ESMA Enforcement Focus Includes ECL, Climate Disclosure, COVID Impact
The European Securities and Markets Authority (ESMA) issued Annual Statement on the European common enforcement priorities for the 2021 annual financial reports. This year’s priorities cover the impact of COVID-19 and climate-related matters, provide guidance on the measurement of expected credit losses, and highlight disclosure obligations pursuant to Article 8 of the Taxonomy Regulation. In addition, issuers are reminded to make the necessary preparations to fulfill the disclosure requirements foreseen by Article 8 of the Taxonomy Regulation, which will come into force as of January 01, 2022.
The areas covered in the enforcement priorities will be considered by national enforcers when monitoring and assessing the 2021 annual financial reports of listed companies. The statement contains priorities linked to financial statements prepared in accordance with the International Financial Reporting Standards (IFRS) and priorities relating to non-financial statements and other considerations related to Alternative Performance Measures. The 2021 key enforcement priorities for financial statements prepared in accordance with IFRS are focused on:
- Careful assessment and transparency in accounting for longer-term impact of the COVID-19 pandemic and the recovery phase
- Consistency between the information disclosed within the IFRS financial statements and the non-financial information concerning climate-related matters, consideration of climate risks, disclosure of any significant judgements and estimation of uncertainty regarding climate risks while Clearly assessing materiality
- Enhanced transparency regarding the measurement of Expected Credit Loss (ECL), particularly in relation to management overlays, significant changes in credit risk, forward-looking information, changes in loss allowances, credit risk exposures and collateral, and the effect of climate-related risk on ECL measurement
The recommendations concerning non-financial information refer to climate-related policies and their outcomes, impact of COVID-19 on sustainability-related goals and non-financial key performance indicators, and information on any structural changes. ESMA and national enforcers will monitor and supervise the application of the recommendations for preparing IFRS financial statements and non-financial statements as well as any other relevant provisions outlined in the Statement, with national enforcers incorporating them into their reviews and taking corrective actions where appropriate. ESMA will collect data on how European listed entities have applied the recommendations in the Statement and will communicate its findings in its report on the enforcement activities of 2022, to be published in Spring 2023.
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Keywords: Europe, EU, Banking, Securities, Climate Change Risk, Taxonomy Regulation, ECL, Expected Credit Loss, Disclosures, COVID-19, IFRS 9, ESG, ESMA
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