ESMA’s report on enforcement actions – bow to the numbers!

The European Securities and Markets Authority (ESMA) has issued its report on Enforcement and regulatory activities of European enforcers in 2020.

The report provides “an overview of the activities of ESMA and of accounting enforcers in the European Economic Area…when examining compliance of financial and non-financial information provided by issuers in 2020 (and) presents the main activities contributing to supervisory convergence performed at European level, quantitative information on enforcement activities in Europe as well as ESMA’s contribution to the development of a single rulebook in the area of corporate reporting.” We’re told that enforcers undertook 729 examinations (810 in 2019) of financial statements drawn up in accordance with IFRS, constituting an examination rate of 17% of issuers listed on European regulated markets preparing financial statements in accordance with IFRS (the 2019 examination rate was 19%) and that enforcers took enforcement actions against 265 issuers (253 in 2019) in order to address material departures from IFRS.

The application of IFRS 16 was a focus area, and the report goes into some detail on the percentages of issuers that provided disclosure in various areas. From an enforcement perspective, it sums up:

  • European enforcers took 18 enforcement actions against the issuers in the sample, composed of 15 corrections in the future financial statements with restatement of comparatives and three corrective notes. Enforcement actions regarding measurement issues are notably related to the calculation of the lease term. For example, in one case, a lack of consistency was observed between the lease term and the period retained to determine the related dismantling liabilities. Enforcement actions related to disclosures include the presentation of the cash payments for the principal portion of the lease in the cash flow statement, insufficient explanation of issuers’ arrangements in the scope of IFRS 16, the maturity of the lease liabilities and entity-specific information on the determination of the lease term and of the interest rate.

As you might already guess from the above, the report provides a barrage of quantified observations (“ESMA observes that 51% of issuers provided sufficient disclosures in relation to determination of the lease term as the non-cancellable period of a lease, whereas disclosures of 26% where not sufficient or not entity-specific…”). Even though the report specifies that “issuers for which a given topic was not applicable were removed from the sample for the purpose of calculating the percentages presented,” it still comes across – fairly or not – as a rather mechanistic approach to assessing compliance. It will be interesting to see in future years, if the proposals we addressed here are adopted in their current form, how the tone of this kind of communication, and (more importantly) the nature of underlying regulatory practice develop.

Anyway, we haven’t mentioned covid-19 on this blog for a while. The ESMA includes some observations on the impact:

  • ESMA observed that 78% of the issuers in the sample presented a decrease in the total of revenues in the first half of 2020 compared to the total of revenues recognized in the first half of 2019. 22% of the issuers in the sample (half of them financial companies) were able to maintain or increase their revenues. While some of these developments may relate to other factors such as changes in the accounting consolidation perimeter, 40% of the issuers in the sample indicated that the variation of their half-yearly revenue was mainly attributed to the COVID-19 pandemic. As regards the profit or loss account, ESMA also observed that not only did 84% of issuers in the sample report a decrease in half year earnings when compared to the first semester 2019, but 59% of those issuers reported a negative performance of more than 70%. While it seems obvious that airlines and travel companies were harshly hit by the pandemic, the oil & gas sector (due to the drop in oil and gas prices as a result of the global economic slowdown and the imbalance between supply and demand) the automotive industry and various industrials were also strongly negatively affected. Although financials and healthcare were the main sectors with growth, in some cases, financials also recognized losses.

And also, by the way, despite the concern about a possible plethora of income statement subtotals designed to segregate or obscure the impact of the pandemic, “ESMA welcomes the fact that, as recommended in the ESMA statement, none of the issuers in the sample modified subtotals included inside financial statements to depict the effect of COVID-19.”

For weird trivia buffs, the report also includes such delights as a table setting out the number of IFRS issuers per EEA country, from which we learn for instance that Bulgaria has something like seven times as many IFRS issuers as Portugal. Maybe it’s just me, but I would never have guessed. Despite that disparity, Portuguese enforcers took seven corrective actions during 2020 whereas Bulgarian enforcers only took three. Explain that as you will…!

The opinions expressed are solely those of the author

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