Legal Alerts / 9 Jul 2020

Listed Companies’ Half-year Reports to Focus on the Impact of the COVID-19 Pandemic

At this time of the year, Finnish listed companies will begin issuing their half-year reports. We published a legal alert concerning the preparation of Q1/2020 reports and how to address the COVID-19 pandemic in April. Since then, the European Securities Markets Authority (“ESMA”), the Finnish Financial Supervisory Authority (“FIN-FSA”), and the U.S. Securities and Exchange Commission (“SEC”) have published guidance on financial reporting and the preparation and publication of interim reports during the COVID-19 outbreak.

In the Q1/2020 reports, many companies addressed the company-specific implications and insecurity related to the COVID-19 pandemic. However, only very few companies’ financials for Q1 actually showed the effects of the pandemic and, at the same time, many companies had withdrawn their guidance for 2020. We expect that the results of the second quarter of 2020 will already show the impact of COVID-19 for many companies, and we also believe that at least some of them will be able to shed more light on their expectations for the remaining part of 2020. Furthermore, share prices have on many occasions reached pre-crisis levels, but it remains to be seen how investors will react to seeing the actual financials and outlooks. The future will probably still appear foggy, especially for companies operating in the industries where the effects of the pandemic have already been severe.

As always, prior to issuing their half-year reports, companies may also need to consider if their results deviate from what could reasonably be expected based on financial information previously disclosed by the company in an unexpected and significant way. In such a situation, the company may be required to disclose information (i.e. a positive or a negative profit warning) on its financial performance in accordance with the Market Abuse Regulation [1] and the rules of Nasdaq Helsinki.

Recent guidance from authorities

In this legal alert, we take a look at recent guidance provided by the authorities with respect to the upcoming reporting season. On 20 May 2020, ESMA published a public statement concerning the implications of the COVID-19 outbreak on half-year reports (“May 2020 ESMA Statement”). The statement addresses the preparation of interim financial statements in accordance with IFRS and interim management reports for the 2020 half-yearly reporting periods. The considerations in the statement also apply to the reporting of financial information in other interim periods to which IAS 34 Interim Financial Reporting is applied.

The May 2020 ESMA Statement highlights transparency and the consistent application of European requirements for the information provided in the half-year financial reports under the exceptional circumstances arising from the COVID-19 pandemic. The May 2020 ESMA Statement also highlights the need for issuers to provide updated information useful to investors to adequately reflect the current and expected impact of the COVID-19 pandemic on the financial position, performance and cash-flows of issuers. ESMA’s statement was further emphasised in a release published by the FIN-FSA on 29 May 2020 where it also provides its guidance on the matter (“May 2020 FIN-FSA Release”).

In addition to the two other releases, the SEC issued disclosure guidance regarding operations, liquidity, and capital resources disclosures as well as a public statement  on the continued importance of high-quality financial reporting for investors in light of COVID-19 on 23 June 2020 (“June 2020 SEC Guidance”). The June 2020 SEC Guidance supplements SEC’s previous guidance on the topic, which we discussed in our previous legal alert. The June 2020 SEC Guidance continues to encourage companies to provide disclosures that allow investors to evaluate the impact of COVID-19 through the eyes of management and to proactively revise disclosures when needed.

The SEC emphasises that disclosures should enable investors to understand how management is analysing the impact of COVID-19 on the company’s operations, liquidity and capital resources. The SEC also emphasises that companies should provide robust and transparent disclosures on how they manage short- and long-term liquidity and funding risks in the current economic environment, especially if such efforts present new risks or uncertainties to their businesses. In addition, the authority highlights the importance of management consideration and disclosure concerning the company’s ability to continue as a going concern, the importance of timely and high-quality financial information useful to investors and the fundamental role of the companies’ audit committees.

Similarly to SEC’s previous guidance, the June 2020 SEC Guidance provides a non-exhaustive, illustrative list of questions for companies to consider when fulfilling their disclosure obligations. The list includes questions concerning operational challenges, liquidity position and outlook, financing activities, funding sources, covenants, metrics, capital expenditures, debt obligations, customer and supplier arrangements, and subsequent events.

 We will first discuss the May 2020 ESMA Statement and the May 2020 FIN-FSA Release more thoroughly since they are more relevant for Finnish listed companies and after that focus on the similarities between the May 2020 ESMA Statement and the June 2020 SEC Guidance. The key points of the May 2020 ESMA Statement and the May 2020 FIN-FSA Release are discussed below.

