ESMA outlines priorities for 2019 financial statements

Nov 01, 2019
Michael Kavanagh summarises the key points in ESMA’s recently published statement on European common enforcement priorities for 2019 IFRS financial statements.

Last week, the European Securities and Markets Authority (ESMA) 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 is it important?

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, 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 the ESMA topics in their examinations of companies’ 2019 year-end financial statements.

ESMA’s priorities

The common enforcement priorities related to the 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 of focus where 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.

Other matters highlighted

The Statement also highlights topics related to other parts of the annual report outside the financial statements. These include:
1. Key non-financial information issues and Alternative Performance Measures (APMs)
ESMA highlights the principles of materiality and completeness of disclosures that 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.

ESMA also highlights specific aspects related to the application of the ESMA Guidelines on Alternative Performance Measures (APMs). 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.

2. New European harmonised electronic format
ESMA expects issuers to undertake all necessary steps to comply with the new European Single Reporting Format (ESEF) for requirements, which will be applicable for 2020 annual financial statements.
3. Brexit
Finally, ESMA once again highlights the importance of disclosures analysing the possible impacts of the United Kingdom's decision to leave the European Union.

Next steps

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 action where appropriate.

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

For more details, download the ESMA public statement here.
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.