CSSF have announced enforcement priorities for its upcoming transparency supervision campaign

What issuers need to know when preparing their 2023 annual financial reports.

The Luxembourg financial supervisory authority CSSF published a press release on 8 January 2024 drawing market participants' attention to the CSSF's upcoming transparency supervision campaign as regards issuers' reporting and disclosure obligations in accordance with the law of 11 January 2008 on transparency requirements for issuers whose securities have been admitted to trading on a regulated market (the “Luxembourg Transparency Law”) with respect to the 2023 annual financial reports.

As in previous years, this means that issuers preparing their financial statements in accordance with IFRS under article 3 of the Luxembourg Transparency Law and/or specific non-financial information in accordance with the Luxembourg law of 23 July 2016 on disclosure of non-financial and diversity information for certain large undertakings and groups (the "Luxembourg Non-financial Information Law"), as well as these issuers' auditors, must sufficiently address certain topics and issues in such financial and non-financial information as further set out in the press release.

Common enforcement priorities

In addition to the more specific topics discussed in the press release the CSSF informs issuers that it will be assessing the 2023 annual financial reports in accordance with ESMA's European common enforcement priorities (the “ECEPs”) for the 2023 annual reports. 

The CSSF therefore encourages issuers to consider the ECEPs in addition to the other enforcement priorities discussed in the press release.

Additional specific enforcement priorities

As regards the more particular enforcement topics, it is important to distinguish between subjects which need to be addressed in issuers' IFRS financial statements and topics that are to be included in the non-financial information to be disclosed pursuant to the Luxembourg Non-Financial Information Law by certain large issuers.

1. IFRS financial statements

With respect to the IFRS financial statements issuers mainly need to ensure that (1) the impacts of climate-related risks are appropriately described, (2) interest rate risks affecting the issuer are sufficiently covered and that (3) the necessary fair-value measurement description and disclosures are included in the reporting.

With respect to the required description of the impact of climate-related matters the CSSF invites issuers to pay attention to ESMA's recent report on the topic which illustrates best practices in this respect. The report can be found here on the CSSF's website.

Regarding the topic of increases in interest rates and the impact on re-financing the CSSF emphasizes the importance of a sensitivity analysis which shows how profit or loss and equity would have been affected by reasonably possible changes in interest rates. Furthermore, if the macroeconomic environment requires changes in the methods and assumptions that are used for such sensitivity analysis these changes should be disclosed together with the reasons for such changes.

Additionally, the CSSF takes the view that the effects of high inflation and volatile interest rates can also impact the ability of issuers to reach specific covenant requirements included in long-term loan arrangements the issuers have entered into. Generally, higher interest rates could lead to decreases in the fair value of investment properties and also have a negative impact on the issuer's equity.

Consequently, the CSSF stresses that issuers should consider providing disclosures about such covenants and the impact of any potential breaches caused by the high inflation and volatility in interest rates. Likewise, should such effects lead to the re-negotiation of financing structures adequate disclosure must be provided, in particular with respect to the main changes in the terms of the affected debt agreements.

With respect to fair-value measurement and disclosures the CSSF expects that the current macroeconomic conditions such as high interest rates, yields and vacancy expectations are duly reflected in the issuers' fair value measurement and in the related disclosures.

2. Non-financial statements

Regarding non-financial information for the financial year 2023 the focus of the CSSF's transparency supervisory campaign will mainly relate to (1) the information to be disclosed under article 8 of Regulation (EU) 2020/852 of 18 June 2020 on the establishment of a framework to facilitate sustainable investment (the "Taxonomy Regulation") and (2) the impact of climate-related matters.

Additionally, the CSSF draws the issuers' particular attention to the treatment of capital and operating expenditure, which calculation should strictly follow the rules set out in the Taxonomy Regulation. Otherwise, if the calculation does not strictly follow the regulatory guidelines, it will be considered as an alternative performance measure (APM) and have to be treated in line with the ESMA APM Guidelines.

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