  • The timing of the publication of the half-year report may be delayed, if necessary

Issuers may consider publishing their half-year reports later than usual within the available time-span, while complying with the obligations arising from the Market Abuse Regulation[1]. ESMA emphasises that the obligation to provide timely, relevant and reliable information while not unduly delaying the publication of information must remain the key objective when making this assessment. ESMA also reminds issuers to consider the impact any material events occurring after the end of the reporting period may have on their financial statements and to provide the relevant disclosures in accordance with paragraph 16A(h) of IAS 34. If an issuer decides to delay the timing of the publication, they should announce the new date of publication in accordance with the rules of Nasdaq Helsinki.

  • Audit committees’ oversight role is highlighted

Both ESMA and FIN-FSA highlight the role of audit committees when it comes to financial reporting in the midst of the COVID-19 pandemic. ESMA calls on audit committees to play an active role in overseeing financial reporting, and the FIN-FSA emphasises the important role of audit committees as the bodies with the highest capability of monitoring the quality and reliability of financial reporting. According to the FIN-FSA, in addition to more risky areas, it is important for audit committees to pay due attention to the judgments, estimates and forecasts used by management because the importance of these increases in uncertain market conditions. The FIN-FSA encourages audit committees to engage in proactive and close dialogue with auditors in addition to engaging in discussions with management and the board of directors.

  • Description of COVID-19 impacts should be entity-specific

Companies should provide detailed and entity-specific information about the impact that the COVID-19 pandemic has had on their strategic orientation and targets, operations, financial performance, financial position and cash-flows in their interim management reports. Both ESMA and the FIN-FSA emphasise that information on liquidity and financial position as well as on the impact of the pandemic on supply chains and production is important data for investors. Measures taken by companies to address and mitigate the negative effects should also be described.

In addition, ESMA considers forward-looking information to be material for investors at this stage of the year, and therefore ESMA recommends that estimates of the future impact of the pandemic should be provided, where available. However, the authorities note that the absence of reliable information may make it difficult for companies to estimate the future impact. While the FIN-FSA considers it advisable to present a description of estimated future development on the basis of the best information available when the report is prepared, it is likewise advisable to provide narrative information regarding the estimates, judgements and underlying assumptions.

  • Presentation of COVID-19 related items in the statement of profit or loss should be avoided

 ESMA calls for caution regarding any separate presentation of the impacts of the COVID-19 pandemic in issuers’ profit or loss statements. ESMA states that such a separate presentation may not faithfully represent issuers’ overall financial performance, position and/or cash-flows and that, as such, it may be affected by the users’ understanding of the financial statements. Instead, ESMA encourages issuers to provide information, also on a quantitative basis, on the significant impacts of the COVID-19 outbreak as part of the explanations of the amounts presented and recognised in the statement of profit or loss in a single note as part of the notes to the financial statements. The ESMA Guidelines and the Q&A on Alternative Performance Measures (APM) should be followed, and rather than adjusting existing APMs or including new APMs, ESMA urges issuers to improve their disclosures and include narrative information in their communications.

  • For many companies, COVID-19 is a significant event that requires more detailed and extensive disclosures

ESMA and the FIN-FSA underline that for many companies, the pandemic is expected to constitute a significant event under paragraph 15 of IAS 34, which will require the information presented in the last annual financial statements to be updated with information concerning the pandemic. This may call for more detailed information and more extensive disclosures. IAS 1 requires additional disclosures if giving a true and fair view so requires (IAS 1.17, IAS 1.31). The FIN-FSA also calls attention to the list disclosed in paragraph 15B of IAS 34 that sets out significant events and transactions for which updated information is required in the half-year report. ESMA, on the other hand, emphasises that companies should also assess the significance of material events after the reporting date and present information on them in the half-year report, if necessary.

  • Increased management judgment should be reflected in the reports

Uncertainty about future development has increased significantly due to the COVID-19 pandemic, and according to the FIN-FSA, this, in turn, will result in management exercising increased judgment in the preparation of interim reports. Such situations may relate to, for example, forecasts and impairments as well as the impact of new factors that were not current and did not require consideration at the balance sheet date or in the previous interim report. For some companies, the impact of the pandemic may have been so significant that the management will have to assess the company’s ability to continue on a going concern basis. The FIN-FSA states that increased management judgment should be described in sufficient detail to enable investors to understand which items have required additional management judgment and how the management has exercised that judgment.

