Consob warning notice no. 4/21 of March 15, 2021
COVID 19 - Measures to support the economy - Warning notice on the information to be provided with reference to the 2020 financial statements drawn up on the basis of the provisions of the Civil Code and national accounting standards and addressed to:
- issuers of financial instruments widely distributed among the public pursuant to the Article no. 116 of the TUF (Consolidated Law on Finance);
- issuers of financial instruments traded on multilateral trading facilities ("MTF") and on organized trading facilities ("OTF") subject to EU Regulation no. 596/2014 ("MAR");
- auditing companies and control bodies.
1. Information to be provided by issuers
As part of the legislative measures adopted to address the impact of the Covid 19 emergency, article 38-quater of Italian Decree Law no. 34 of 2020, converted into law by Italian Law no. 7 of 17 July, introduced a number of measures to preserve business continuity.
The Italian Accounting Standard Setter (Organismo Italiano di Contabilità or OIC) has given, with Interpretative Document no. 8, some clarifications on the subjective scope, the application methods, and the additional information that issuers must provide in their financial statements.
Among other things, the document specifies that, in cases where, in the future reference period, there is no reasonable alternative to the discontinuation of operations, these circumstances must be described and, as far as possible and reliable, the foreseeable effects that they could have on the company’s statement of assets and liabilities and income statement.
These assessments must take account of the ability to meet future financial needs as well as the impacts of the economic support measures and any interruption of them. Specific evaluations must be carried out by companies that have made use of the provisions to preserve continuity including with reference to the previous financial statements.
The financial statements must also provide specific information on any use of the other measures adopted to address the Covid 19 pandemic, such as the right to suspend the annual depreciation of tangible and intangible fixed assets (article 60 of Italian Law no. 126 of 13 October 2020 converted, with amendments, to Italian Decree Law no. 104 of 14 August 2020), the possibility of not devaluing the securities recorded under current assets(Italian Ministerial Decree of 17 July 2020 which extended the waiver provision contained in article 20-quater of Italian Decree Law 119/2018 converted into Italian Law no. 136/2018 to the 2020 financial year), the right to revalue corporate assets and equity investments (article 110 of Italian Decree Law no. 104 of 14 August 2020 converted into Italian Law no. 126/2020).
Issuers, who make use of the aforementioned options, must provide the information required by the documents issued by the OIC as well as indicate, in the explanatory notes, the reasons for which they benefit from the waivers and must describe any impacts on the company’s economic and financial situation.
In the current context of general uncertainty, issuers must pay particular attention to the planning process, in order to ensure that budgetary assessments based on forecast estimates are consistent and appropriately reflect the available internal and external variables. An adequate and reliable control system for the plan’s objectives must be maintained in order to be able to implement risk mitigation actions and processes in a timely manner.
In addition, issuers must provide, in the Report on Operations, information, updated as of the date on which the financial statements are prepared, regarding the impacts, including the future impacts, of COVID-19 on the company’s situation and outlook, providing specific details (i) on the description of the evolution of the business model in response to the pandemic, (ii) on the risks and uncertainties to which the company is exposed, and (iii) on the measures taken and planned to mitigate the effects of the pandemic.
Issuers who make use of the provisions of article 6 of Italian Decree Law no. 23 of 8 April 2020 containing “Temporary provisions regarding capital reduction” which, “for losses arising in the current financial year as of 31 December 2020”, temporarily suspends certain obligations laid out in the Italian Civil Code in the event of a capital reduction of more than one third or a reduction below the legal minimum, must:
- indicate separately in the explanatory notes to the financial statements the losses “specifying, in the special tables, their origin as well as the changes that occurred during the year”, as well as provide the assessments regarding the timing with which they expect to be able to comply with their settlement obligations (see article 6, paragraph 4 of the Liquidity Decree);
- call the shareholders’ meeting without delay, 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 caused the capital to fall below the legal minimum. At the shareholders’ meeting, it is important that issuers provide information on the company’s situation, the amount and nature of the losses accrued during the year for which the suspension measures come into play, the reasons for the decisions taken regarding the possible postponement of the resolutions to reduce the capital, as well as the timing to cover the losses and/or reconstitute the share capital.
The press releases approving the accounting reports or relating to the aforementioned shareholder meetings will report the information indicated above, taking into account the relevance of the same pursuant to article 17, paragraph 1, of the MAR for issuers traded on the MTF and the OTF, and article 116, paragraph 1-bis, of the TUF for issuers of distributed financial instruments not subject to the obligations of the MAR.
