European accounting enforcers outline priorities for 2019 financial statements

Dec 03, 2019
Michael Kavanagh summarises the key points in ESMA’s recently published statement on European common enforcement priorities for 2019 IFRS financial statements.

As we reach the end of 2019, it is timely that the European Securities and Markets Authority (ESMA) has issued its annual public statement highlighting the common areas that European national accounting enforcers will focus on when reviewing listed companies’ 2019 IFRS financial statements.

Why should I care?

Financial reporting plays an essential role in securing and maintaining investors’ confidence in financial markets. Effective financial reporting depends on appropriate and consistent enforcement of high-quality financial reporting standards. Within the EU, individual national accounting enforcers – such as the Irish Auditing and Accounting Supervisory Authority (IAASA) in Ireland and the Financial Reporting Council (FRC) in the UK – enforce financial reporting standards. European accounting enforcers are required to include ESMA topics in their examination of companies’ 2019 year-end financial statements. As such, the ESMA statement is essential reading for those within the remit of an EU accounting enforcement regime. It will also be of interest to others involved in any aspect of financial reporting.

The priorities

The common enforcement priorities related to 2019 IFRS financial statements include:

  • Specific issues related to IFRS 16 Leases, especially the need to exercise significant judgement in its application, particularly in determining the lease term and the discount rate;
  • Specific issues related to the application of IFRS 9 Financial Instruments for credit institutions relating to expected credit losses and assessing a significant increase in credit risk, and IFRS 15 Revenue from Contracts with Customers for corporate issuers, which should be in focus when revenue recognition is subject to significant assumptions and judgements; and
  • The application of IAS 12 Income Taxes regarding deferred tax assets arising from unused tax losses (including the application of IFRIC 23 Uncertainty over Income Tax Treatments).
The statement also highlights topics related to other parts of the annual report outside the financial statements. These include key non-financial information issues and alternative performance measures (APMs), the new European Single Reporting Format (ESEF) and disclosures around Brexit.

Application of IFRS 16 Leases

2019 is the first year in which all entities mandatorily apply IFRS 16. To foster its consistent application, ESMA recommends that issuers monitor the discussions at the IFRS Interpretations Committee (IFRS IC) closely and highlights some of the recent IFRS IC agenda decisions. ESMA encourages issuers to assess whether these decisions have any impact on their application of IFRS 16 and, where applicable and relevant, provide specific information in their accounting policies, increase the level of transparency of the significant judgements made, and/or disclose the potential impacts.
The statement goes on to discuss recent IFRS IC tentative decisions and discussions on lease terms and discount rates, and the impact they may have on financial reporting.

ESMA also outlines its expectations concerning presentation and disclosure aspects of IFRS 16. The statement outlines that disclosable judgements may include, in particular, determining the lease liability (e.g. lease term, the discount rate used) as well as assessing whether a contract meets the definition of a lease under IFRS 16.

Application of IFRS 15 and IFRS 9

The 2018 financial period was the first time IFRS 15 and IFRS 9 became applicable. IFRS 15 Revenue from Contracts with Customers led to major changes in the methodology used by companies in recognising revenue. ESMA states clearly that, in its view, the disclosures provided by entities need to be further improved. This is of importance in industries where revenue recognition is subject to significant assumptions and judgements. In particular, ESMA feels that:

  • The disclosure on accounting policies needs to be detailed, entity-specific and consistent with the information provided in the other parts of the annual financial report;
  • Financial reports should provide adequate information on the significant judgements and estimates made – such as regarding the identification of performance obligations and the timing of their satisfaction, whether the issuer is a principal or an agent under the contract, the determination of the transaction price (including the judgements related to variable consideration) and the allocation to the performance obligations identified (and notably the amount allocated to the remaining performance obligation); and
  • Disclosure of disaggregated revenue could be improved and should take into account both their activities and the needs of users.
The introduction of the new impairment model under IFRS 9 Financial Instruments had a significant impact on the financial statements of credit institutions. ESMA reiterates that the estimate of credit losses should be unbiased and probability-weighted based on a range of possible outcomes. Furthermore, this estimate should take into account forward-looking information that is reasonable, supportable and available without undue cost or effort. The statement outlines various messages around the requirements relating to the assessment of whether the credit risk has increased significantly since initial recognition, the disclosure requirements concerning the expected credit losses, disaggregation, sensitivity analysis etc.

Accounting for taxation

The statement provides certain messages around accounting for deferred tax assets arising from the carry-forward of unused tax losses and the application of the IFRIC 23 Uncertainty over Income Tax Treatments, which is applicable for the first time in 2019. Readers should note the recently published ESMA Public Statement on the deferred tax for such losses carried forward and ESMA’s expectation in this regard.

Other matters

The statement also highlights topics related to other parts of the annual report outside the financial statements. These include key non-financial information issues and APMs. ESMA also highlights the principles of materiality and completeness of disclosures, which should guide the reporting of non-financial information, including the importance of reporting information in a balanced and accessible fashion. This should include disclosures of non-financial information focusing on environmental and climate change-related matters, key performance indicators, and the use of disclosure frameworks and supply chains.

Also, ESMA highlights specific aspects related to the application of the ESMA Guidelines on Alternative Performance Measures. In particular, companies are reminded of the importance of providing adequate disclosures to enable users to understand the rationale for, and usefulness of, any changes to their disclosed APMs, especially regarding changes due to the implementation of IFRS 16.

New European harmonised electronic format

ESMA expects issuers to take all necessary steps to comply with the new European Single Reporting Format (ESRF) for requirements that will be applicable for 2020 annual financial statements.


Finally, ESMA once again highlights the importance of disclosures analysing the possible impacts of the decision of the UK to leave the EU.


ESMA and European national accounting enforcers will monitor and supervise the application of the IFRS requirements, as well as any other relevant provisions outlined in the statement, with national authorities incorporating them into their reviews and taking corrective actions where appropriate.

ESMA will collect data on how EU-listed entities have applied the priorities and will report on findings regarding these priorities in its report on the 2020 enforcement activities.

The ESMA public statement is available at
Michael Kavanagh is CEO of the Association of Compliance Officers in Ireland (ACOI) and a member of the Consultative Working Group, which advises the European Securities and Markets Authority’s Corporate Reporting Standing Committee.