies adopting multiple frameworks together). It highlights that cross-referencing and incorporation by referencing is permitted; however, companies need to make sure that they continue to meet the general presentation requirements. ESMA highlights that the transitional reliefs apply for value chain information in the first three years, with an expectation of a gradual enhancement in disclosures provided.
EU Taxonomy Regulation	ESMA reminds companies to use the templates prescribed by the taxonomy without modifications. Activities are sometimes eligible under multiple environmental objectives. In this situation, ESMA highlights that companies need to assess and report on eligibility under all applicable objectives, highlighting the primary objective in bold in the template. ESMA reminds companies to align disclosures in the financial statements with corresponding elements in the taxonomy disclosures.

Priorities related to ESEF reporting

On the requirements of digital reporting under the European Single Electronic Format (ESEF) regulation, ESMA highlights the following priorities.

Accuracy and consistency: ESMA highlights common errors in tagging for ESEF and stresses the importance of using the appropriate taxonomy elements. There is an emphasis on correct scaling, consistency of calculations and completeness in tagging line items in the balance sheet.
Mark-up quality: ESMA notes the improvement in text block readability. Issuers are advised to adhere closely to the guidance in the ESEF Reporting Manual.

Other ESMA communications

In addition to the enforcement priorities for 2024 annual reports, ESMA has issued:

a statement on accounting for carbon allowances in the financial statements; and
a report on first-time application of IFRS 17 Insurance Contracts.

ESMA also reminds companies about enforcement priorities from 2023 that remain relevant, such as the need for connectivity between financial and sustainability statements in relation to climate-related risks and opportunities, the application of IFRS 17 and considerations on alternative performance measures (APMs).

Find out more

Our 2024 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 on newly effective standards and our digital hubs on uncertain times and clear on climate reporting form part of your essential reporting toolkit.

Our ESRS Foundations guide explains ESRS in plain English, pulling together the detailed requirements in one place.

¹ European Securities and Markets Authority.

² The advisory body to the EU on corporate reporting.