Legal Framework

Warning Notice no. 6/20 of 9-4-2020

Subject: COVID 19 - Drawing attention to financial reporting

In March 2020, ESMA published specific public statements[1],[2],[3] on the impacts of COVID-19 on the financial reporting of listed companies, containing recommendations which are referred to in full in this document.

In line with the aforementioned ESMA public statements, the directors will assess, based on the specific nature of the company and the information available, the relevance of the qualitative or quantitative impacts of COVID-19 on the economic and financial situation at 31 December 2019.

The impacts of the spread of COVID-19 may differ in both magnitude and nature. Some effects are closely related to the individual's operations, while others are a direct consequence of the emergency measures taken by government authorities (restrictions on mobility and other constraints).

In this context, it seems appropriate to draw the attention of the members of the management and control bodies and the managers responsible for drafting the company's financial documents to the need for complying with the principles that govern the process of producing financial information.

1. In relation to the financial reports, drawn up by listed issuers with Italy as their Member State of origin and by issuers of financial instruments that are widely distributed to the public pursuant to Article 116 of Legislative Decree no. 58/1998 that apply international accounting standards[4], the COVID-19 outbreak can be considered for the most part as an event arising after the end of the financial year[5] and, as such, in accordance with IAS 10, the related effects should not lead to adjustments to the amounts recognised in the financial statements for the year ended 31 December 2019[6]. A number of considerations should be made in cases where the consequences of the epidemic represent the materialisation of critical situations that already existed before the balance sheet date.

In this regard, with reference to “events occurring after the balance sheet date that do not involve an adjustment”, international accounting standards require that information about the event and, if relevant, an estimate of the associated future effects on the carrying amounts of assets and liabilities, be included in the financial reports. If such an estimate cannot be made, specific evidence shall be provided (IAS 10, paragraph 21 and IAS 1, paragraph 125).

In addition, events occurring after the end of the financial year may have an impact on the estimates of the underlying future forecasts, especially the going concern tests[7].

Indeed, the international accounting standards clarify the fact that directors must also consider events occurring after the end of the financial year (IAS 1, paragraph 26 and IAS 10, paragraphs 15 and 16).

In this regard, attention is drawn to the correct application of the standards indicated above, which require directors to base their assessments of the existence of the going concern assumption on all available information regarding the future, covering at least twelve months after the end of the financial year, acquired up to the date of approval of the financial statements.

Moreover, the current context of uncertainty may be relevant for the valuation of assets (impairment test), particularly in cases where the value in use is used as the basis for estimating the recoverable value[8]. The standard requires that the cash-flow projections used to determine the recoverable value must be based on the most recent budget/plan approved by the management, along with reasonable and demonstrable assumptions capable of representing the best estimate of future economic conditions, expected over the useful life of the assets, with greater weight given to external evidence (IAS 36, paragraph 33).

In particular, given the current situation of uncertainty, directors will have to pay particular attention to providing detailed information on the basic assumptions used for the projection of cash flows (IAS 36, paragraph 134). Significant attention must be paid to carrying out the sensitivity analyses required by IAS 36 regarding the potential impact of the current pandemic on the assumptions underlying the estimates made.

In addition to what is required by international accounting standards, in the current context, the information required by the directors' report on operations accompanying the financial statements may be relevant.

In this regard, where relevant, the attention of issuers is drawn to providing updated information (i) on the risks associated with COVID-19 that may have an impact on the company's financial position and assets, (ii) on any measures taken or planned to mitigate such risks and (iii) an indication of a qualitative and/or quantitative nature of the potential impacts that have been considered in estimating the company's future performance.

Without prejudice to the public disclosure obligations required by the MAR Regulation, the directors will assess whether to provide the shareholders' meetings with information on these impacts, up to date compared with the information already communicated to the market at the time of the approval of the 2019 figures.

In addition, directors' are required to carefully evaluate, in reports after December 31 2019, how up to date the business planning is, in order to consider the main risks related to the pandemic in question that could preclude the achievement of the strategic objectives and/or compromise the company's ability to continue as a going concern. These elements could be an indication that the assets recorded in the financial statements may be impaired, thus highlighting the need to estimate the recoverable value of the asset (IAS 36, paragraphs 9 et seq.). Specific assessments should also be carried out on other areas of the balance sheet that could be affected by the crisis in question.

