Legal Framework

Consob warning notice no. 9/20 of July 30, 2020

Subject: Financial reporting drawn up by issuers of financial instruments widely distributed among the public, pursuant to Article no. 116 of the Consolidated Law on Finance (TUF), and by issuers of financial instruments exchanged on multilateral trading systems adopting the rules of the civil code and the national accounting principles

Impacts of COVID-19 and use of the exemptions provided for business continuity

As part of the legislative measures put in place to address the impact of the epidemiological emergency by Covid-19, Decree Law no. 23 of 8 April 2020, converted into Law no. 40 of 5 June 2020 and Article 38-quater of Law no. 77 of 17 July 2020 introduced a number of measures to preserve the continuity of the business[1].

In particular, Article 38-quater establishes that when preparing the financial statements for the year ended 31 December 2020, the items and the going concern assumption referred to in Article 2423-bis, first paragraph, no. 1) of the Italian Civil Code may in any case be measured if existing in the last financial statements for the year ended before 23 February 2020[2].

The Organismo Italiano di Contabilità (OIC) has given some clarifications regarding the subjective scope, the application methods and the additional information to be provided by the companies applying these provisions when preparing financial statements. In particular, reference is made to Interpretative Document no. 6, issued in June 2020, on which Consob provided its required opinion.

With reference to the scope of application, Interpretative Document no. 6 clarifies that the measures most recently introduced by the legislator refer to companies that apply the provisions of the Italian Civil Code and the national accounting standards issued by the OIC pursuant to Article 9-bis of Legislative Decree no. 38/2005 to prepare financial statements.

The document states that those companies applying these measures should make this clear in the notes to the accounts. These companies must also provide information regarding the risk factors, the assumptions made and the uncertainties identified, as well as future business plans to address these risks and uncertainties. In addition, in cases where, in the future reference period, it is considered that there is no reasonable alternative to the discontinuation of operations, the notes to the financial statements must describe these circumstances and, as far as possible and reliable, the foreseeable effects that they could have on the company’s balance sheet and income statement.

The measures introduced by the legislator to preserve the going concern may be used by the issuers of financial instruments widely distributed among the public who do not make use of the option to apply international accounting standards pursuant to Article 2-bis of Legislative Decree no. 38/2005. The issuers of financial instruments traded on multilateral trading facilities that adopt national accounting standards may also apply this exception. These issuers are subject to Consob supervision of market disclosure pursuant to Articles 114 "Disclosure to the public" and 116 "Financial instruments widely distributed among the public" of the Consolidated Law on Finance, as well as to EU market abuse legislation.

In order to ensure proper information transparency, allowing investors to have an adequate set of information to guide their investment choices and intermediaries to provide information on the risks associated with the proposed investments, the attention of the above mentioned issuers is drawn to providing, in the event that they resort to Article 38-bis above, specific and updated information at the date of preparing the financial statements.

As indicated in OIC Document no. 6, all of the other provisions relating to the information to be provided in the Notes to the financial statements and, as required by applicable legislation, in the Report on operations, including information on the effects of the Covid-19 pandemic, remain unchanged. In this context, all the issuers mentioned above are required to provide, in the Report on operations, if available, 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.

Taking into account the importance of the information referred to above, including the use of the above measures, on the representation of the economic, equity and financial situation of the issuers, the same must be reported, where drafted, in the press releases approving the accounting statements also, where appropriate, by means of a specific paragraph.

Similar considerations, without prejudice to applying the provisions and the related OIC interpretative document to annual financial statements, may refer to the forthcoming half-yearly financial information to be published by these issuers on a voluntary basis or under specific obligations, such as the provisions of the applicable MTF regulations.

In this context, the administrative and control bodies, in the light of their respective responsibilities, are invited to pay particular attention to the processes of preparing financial information in the upcoming financial reports (annual or interim) that will incorporate the economic and financial effects of the COVID-19 pandemic.

Finally, the auditors and the audit firms are invited to apply the ISA (Italy) auditing standards issued pursuant to Article 11, paragraph 2, of Legislative Decree no. 39/2010, in order to express their opinion on the financial statements, taking into account the changes introduced in the regulatory framework and the information required in the circumstances.

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Issuers with financial instruments traded on multilateral trading facilities that adopt international accounting standards, subject to Consob supervision pursuant to Article 114 "Disclosure to the public" of the Consolidated Law on Finance as well as to EU regulations on market abuse, are invited to refer to Consob's Reminder No. 8/20 of 16.7.2020 "COVID 19 - Reminder concerning financial reporting".

Paolo Savona

[1] In this context, on 3 June 2020, the Organismo Italiano di Contabilità (Italian Accounting Body) published Interpretative Document no. 6, which provides application indications on the above-mentioned regulatory provision.

[2] More specifically, the exception provided for by the rule applies to the financial statements: "closed and not approved by the shareholders' meeting before 23 February 2020; - closed after 23 February 2020 and before 31 December 2020; ongoing as at 31 December 2020".