Warning notice no. 1/21 of 16 February 2021
Subject: COVID 19 - Measures to support the economy - Warning notice on the information to be provided:
- by supervised issuers, supervisory bodies and audit firms in relation to the 2020 financial statements prepared in accordance with international accounting standards;
- by companies that publish 2020 non-financial statements;
- by issuers with listed shares and by supervisory bodies at shareholders’ meetings for capital resolutions;
- by those responsible for drafting offer documents and prospectuses;
- by issuers subject to the MAR.
1. Annual financial reports for which the reporting period starts on 1 January 2020 or later
1.1. Information to be provided by supervised issuers
When preparing the 2020 financial statements, issuers will have to consider the effects of the ESMA document on the 2020 common European enforcement priorities of 28 October 2020 (“European common enforcement priorities for 2020 annual financial reports”) which, in the light of the consequences of the COVID-19 pandemic, highlights the thematic areas of particular significance to preparing financial statements.
The areas identified are:
- the application of IAS 1 “Presentation of Financial Statements”, with reference to the issues related to the existence of the going concern assumption, to the causes of uncertainty in accounting estimates, as well as to the representation of the items impacted by COVID-19;
- the application of IAS 36 “Impairment of Assets”, in relation to the methods used to determine the recoverable value of goodwill and the intangible and tangible assets that may be affected by a deterioration in economic prospects;
- the application of IFRS 9 “Financial Instruments” and IFRS 7 “Financial Instruments: Disclosures”, in consideration of the risks related to the financial assets and liabilities, with particular attention to liquidity risk and the measurement of expected credit losses by credit institutions;
- the application of IFRS 16 “Leasing”,in relation to the specific issues related to the consequences of COVID-19.
In this context, particular attention must be paid to the planning process by taking into account the possible impacts on business objectives and risks arising from: the pandemic, the use of measures to support the economy and their possible interruption. Issuers must ensure that the financial statement assessments based on business plans are consistent with each other.
Information on these aspects must also be provided in the management reports, with particular emphasis on the description of the evolution of the business model in response to the pandemic and the actions that companies have taken and intend to take to address the short- and medium-term uncertainty as a result of COVID-19.
Issuers preparing financial statements in accordance with the Bank of Italy’s provisions for banking intermediaries - adopted pursuant to article 43 of Italian Legislative Decree no. 136 of 18 August 2015 - take into account the specific indications that European regulatory and supervisory bodies (EBA, ESMA, ECB), as well as the IFRS Foundation, have addressed to credit institutions regarding the application of IFRS 9 on the measurement of expected credit losses. These include the instructions provided by the ECB’s Banking Supervision to all significant banks in its letter of 4 December 2020, as well as those provided by the Bank of Italy in its Communication of 15 December 2020, which requested banks to provide, starting with the financial statements closed or in progress as at 31 December 2020, specific information on the effects that COVID-19 and the measures to support the economy have had on risk management strategies, objectives and policies, as well as on the financial position of intermediaries.
Issuers who make use of the suspension provided for by article 6 of Italian Law Decree no. 23 of 8 April 2020 (the so-called “Liquidity Decree” converted, with amendments, by Italian Law no. 40 of 5 June 2020) “Temporary provisions on capital reduction”, as recently amended by Italian Law no. 178 of 30 December 2020 (the 2021 Budget Law), must indicate separately in the notes to the financial statements the losses “specifying, in special statements, their origin as well as the changes that occurred during the year”, as well as the assessments of the timing with which they expect to be able to comply with their settlement obligations.
The shareholders’ meeting must be convened without delay pursuant to articles 2446 and 2447 of the Italian Civil Code, both in the event that the capital is reduced by more than one third as a result of losses, and in the event that the losses have dropped the capital below the legal minimum.
In these cases, in the explanatory reports prepared pursuant to article 125-ter of the Consolidated Law on Finance and in the statement of assets and liabilities prepared pursuant to article 2446, sec. 1 of the Italian Civil Code, information must be provided on the situation in which the issuers pay, on the amount and nature of the losses accrued in the year for which the suspension measures are applied, on the reasons for the decisions taken regarding the possible postponement of the resolutions pursuant to articles 2446 and 2447 of the Italian Civil Code, as well as on the timing of the settlement of the losses and/or the recovery of the share capital.
