Michael Kavanagh summarises the key points in ESMA’s recently published statement on European common enforcement priorities for 2020 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’ 2020 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 enforce financial reporting standards. European accounting enforcers are required to include the ESMA topics in their examinations of companies’ 2020 year-end financial statements.
ESMA’s priorities
It won’t come as any surprise that the impact of COVID-19 is the dominant theme this year. The common enforcement priorities related to the 2020 IFRS financial statements include:
- The application of IAS 1 Presentation of Financial Statements with a focus on going concern, significant judgements and estimation uncertainty, and the presentation of COVID-related items in the financial statements;
- The application of IAS 36 Impairment of Assets, where the recoverable amount of goodwill, intangible assets and tangible assets may be impacted by the deterioration of the economic outlook of various sectors;
- The application of IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures, with particular emphasis on the general considerations relating to risks arising from financial instruments, focusing on liquidity risk, and specific considerations related to the application of IFRS 9 for credit institutions when measuring expected credit losses; and
- Specific issues related to the application of IFRS 16 Leases, including explicit disclosures by lessees which have applied the IASB’s amendment providing relief to lessees when accounting for rent concessions.
Other matters highlighted
For the first time, ESMA splits the statement into different parts. Part one, summarised above, deals with IFRS ‘back-end’ reporting while parts two and three deal with what is commonly called ‘front-end’ reporting. In an Irish context, it should be noted that, while IAASA is the enforcer for IFRS, other authorities such as the Central Bank are responsible for regulating certain front-end items outlined in the document. The matters highlighted in the statement include the requirements to disclose non-financial information with regard to:
- The impact of the COVID-19 pandemic on non-financial matters;
- Social and employee matters – most notably in relation to the extensive use of remote working arrangements and compliance with health and safety rules;
- Business model and value creation, with an emphasis on the need to provide disclosures on the impact of the pandemic on the business model and value creation;
- Risks relating to climate change, taking into account physical and transition risks; and
- Considerations on the application of the ESMA Guidelines on APM in relation to COVID-19.
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. National authorities will also incorporate them into their reviews and take corrective action 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.
For more detail,
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.