2020/21 Reporting Season: ESMA calls for COVID consequence transparency
17 November 2020: The European Securities and Markets Authority has highlighted the need for timely disclosures on the consequences of the pandemic in annual financial reports as part of next year’s enforcement priorities.
The priorities focus on the need for transparency on the consequences of COVID-19 across different areas of the 2020 annual financial reports.
Key areas for IFRS financial statements
ESMA highlights key areas of concern in relation to financial statements prepared in accordance with IFRS, including:
- IAS 1 Presentation of Financial Statements – ESMA highlights the importance of providing sufficiently detailed disclosures in relation to going concern assumptions, particularly where such assessments require significant judgment or where there may be material uncertainties. ESMA suggests issuers could disclose the feasibility and effectiveness of any planned mitigation initiatives, such as public support measures. Issuers are reminded to provide detailed disclosures on how COVID-19 has affected significant judgments and estimation uncertainty and any consequent impact on different items in the financial statements. Caution is warranted regarding any separate presentation of COVID-related items in the financial statements, as this may be misleading for users’ understanding of the issuer’s current and future overall financial performance. Rather, ESMA encourages a clear and unbiased disclosure of qualitative and quantitative information on the significant impacts of COVID (and the methodology applied).
- IAS 36 Impairment of Assets – Issuers are asked to carefully consider the adverse impact of COVID-19 in assessing any indications of impairment for non-financial assets. It is stressed that the recoverable amount of goodwill, intangible assets and tangible assets may be impacted the deteriorating economic outlook in one or more sectors. Issuers may need to consider modelling multiple possible future scenarios when estimating future cash flows of cash-generating units. ESMA reminds issuers to provide adequate transparency of the estimates and key assumptions underlying the impairment assessment (and any changes to them during the year).
- IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures – The pandemic may have given rise to new or more significant financial risks, including significant amounts of debt, debt renegotiations, new financial arrangements or breaches of debt covenants. Where relevant, ESMA calls for these disclosures to be based on information used for the internal reporting to key management personnel. Issuers should ensure disclosures of how financial risks arise and how they are managed – especially regarding liquidity risk. ESMA also raises specific considerations relating to the measurement of expected credit losses under IFRS 9, reminding issuers of the need to reflect significant economic uncertainties in an unbiased way by taking into account all reasonable and supportable information about past events, current conditions and future economic forecasts.
- IFRS 16 Leases – Specific issues are raised by ESMA including the need for explicit disclosures by lessees which have applied the IASB’s May 2020 amendment providing relief when accounting for COVID-19 related rent concessions.
Priorities related to non-financial statements
ESMA also sets out several common enforcement priorities related to non-financial statements for the 2020 year-end, including:
- Impact of the pandemic on non-financial matters – Noting the pervasive impact of COVID-19 on issuers’ activities in relation to non-financial matters (ie environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters), ESMA calls for transparency on the consequences of, and mitigating actions taken in response to, the pandemic.
- Social and employee matters – Particular reference is made to the extensive use of remote working arrangements, as well as compliance with health and safety rules. ESMA also calls on issuers to disclose matters relating to IT infrastructure resilience and cybersecurity, given widespread homeworking.
- Business model and value creation – ESMA emphasises the need to provide disclosures on the impact of COVID-19 on the resilience of an issuer’s business model and value creation over the short, medium, and long-term.
- Climate change risk – Building on 2019 enforcement priorities, ESMA continues to highlight the relevance of environmental matters and especially measures taken to prevent and mitigate negative consequences associated with climate change. Issuers are encouraged to explain climate change risks and associated actions in the context of their business model.
- Application of ESMA guidelines on Alternative Performance Measures (APMs) – ESMA recalls guidance shared in April 2020 on how issuers should present the impact of the pandemic on their operations to comply with ESMA’s 2015 Guidelines on APMs.
Other issues
The public statement draws particular attention to the responsibility of management and supervisory bodies, including the role of the audit committee, to ensure the overall internal consistency and high quality of the annual financial report given current complexities.
ESMA also reminds issuers that annual financial reports from the 2020 financial year need to be compliant with the European Single Electronic Format (ESEF). The entire annual financial report needs to be prepared in xHTML format – issuers preparing IFRS consolidated financial statements need to mark the primary financial statements using Inline XBRL.
Finally, considering the end of the UK’s transition period following its withdrawal from the EU, ESMA underlines the importance of providing disclosures on any Brexit-related impact on issuers’ activities and their financial and non-financial information.