2. Checks by audit firms and supervisory bodies
The uncertainties related to the effects of the pandemic and the potential loss of economic support measures increase the level of judgement inherent in budgetary assessments. This requires auditors, in carrying out the audit procedures, to verify the impacts that may derive from these factors, with particular regard to the accounting estimates and to the completeness and correctness of the disclosures provided in the financial statements. Particular attention must be paid to the potential use of the powers provided for by the aforementioned regulatory provisions, especially for the issues connected with verifying business continuity and the consequent information to be provided in the financial statements.
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 the restrictive measures and the transition to remote working could also jeopardise the operational effectiveness of the internal control systems of the audited companies, a situation that must be duly taken into account when planning the audit strategy.
In applying the ISA (Italy) auditing standards, in order to express an opinion on the financial statements, auditors must, therefore, raise the level of professional scepticism in order to make it appropriate to the circumstances.
It is understood that auditors must establish a suitable dialogue with those responsible for governance activities and must acquire appropriate audit evidence and information updated to the audit report’s issue date.
Finally, in cases where significant difficulties have been encountered in concluding the audit procedures, due to restrictions on the auditors’ performance, auditors must carefully assess their effects for the purpose of expressing an opinion on the financial statements.
Taking the above into account regarding the relevance, under the current pandemic conditions, of the information to be reported by issuers, as well as the assessments made on the suitability of the internal control system, the information flows of the supervisory bodies need to be strengthened, both with the board of directors, which is responsible for preparing the financial statements, and with the auditors, also taking into account, where the issuers are public-interest entities, pursuant to article 16 of Italian Legislative Decree no. 39/2010, as amended, the tasks assigned to the internal control and audit committee under article 19 of the same Decree.
 Published definitively on the OIC Foundation’s website on 11 March 2021.
 Reference is made to the provisions contained in the OIC Interpretative Document no. 4.
 Reference is made to the OIC Interpretative Documents published definitively pursuant to article 12 of the OIC Statute.
 The so-called “Liquidity Decree”, converted, with amendments, by Italian Law no. 40 of 5 June 2020, and recently amended by Italian Law no. 178 of 30 December 2020, the 2021 Budget Law.
 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 for losses (article 2446, paragraphs 2 and 3, and article 2482-bis, paragraphs 4, 5 and 6 of the Italian Civil Code), on a capital reduction below the legal limit (article 2447 and article 2482-ter of the Italian Civil Code), and on the dissolution of the company due to a reduction or loss of the share capital (as referred to in article 2484, paragraph 1, number 4, and article 2545-duodecies of the Italian Civil Code). The possibility is provided of postponing, until “the fifth subsequent financial year”, the obligation to cover losses (article 2446, paragraph 2, and article 2482-bis, paragraph 4 of the Italian Civil Code) and, in the event of a capital reduction below the legal minimum, the obligation of the 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. Until the date of this meeting, the cause of the company’s dissolution does not have effect.
 Article 6 of the Liquidity Decree in question does not, in fact, suspend the application of paragraph 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 on the company’s statement of assets and liabilities must be submitted to the shareholders’ meeting, together with comments from 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 office within the eight days preceding the meeting, so that shareholders may view it. At the shareholders’ meeting, the directors must give an account of the significant events that occurred after the report was prepared” and paragraphs 1 to 3 of article 2482-bis of the Italian Civil Code (“When the capital has decreased by more than one third as a result of losses, the directors must immediately convene the shareholders’ meeting for the appropriate measures. A directors’ report on the company’s statement of assets and liabilities must be submitted to the shareholders' meeting, together with comments, in the cases provided for by article 2477, by the board of statutory auditors or by the person appointed to carry out the statutory audit. Unless otherwise provided for in the article of incorporation, a copy of the report and the comments must be filed at the company’s registered office at least eight days before the shareholders’ meeting, so that shareholders may view it. At the shareholders’ meeting, the directors must give an account of the significant events that occurred after the report was prepared, as provided for in the previous paragraph”).
 Article 6, paragraph 3 of the Liquidity Decree provides that the meeting shall, in any case, be convened without delay and that the same, “as an alternative to the immediate capital reduction and the simultaneous increase of the same to a figure not lower than the legal minimum”, may choose to postpone such resolutions until the fifth subsequent financial year.