In the event that financial statements are prepared on a going concern basis but the management is aware of material uncertainties related to this, the company must present these uncertainties in its financial statements in accordance with paragraph 25 of IAS 1. If the management had to exercise significant judgment in determining that the company has no material uncertainties regarding its ability to continue as a going concern, the company must disclose this judgment in accordance with paragraph 122 of IAS 1. In addition, ESMA expects companies most significantly impacted by COVID-19 to provide disclosures on the assessment of their ability to continue as a going concern as well as the related underlying judgments. In the view of the FIN-FSA, information disclosed on the ability to continue as a going concern should be presented in a sufficiently detailed manner and under its own heading in the report. The FIN-FSA also considers it important that the company present a justified conclusion as to why its compliance with the principle of the ability to continue as a going concern is appropriate, despite threats to this ability.

  • Financial risk disclosures should be reassessed

The impact of the pandemic may cause or increase financial risks that did not previously affect the company or which were not significant vis-à-vis the company in the previous financial statements. Paragraphs 15–15C of IAS 34 require additional information about significant changes and events related to the company’s financing. As regards financial risks, the FIN-FSA recommends that companies consider providing additional disclosures based on the requirements of IFRS 7, such as analyses and descriptions of liquidity risk and its management in accordance with IFRS 7.39.

  • Critical assessment of carrying amounts and assessment of the need for impairment

According to the FIN-FSA, the increased amount of uncertainty will result in a critical assessment of the carrying amounts of assets and liabilities and in an increased risk of asset impairment in many companies. ESMA urges companies to update their assessments and forecasts made at year-end about the carrying amounts of assets and liabilities and to take into account, in accordance with paragraph 125 of IAS 1, the requirement to provide information on major sources of estimation uncertainty arising from a significant risk of material adjustment to the carrying amounts of assets and liabilities. Disclosures on the nature and amount of any changes in the estimates should be made (IAS 34.16Ad). In its statement, ESMA also reminds companies that they should assess, on an ongoing basis, whether there are any internal or external factors indicating impairment of non-financial assets (IAS 36.9 and IAS 36.12). In ESMA’s view, the effects of the COVID-19 pandemic might constitute a strong basis for many companies to conclude that impairment indicators exist and that impairment testing should be carried out.

The FIN-FSA recommends that companies assess the assumptions used in the preparation of the sensitivity analysis of goodwill impairment testing carefully and to disclose information on management judgment and the uncertainties associated with estimates. The FIN-FSA suggests that the scale of reasonably possible changes in the key assumptions used in half-year report impairment testing will be larger than usual. The FIN-FSA reminds companies that when a reasonably possible change in a key assumption could cause the carrying amount of a cash-generating unit to exceed its recoverable amount, the disclosures should include all information in accordance with IAS 36.134 (f) (i)–(iii). The FIN-FSA urges companies to ensure that sensitivity analyses conform with the standards also when they disclose so-called voluntary sensitivity analysis data.

Issues highlighted by both the May 2020 ESMA Statement and the June 2020 SEC Guidance

 The May 2020 ESMA Statement focuses on guiding issuers in their financial reporting, whereas the June 2020 SEC Guidance additionally sets forth the SEC’s views regarding COVID-19 related effects on the issuers’ operations more broadly. However, both ESMA and the SEC emphasise the importance of providing timely and adequate information on the effects of the COVID-19 pandemic to investors.

Both the May 2020 ESMA Statement and the June 2020 SEC Guidance

  • stress the vital role of audit committees in overseeing financial reporting;
  • remind issuers that they should disclose recently emerged financial risks relating to, for example, any changes in financing arrangements and the risk of not meeting debt covenants;
  • include guidance regarding the issuers’ ability to continue as a going concern that may be affected by the uncertainties caused by COVID-19;
  • recommend issuers to provide information on COVID-19 related impacts on their operations, liquidity position, cash flow, and financial condition; and
  • recommend issuers to disclose information on the estimates and judgments made in order to facilitate investors’ understanding.

Borenius’ capital markets lawyers are available to assist in addressing any questions you may have regarding this legal alert. As a leading Finnish capital markets practice, we strongly benefit from our presence in London and New York, which enables us to have constant dialogue with the leading City and Wall St. experts.


[1] Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse

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