ESMA reporting enforcement prioritises IFRS 16 Leases

The European Securities and Markets Authority (ESMA) has outlined the priorities for European enforcers when examining 2019 annual financial reports of listed companies

The key areas of concern include the application of IFRS 16 Leases, which came into effect from 1 January 2019, and the transition to new interest rate benchmarks.

The EU’s securities markets regulator says the priorities reflect the changes introduced in recent International Financial Reporting Standards (IFRS) and the issues identified by national competent authorities (NCAs).

On IFRS 16 Leases, enforcers will be looking at how companies exercise significant judgment in their application, particularly in determining the lease term and the discount rate.

There will also be a focus on the improvement of the information provided under standards that became applicable in 2018. These include IFRS 9 Financial Instruments for credit institutions, relating to expected credit losses and significant increase in credit risk, and IFRS 15 Revenue from Contracts with Customers for corporate issuers, which will focus on instances where revenue recognition is subject to significant assumptions and judgments; and the application of IAS 12 Income regarding deferred tax assets arising from unused tax losses.

Steven Maijoor, ESMA chair, said: ‘We continue to stress the importance of providing investors with material, complete, balanced and accessible information on non-financial matters, including environmental matters and climate change.

‘Issuers should also improve the transparency and quality of reported information in various areas, most notably on the key non-financial performance indicators used and on the non-financial disclosure frameworks adopted.

‘The consistent application of reporting standards across the EU is essential to enhancing investor protection and promoting stable and orderly markets.’

ESMA also highlighted the importance of disclosures analysing the possible impacts of Brexit, as well as disclosure of non-financial information focusing on environmental and climate change-related matters, key performance indicators, the use of disclosure frameworks and supply chains.

The regulator flagged up the potential implications of the transition from one interest rate benchmark rate to another one on financial reporting and the importance of timely disclosure of its consequences.

It is encouraging issuers to prepare for the timely implementation of recent IFRS 9 amendments which address hedge accounting implications, and it will monitor developments in the EU endorsement process which is expected to be finalised in time for the 2019 accounts.

In addition, ESMA said it expects issuers to undertake all necessary steps to comply with the new European single reporting format (ESEF) requirements which will begin to apply with the 2020 annual financial statements.

ESMA and European national enforcers will monitor and supervise the application of the IFRS requirements, 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.

ESMA European common enforcement priorities 2019

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