1.2. Supervisory body checks
The supervisory bodies must: (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, sec. 3, of the Consolidated Law on Finance.
Supervisory bodies are also required to promote a timely dialogue with the corresponding bodies of subsidiaries, pursuant to article 151 of the Consolidated Law on Finance, if useful for their supervisory tasks to be performed.
Particular attention must also be paid to the assessments made by issuers regarding the existence of the going concern assumption and the suitability of the internal control system - also taking into account the situations in which the issuer has used the suspension of the regulations under articles 2446 and 2447 of the Italian Civil Code (see sec. 1.1.), as well as the risks related to the difficulties of carrying out on-the-spot checks due to the restrictions relating to the COVID-19 pandemic - by providing information in the reports pursuant to article 153 of the Consolidated Law on Finance.
Lastly, particular attention must be paid to preparing the comments on the statement of assets and liabilities published pursuant to the aforementioned article 2446, sec. 1 of the Italian Civil Code.
1.3. Audit firm checks
In carrying out the audit procedures, auditors must pay particular attention to the impacts that could derive from the uncertainties related to the effects of the pandemic and the loss of measures to support the economy, which may further increase the level of judgement inherent in assessing the financial statements. This is with particular regard to accounting estimates, the going concern and the related disclosure. To this end, auditors must raise the level of professional scepticism to make it appropriate to the circumstances.
Auditors must also assess the elements that might lead to a risk of material misstatement due to fraud, planning where, deemed necessary, additional audit procedures. The effects of the pandemic could, in fact, put management under particular pressure in view of the potential difficulties in achieving the planned budgetary targets; the limitations related to restrictive measures and the transition to remote working could also jeopardise the operational effectiveness of the internal control systems of the audited companies.
It is understood that auditors must establish an adequate dialogue with those responsible for governance activities and acquire appropriate audit evidence and updated information until the audit report’s issue date.
Those aspects which, in the context highlighted above, were most significant during the audit of the financial statements must be laid out in the audit report (“key aspects”). If significant difficulties were encountered in concluding the audit procedures, due to limitations in the performance of the same, auditors must carefully evaluate their effects for the purpose of expressing their opinion on the financial statements.
2. 2020 non-financial statements
The administrative and supervisory bodies and the auditors of companies that publish non-financial statements pursuant to Italian Legislative Decree no. 254 of 2016 must, each to the extent of its responsibilities, consider the indications provided by ESMA, in the document on enforcement priorities, relating to:
- the impact of the COVID-19 pandemic on non-financial issues, highlighting the mitigation actions taken;
- social and personnel issues, with particular attention to aspects concerning health, safety at work and remote working, as well as the policies adopted in this regard towards its employees and collaborators;
- the business model and value creation, highlighting the main trends and factors that might affect the issuer’s business model, that model’s level of resilience to the consequences of exceptional events such as COVID-19 and the consequences on the company’s ability to continue to create value over time;
- the risks relating to climate change, even in a complex and difficult context such as that resulting from the spread of the new virus;
- the interconnections between financial and non-financial information, highlighting how the company’s financial situation and its performance have been impacted by the events caused by COVID-19.
3. Information documents or prospectuses
Those responsible for preparing the public offering/admission to trading prospectuses for financial instruments, as well as the related supplements, must provide updated information on the business plans and the impacts on future management dynamics resulting from the exacerbation/continuation of the pandemic, indicating - in the assumptions underlying the updates to the plan - the assumptions made about the length of the pandemic and the loss of measures to support the economy. The plan’s sensitivity analysis must take into account, where necessary, different possible scenarios in order to adequately reflect the risk associated with the evolution of the COVID-19 pandemic.
If the prospectus does not include forward-looking data, updated informationmust be provided on the changes made to strategies and objectives as a result of the COVID-19 pandemic.
Takeover bids or exchange transactions must give information regarding the known impacts of the current COVID-19 pandemic on the offerer’s specific business and that of 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, in relation to the information required by article 39, sec. 1, letters e) and f) of the Issuers’ Regulation must contain details relating to any impacts as a result of the continuation of the COVID-19 pandemic and the loss of measures to support the economy.