2. With reference to the statutory audit engagements for listed issuers, with Italy as their home Member State, and for issuers of financial instruments that are distributed to the public to a significant extent pursuant to Article 116 of Legislative Decree 58/1998, which apply international accounting standards, auditors are invited to pay particular attention to the audit procedures provided for in the ISA standards that may be applied in the particular circumstances created as a result of COVID-19. To this end, refer to the content of the Statement adopted last 24 March by CEAOB[9], the European body that brings together the Authorities responsible for the supervision of statutory auditors, which highlights the main areas that may be affected by the impact of COVID-19 in carrying out audit activities on the financial statements as at 31.12.2019.

In particular, the Statement draws the attention of the auditors, including in relation to group audits, to the need for acquiring evidence for the purposes of expressing their opinion, to business continuity issues, to adequate disclosure of the effects related to "subsequent events", to the importance of discussion with those responsible for corporate governance and to the representation of "key aspects" in the audit report.

3. With regard to the public offering/admission to trading prospectuses for financial instruments as well as the associated supplements, attention is drawn to the need for the persons responsible for preparing these documents to provide qualitative and quantitative information to account for the impact of COVID-19 on the company's specific business, in order to help investors understand the risks associated with the investment as a result of the current pandemic.

In particular, the "Risk Factors" section of the prospectus should be updated to take into account the possible impacts of the Covid-19 pandemic. The risks represented must be material, specific and supported by the information contained in the prospectus, in accordance with the Prospectus Regulation and the relevant ESMA Guidelines.

Directors shall also update information regarding business plans, forecasts or estimates of profits previously disclosed to the market, or indicate that they are no longer current. When plans, forecasts or estimates of profits are updated, the assumptions and hypotheses used to estimate the impact of the current pandemic must be based on the principles of reasonableness, accuracy and specificity required by the rules governing the preparation of the prospectus.

4. Including in relation to takeover bids or exchange transactions, without prejudice to the foregoing with reference to the prospectuses to be drawn up for the offer of the financial products offered in exchange, attention is drawn to the need for the offer document to contain information on the known impacts of the COVID-19 pandemic in progress on the specific business of the offeror and the group to which it belongs, on the related prospects and on future plans drawn up in relation to the offer; the issuer's press release must also contain details of any impacts of the COVID-19 pandemic, in relation to the information required by Article 39, paragraph 1, letters e) and f) of the Issuers' Regulation.

5. In relation to price-sensitive public disclosure obligations, it is necessary to maintain an adequate level of disclosure on the impacts of the epidemic on the management of the business of issuers subject to such disclosure obligations, taking into account the particular aspects connected with each business sector.

With particular reference to the companies subject to the provisions of the MAR Regulation, for the purposes of identifying inside information relevant to these regulations - including with regard to the possible need to publish timely profit warnings - the attention of these issuers is drawn to the usefulness of consulting the Consob Guidelines for the management of insider information, published in October 2017.

6. Finally, with reference to the supervisory activities of the control bodies of listed companies, including in their role as audit committee, pursuant to Article 19 of Legislative Decree no. 39/2010, as amended and supplemented, the latter are invited to: (i) strengthen information flows with the board of directors responsible for preparing the draft financial statements; (ii) promote effective and timely communication with the auditors, to ensure the mutual exchange of information useful for the performance of their respective duties, also pursuant to Article 150, paragraph 3, of the Consolidated Law on Finance.

Paolo Savona

[1] ESMA 71-99-1290 of 11 March 2020 (

[2] ESMA32-63-951 of 25 March 2020 (

[3] ESMA31-67-742 of 27 March 2020 (

[4] Refer to the international accounting standards adopted in accordance with the procedure laid down in Article 6 of Regulation (EC) No 1606/2002 of the European Parliament and of the Council.

[5] See IAS accounting standard 10, paragraph 3.

[6] Different considerations should be made by the companies with closing dates after 31 December 2019.

[7] In relation to the going concern assumption, IAS 1 states, in paragraph 26 that “[i]n determining whether the going concern assumption is applicable, management shall take into account all available information about the future. Such information shall at least cover, but not be limited to, twelve months after the end of the financial year. The degree of analysis depends on the specific circumstances of each case”.

[8] In particular, paragraph 33 of IAS 36 "Impairment of Assets" requires an entity to base its cash-flow projections (a) on reasonable and demonstrable assumptions that represent the management's best estimate of a series of economic conditions that will exist over the remaining useful life of the asset, giving greater weight to external evidence; (b) on the most recent budget/plan approved by the management.

[9] CEAOB 2020-008 of 24 March 2020