The European Securities and Markets Authority (“ESMA”) has published its findings regarding the European Common Enforcement Priorities (“ECEP”) for the 2025 annual financial reports for the EEA regulated market. This publication gives a clear understanding of what ESMA will be focusing on in the 2025 annual reports and provides valuable insight to businesses, auditors and legal advisors alike, on the key aspects to prioritise when reviewing sustainability and financial disclosures.
In this Article we will analyse the Priorities related to IFRS financial statements
Priorities related to Financial Statements
Geopolitical risks and uncertainties have been identified by ESMA as top enforcement priority areas for 2025, reflecting their widespread and multifaceted impact on business performance, financial position and disclosures. Over the past year, we have seen continued volatility in energy and commodity prices, supply chain disruptions and shifts in global trade patterns. These developments may have a direct implications on financial reporting, including potential asset impairment and write-downs amongst others. Moreover, reassessment of provision needs, liquidity risks and key assumptions in valuation models may also be needed.
Throughout this statement, ESMA highlights several key areas that issuers, advisors and auditors should prioritise, namely:
- Asset impairments and Inventory write-downs: Companies should reassess the value of inventories and non-financial assets affected by market volatility, tariffs and supply-chain challenges ensuring transparency in their disclosures of impairments or reversals.
- Revenue recognition and Contract modifications: Trade barriers and fluctuating costs may alter contract terms or pricing structures. Issuers should ensure that revenue recognition policies and provisioning for onerous contracts are updated accordingly, with clear disclosures of key judgements and assumptions.
- Deferred Tax Assets: Increased uncertainties and greater profitability risks may impact the recoverability of deferred tax assets. Issuers are required to reassess recognition criteria and provide detailed disclosures on the evidence supporting their recoverability.
- Liquidity and Going Concerns: ESMA expects transparency in disclosures, as well as entity specific disclosures related to how geopolitical developments affect liquidity, debt covenants and going concern assumptions. Generic references to ‘geopolitical uncertainty’ should be avoided.
- Financial Instruments and Expected Credit Losses: Issuers are urged to evaluate the effects of geopolitical risks on counterparties’ creditworthiness and disclose any resulting changes in risk profiles or management strategies.
ESMA has also identified ‘Segment Reporting’ as a priority under Financial Statements, reaffirming the importance of transparent and consistent segment reporting under IFRS 8. The aim is to ensure that investors and stakeholders clearly understand the nature of the company’s operations, its performance across business lines and the economic environment in which it operates.
The main highlights within this priority are:
- Identification and Aggregation of Segments: Companies are required to clearly disclose the factors used to determine operating segments and justify any aggregation under IFRS 8. Segments may only be combined if they share common economic characteristics. ESMA highlights that evolving geopolitical and climate-related factors may require reassessment of reportable segments or revenue disaggregation to ensure accurate representation of business realities.
- Disclosure of Revenues and Expenses: In this Statement, ESMA reiterates the IFRS Interpretations Committee’s 2024 Agenda decision, that income and expense items must be disclosed if they are:
- Included in the measure of segment profit or loss reviewed by the Chief Operating Decision Maker (“CODM”), or
- Regularly provided to the CODM, even if not part of the profit/loss measure
Furthermore, ESMA clarifies that these disclosures are not limited to unusual or non-recurring items, but issuers should apply sound materiality judgements to determine which income and expense items meaningfully affect segment performance, ensuring transparency in how calculations are worked out.
- Geographical areas and Major Customers: As the world of trade barriers and global supply chains shift and develop, ESMA places further emphasis on presenting entity-wide disclosures of revenues and non-current assets by geographical location and major customers contributing significantly to revenue
In summary, ESMA urges companies to prioritise clarity, transparency, and consistency in both financial and sustainability reporting. Companies are expected to align the assumptions underpinning their financial statements with their overall corporate narrative and provide meaningful disclosures on how geopolitical and sustainability risks influence performance.
