Enforcement of the 2022 annual reports published by issuers subject to the Transparency Law

On 2 January 2023, the Commission de Surveillance du Secteur Financier (CSSF) published a communication, informing about the enforcement of the 2022 annual reports published by issuers subject to the Transparency Law, and highlights topics and issues that will be the subject of a specific monitoring in 2023.
In accordance with to the Law of 11 January 2008 on Transparency requirements for issuers (Transparency Law), the CSSF is monitoring that financial and non-financial information published by issuers is drawn up in compliance with the applicable reporting frameworks. As issuers are now preparing their reporting for the 2022 financial year, the CSSF wishes to draw the attention of those issuers preparing their financial statements in accordance with International Financial Reporting Standards (IFRS) and/or their non-financial report in accordance with the Law of 23 July 2016 concerning the publication of non-financial information, as well as their auditors, to a number of topics and issues that will be the subject of a specific monitoring during the CSSF’s enforcement campaign planned for 2023.
On 28 October 2022, ESMA issued a public statement which presents the 2022 European common enforcement priorities (ECEPs). As in previous years, the European Securities and Markets Authority (ESMA), together with the European national accounting enforcers – such as the CSSF – identified the following ECEPs for the 2022 annual reports to which particular attention will be paid when monitoring and assessing the application of the relevant reporting requirements:
I. PRIORITIES RELATED TO IFRS FINANCIAL STATEMENTS
Priority 1: The ECEP on climate-related matters is articulated around four areas of focus: i) consistency between IFRS financial statements and non-financial information; ii) impairment of non-financial assets; iii) provisions, contingent liabilities and contingent assets; and iv) power purchase agreements. The CSSF recalls that, in the given context, boilerplate disclosures on climate related topics are not what is needed by users of the financial statements. They require specific and relevant information on how climate risks have been factored in the financial statements. It goes without saying that the CSSF supports the ESMA recommendation to group these disclosures into one single note or, at least, to make this information easily accessible by providing a mapping of where different notes address climate-related matters.
Priority 2: Concerning direct financial impacts of Russia’s invasion of Ukraine, ESMA reminds issuers of the following requirements and/or points of attention: i) presentation of the impacts of Russia’s invasion in the financial statements; ii) loss of control, joint control or the ability to exercise significant influence; iii) discontinued operations, non-current assets and disposal groups held for sale; and iv) impairment of non-financial assets. For issuers affected by this issue, it is absolutely necessary to present clear and detailed qualitative and quantitative information on the financial impacts, both at the balance sheet and comprehensive income levels, as well as the judgments and assumptions made.
Priority 3: As indicated in the ECEP statement, the main elements to be considered cover the increase in inflation, interest rates and energy costs, due to the fact that all such issues have an effect on the current business climate and present risks to the activity and financial situation of issuers. Therefore, issuers are required to assess and reflect the impacts that the macroeconomic environment and uncertainties will have on their financial statements, and provide clear and detailed disclosures to ensure that investors obtain relevant, accurate and timely information. In that context, four areas were identified on which national enforcers will focus for the enforcement of 2022 IFRS financial statements: i) impairment of non-financial assets; ii) employee benefits; iii) revenue from contracts with customers; and iv) financial instruments.
II. PRIORITIES RELATED TO NON-FINANCIAL STATEMENTS
Priority 1: Non-financial statements shall include information on the impact of climate change in application of the Non-Financial Reporting Directive (NFRD) and in anticipation of the requirements of the future European Sustainability Reporting Standards that will apply with the forthcoming Corporate Sustainability Reporting Directive (CSRD).
Priority 2: 2023 marks a major step for the reporting under Article 8 of the Taxonomy Regulation. As mentioned in its Sustainability Disclosures for Issuers report released on 26 October 2022, the CSSF will continue to examine the information published under Article 8 of the Taxonomy Regulation by issuers that are covered by that regulation, and will also challenge issuers on the outstanding issues and recommendations made in the above-mentioned report and resulting from the observations made by the CSSF in 2022.
Priority 3: In order to ensure that quality data is used when preparing non-financial reporting, issuers are encouraged to provide transparency on the robustness of their data collection processes. Supply chains are often the main source of a company’s carbon emissions and are therefore central to the fight against climate change. Hence, benchmarking ESG performance across the entire cycle against competitors and players in other sectors is useful and can not only reveal hidden ESG strengths within the value chain, but can also show companies where they need to improve in order to match or exceed industry standards.
III. OTHER CONSIDERATIONS
Alternative Performance Measures (APMs) remain an important topic for the 2023 campaign, especially as issuers use them a lot in their communications. Based on the examination of the 2021 annual reports, the CSSF has decided to focus, in addition to those points mentioned in the ECEP statement, in its future examinations on the application of ESMA Guidelines on APMs. APM labels should be meaningful and clear in order to avoid confusing or misleading the users of these measures, and issuers should identify every APM presented in management reports or press releases. Disclosure of APMs should not be more prominent than other measures that stem directly from the financial statements. The CSSF will pay particular attention to the respect of these requirements during its 2023 campaign.
As from the financial year 2021, issuers’ Annual Financial Reports (AFRs) have to be prepared in compliance with European Single Electronic Format (ESEF). A first requirement from the Regulatory Technical Standard (RTS) on ESEF was to publish all AFRs in xHTML and to mark-up IFRS consolidated financial statements using XBRL tags foreseen by Annex II of this RTS. Issuers are now reminded that for their 2022 AFRs, further mandatory elements will have to be marked up if they are present in the consolidated financial statements. The consolidated Table in Annex II of the RTS now comprises a number of elements defined as, amongst others, “text block” and which are expected to be used for marking up larger pieces of information contained in the consolidated financial statements. Different levels of granularity are expected and specific attention should be brought to the existence of multiple block tags.
Issuers may address their questions and remarks in this respect to enforcement@cssf.lu.