CSSF announces topics of focus during upcoming transparency supervision campaign
06 January 2022
On 17 December 2021 the Luxembourg financial supervisory authority CSSF published a press release in which market participants' attention is drawn to the CSSF's transparency supervision campaign with respect to issuers' reporting and disclosure obligations in accordance with the law of 11 January 2008 on transparency requirements for issuers whose securities have been admitted to trading on a regulated market (the “Luxembourg Transparency Law”) with respect to the 2021 financial year.
In this context, issuers who are preparing their financial statements in accordance with IFRS under article 3 of the Luxembourg Transparency Law and/or specific non-financial information in accordance with the Luxembourg law of 23 July 2016 on disclosure of non-financial and diversity information for certain large undertakings and groups (the "Luxembourg Non-financial Information Law"), as well as these issuers' auditors, are required to sufficiently address certain topics and issues in such financial and non-financial information.
Under the transparency supervision campaign the CSSF according to the afore-mentioned press release will mainly be focusing on four major topics. Therefore, issuers whose securities have been listed on a regulated market and for which Luxembourg is the home Member State under the Luxembourg Transparency Law should make sure that the topics applicable to them are sufficiently addressed in their 2021 annual financial report.
1. European Common Enforcement Priorities
In accordance with ESMA's European common enforcement priorities (the “ECEPs”) for the 2021 annual reports (ESMA32-63-11-86) the CSSF will in particular focus on the below referred-to items. In this respect, it is important to distinguish between subjects which need to be addressed in issuers' IFRS financial statements and topics that are to be included in the non-financial information to be disclosed pursuant to the Luxembourg Non-Financial Information Law by certain large issuers.
With respect to the IFRS financial statements issuers mainly need to ensure that (1) the impacts of the COVID-19 pandemic are sufficiently described in accordance with the ECEPs. Furthermore, (2) climate-related matters affecting the issuer must be included in the IFRS financial statements and (3) information on expected credit losses with respect to financial institutions must also be described in the IFRS financial statements.
In order to analyse what topics will be applicable and to what extent information on such topics needs to be provided issuers should take a closer look at the ECEPs:
As regards non-financial information for the financial year 2021 the focus of the CSSF's transparency supervisory campaign will mainly relate to (1) the impacts of COVID-19, (2) climate-related matters and (3) the information to be disclosed under article 8 of Regulation (EU) 2020/852 of 18 June 2020 on the establishment of a framework to facilitate sustainable investment (the "Taxonomy Regulation").
2. Additional supervision topics
However, it is important for issuers to note that the CSSF's transparency supervision campaign will not be limited to the above items as further attention will be paid to additional two major topics (for a complete overview issuers are encouraged to take into account the entirety of the CSSF press release).
a. Classification/reclassification and measurement requirements under IFRS 9
The CSSF will take a closer look at the disclosures of accounting policies for financial instruments, and particularly with respect to those requiring significant judgement. In this respect, issuers must disclose how the frequency and significance of sales have been assessed with respect to the management of their financial assets and the ensuing impact on their business model. In situations in which a reclassification of financial assets took place after an initial classification, such changes must have been determined by the issuer’s senior management due to external or internal changes having a significant effect on the issuer's operations.
b. Interest Rate Benchmark Reform
On account of the Interest Rate Benchmark Reform the International Accounting Standards Board (IASB) have prepared amendments to IFRS 9, IAS 39 and IFRS 7, IFRS 4 and IFRS 16) in order to provide a mitigating effect on the impact of the reform.
Two main topics are to be distinguished in this respect:
With respect to hedging relationships and in order to ensure that hedge accounting is not required to be discontinued hedge accounting requirements can be applied with respect to the original benchmark interest rate on which the hedged cash flows and cash flows from the hedging instrument are based (i.e. as if such benchmark interest rate had not been changed by the reform).
Secondly, an issuer must account for a change in the basis for determining contractual cash flows of a financial asset or a financial liability, to the extent required by the Benchmark Interest Reform, by updating the effective interest rate of the financial asset or financial liability. Likewise, the issuer must also disclose additional information about its exposure to risks arising from the reform and related risk management activities.
3. European Single Electronic Format (ESEF) rules applicable to the annual financial report under article 3 of the Luxembourg Transparency Law
Furthermore, Commission delegated regulation (EU) 2019/815 of 17 December 2018 supplementing Directive 2004/109/EC of the European Parliament and of the Council with regard to regulatory technical standards on the specification of a single electronic reporting format (the "RTS") imposes on all issuers which have to publish annual financial reports under the Transparency Directive to prepare their annual financial reports in Extensible Hypertext Markup Language (XHTML) format for financial years beginning on or after 1 January 2020 (in Luxembourg the application of this deadline had been postponed so that only financial years beginning on or after 1 January 2021 need to be taken into account). Where annual financial reports include IFRS consolidated financial statements, issuers are additionally required to mark up those consolidated statements using XBRL markup language as defined in the RTS.
Statutory auditors are required to check the compliance of the financial statements with the ESEF requirements and to provide an audit opinion on whether the financial statements comply with these rules.
This means that during its transparency supervisory campaign the CSSF will check with particular attention whether indeed these ESEF rules have been sufficiently reflected in the annual financial report.
For more information please feel free to check out our separate in-depth Ashurst briefing on ESEF.
4. The Taxonomy Regulation
Finally issuers need to assess whether the new disclosure obligations under article 8 of the Taxonomy Regulation will be applicable to them and thus would also need to be included in their annual financial report (usually in the management report). In this respect, article 8 (1), (2) and (3) will be applicable with respect to the environmental objectives referred to in article 9 (a) and (b) of the Taxonomy Regulation from 1 January 2022 onwards.
This means that certain large issuers who are subject to the Luxembourg Transparency Law (regulated market issuers are per se considered to be public interest entities within the meaning of the Luxembourg Non-financial Information Law) provided such issuers exceed at least two of the following three criteria on the balance sheet and for two consecutive financial years (loi du 19 décembre 2002 concernant le register de commerce et des sociétés ainsi que la comptabilité et les comptes annuels des entreprises):
- total balance sheet of EUR 20 million;
- net turnover of EUR 40 million;
- average number of full-time staff employed during the financial year of 250;
and provided they exceed on the balance sheet date the criterion of the average number of 500 employees,
must include in its non-financial statement or consolidated non-financial statement information on how and to what extent the issuers' activities are associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9 of the Taxonomy Regulation.
In particular, non-financial undertakings must in this respect disclose the following: (a) the proportion of their turnover derived from products or services associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9; and (b) the proportion of their capital expenditure and the proportion of their operating expenditure related to assets or processes associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9.
According to the article 9 (a) and (b) of the Taxonomy Regulation environmentally sustainable are the following objectives: climate change mitigation and climate change adaptation.
The other sub-items referred to under items c) to f) of article 9 will only be applicable as of 1 January 2023 and thus should only have to be reflected in the 2022 annual financial report.
For more information please contact a member of the team below.