4. Shareholders’ Meetings to resolve on capital increases
In view of the shareholders’ meetings convened to resolve on capital increases in which use is made of the temporary measures under article 44 of Italian Law Decree no. 76 of 16 July 2020 (the so-called “Simplification Decree”), issuers must provide in the explanatory reports drawn up pursuant to article 125-ter of the Consolidated Law on Finance with reference to: a) the simplified resolving quorum temporarily provided for (until 30 June 2021) as an exception to article 2368, sec. 2, and article 2369, sec. 3 and sec. 7 of the Italian Civil Code for some cases of share capital increase; b) the case in which the issuer intends to make use of the option to resolve on increasing the share capital through new contributions, with the exclusion of the stock option, pursuant to article 2441, fourth section, second sentence of the Italian Civil Code, as amended by article 44, sec. 4, of the Simplification Decree, even in the absence of an express provision in the articles of association, to the extent of 20 percent of the pre-existing share capital, with the relative justification.
5. Price-sensitive disclosure
If, when planning or preparing the final financial information, the Company experiences significant difficulties in achieving the objectives of the business plan made public, this situation must be the subject of a timely profit warning.
Finally, reference is made to the usefulness of consulting the Consob Guidelines for the management of inside information, published in October 2017, for the purposes of implementing these disclosure obligations.
 With reference to listed issuers with Italy as their Member State, issuers of financial instruments widely distributed to the public pursuant to article 116 of Italian Legislative Decree no. 58/98 (the “Consolidated Law on Finance”) and issuers of financial instruments traded on multilateral trading facilities.
 With reference to the supervisory bodies of companies with listed shares as defined by article 119 of the Consolidated Law on Finance, also as an audit committee pursuant to article 19 of Italian Legislative Decree no. 39 of 27 January 2010, as amended.
 With reference to issuers of financial instruments subject to the obligations under article 17, sec. 1, of EU Regulation no. 596/2014, supervised by Consob.
 On 28 October 2020, ESMA published the European common enforcement priorities for 2020 annual financial reports (hereinafter also referred to as the “ESMA Document”) with which it identified the following areas of focus with reference to 2020 financial statements: IAS 1 “Presentation of Financial Statements”; IAS 36 “Impairment of Assets”; IFRS 9 “Financial Instruments” and IFRS 7 “Financial Instruments: Disclosures”; IFRS 16 “Leasing”. The press release accompanying the above communication states that “ESMA and European national enforcers will monitor and supervise the application of the IFRS requirements as well as any other relevant provisions outlined in the Statement, with national authorities incorporating them into their reviews and taking corrective actions where appropriate”. See https://www.esma.europa.eu/sites/default/files/library/esma32-63-1041_public_statement_on_the_european_common_enforcement_priorities_2020.pdf. Specifically, reference is made to Section 1 of the Document.
 In this regard, on 17 April 2020, ESMA published specific indications on how to represent the Alternative Performance Measures in light of the pandemic’s impact (see ESMA32-51-370 Questions and answers - ESMA Guidelines on Alternative Performance Measures), referred to in the ESMA Document of 28 October 2020.
 Bank of Italy Circular no. 262 “Banks’ financial statements: layout and preparation” of 2005.
 Letter from the ECB of 4 December 2020 “Identification and measurement of credit risk in the context of the coronavirus (COVID 19) pandemic”. Specifically, with this letter the ECB underlines that, in relation to a credit risk assessment, it is essential that significant institutions strike the right balance between avoiding excessive pro-cyclicality and ensuring that the risks to which they are (or will be) exposed are adequately reflected in internal risk measurement and management processes, in financial statements and in regulatory reporting, and that this process should also take into account the termination of currently available public support.
 The Bank of Italy’s Communication of 15 December 2020 - Supplements to the provisions of Circular no. 262 “Banks’ financial statements: layout and preparation” on the impacts of COVID-19 and the measures to support the economy and amendments to IAS/IFRS rules. In this regard, the detailed information required by the Bank of Italy in the tables in the notes to the financial statements under Part B (Information on the Balance Sheet), Part C (Information on the Income Statement) and Part E (Information on risks and related hedging policies) concerning loans subject to “moratoriums” or other concession measures in place at the reference date of the financial statements, or constituting new liquidity granted with the support of public guarantees, are relevant.
 This rule allows joint-stock companies and limited liability companies - “for losses arising in the current financial year as of 31 December 2020” - to temporarily suspend certain provisions on capital reduction due to losses (article 2446, sec. 2 and sec. 3, and article 2482-bis, sec. 4, sec. 5 and sec. 6, of the Italian Civil Code), capital reduction below the legal limit (article 2447 and article 2482-ter of the Italian Civil Code) and dissolution of the company due to reduction or loss of share capital (under article 2484, sec. 1, number 4, and article 2545-duodecies of the Italian Civil Code). Until “the fifth subsequent financial year”, it will be possible to postpone the obligation to settle losses (article 2446, sec. 2, and article 2482-bis, sec. 4 of the Italian Civil Code) and, in the event of a capital reduction below the legal minimum, the obligation of convening a shareholders’ meeting to proceed with the immediate reduction of the capital and the simultaneous increase of the same to a figure not lower than the legal minimum. Furthermore, until the date of this meeting, the reason for dissolving the company does not operate.
It should be remembered that the previous version of article 6 of the Liquidity Decree referred to a different period of time: “From the date on which this decree comes into effect and until 31 December 2020 for the cases that occurred during the years ending by the aforementioned date”.
 Article 6 of the Liquidity Decree in question does not, in fact, suspend the application of sec. 1 of article 2446 of the Italian Civil Code, according to which “When the capital has decreased by more than one third as a result of losses, the directors or the management board, and in the event of their inaction, the Board of Statutory Auditors or the Supervisory Board, must immediately convene the shareholders’ meeting for the appropriate measures. A report containing the company’s statement of assets and liabilities must be submitted to the shareholders’ meeting, with comments by the Board of Statutory Auditors or the management control committee. A copy of the report and the comments must be filed at the company’s registered offices eight days prior to the meeting, so that the shareholders can view them. At the shareholders’ meeting itself, the directors must give an account of the significant events that took place after the report was drawn up”.
 Article 6, sec. 3, of the Liquidity Decree requires that the meeting must, in any case, be convened without delay and that the meeting “as an alternative to immediately reducing the capital and simultaneously increasing the same to a figure not lower than the legal minimum”, may resolve to postpone such decisions until the fifth subsequent financial year.
 See Section 2 of the aforementioned ESMA Document “European common enforcement priorities for 2020 annual financial reports” of 28 October 2020.
 Specifically, two temporary measures, effective until 30 June 2021, are permitted to facilitate the recapitalisation of companies in the difficult economic period related to the COVID-19 pandemic:
- the lowering of the quorum necessary to approve resolutions concerning share capital increases with new contributions and the delegation of share capital increases to directors (for increases to be resolved until 30 June 2021), providing that the favourable vote of the majority of the capital present at the meeting (instead of 2/3) is sufficient, provided that at least half of the share capital is present;
- the option, for companies with listed shares on regulated markets or multilateral trading facilities, to resolve on capital increases by means of new contributions with the exclusion of the stock option (pursuant to article 2441, sec. 4, second sentence of the Italian Civil Code), even in the absence of an express provision in the articles of association and to the greatest extent of 20% of the pre-existing share capital (instead of 10%).
 See article 44, sec. 1 of the Simplification Decree: “As an exception to article 2368, second section, and article 2369, third section and seventh section of the Italian Civil Code, until 30 June 2021, provided that at least half of the share capital is represented, resolutions concerning: a) share capital increases through new contributions, pursuant to articles 2439, 2440 and 2441 of the Italian Civil Code; b) adding to the articles of association the delegation of share capital increased to directors, pursuant to article 2443 of the Italian Civil Code, for resolutions regarding capital increases until 30 June 2021, are approved with the favourable vote of the majority of the share capital represented at the shareholders’ meeting, even if the articles of association provide for a higher majority”.
 See article 44, sec. 3 of the Simplification Decree “Until 30 June 2021, companies with listed shares on regulated markets or traded on multilateral trading facilities, may resolve to increase the share capital by means of new contributions, with the exclusion of the stock option, pursuant to article 2441, fourth section, second sentence of the Italian Civil Code, even in the absence of an express provision in the articles of association, to the extent of 20 percent of the pre-existing share capital”.