Clarity in corporate reporting – April 2024 monthly newsletter

Understand the next step in Australia’s introduction of mandatory climate-related financial disclosures, including a deferred start date

Background

During the last sitting week of the recent session of Parliament, the Federal Government introduced a Bill that seeks to legislate the requirements for mandatory climate-related financial disclosures.

The proposed legislation broadly follows the exposure draft legislation released by Treasury in January 2024 but does have some important differences.

What has changed?

Some of the key changes from the exposure draft legislation are:

• Deferred start date. The start date for mandatory reporting is linked to the passage of the legislation, but will be no earlier than financial years beginning on or after 1 January 2025. This is at least six months later than originally proposed. Partially in response to this development, the AASB is to consider a staff recommendation at its April 2024 meeting to defer the planned issue of Australian Sustainability Reporting Standards from July 2024 to November 2024
• Scope clarifications. The legislation now explicitly states that only entities that have a financial reporting obligation under the Corporations Act 2001 can be captured by the sustainability reporting requirements. This means that entities that are not required to report under that Act cannot be captured (which might include charities reporting under the Australian Charities and Not-for-Profits Commission Act 2012, some entities reporting under the National Greenhouse and Energy Reporting Act 2007 and entities eligible for relief from financial reporting under Corporations Instruments)
• Clarification of the overriding assets test. The Bill explicitly restricts the $5 billion gross assets test to registered schemes, registrable superannuation entities and retail CCIVs. Furthermore, transitional provisions prevent these entities from being included in Group 1 so they can only be included in Group 2 or Group 3
• Phase-in of assurance requirements. The legislation is designed in such a way that the phase-in of assurance requirements is at the discretion of the AUASB in relation to financial years commencing on or before 30 June 2030. The AUASB has also released a Consultation Paper seeking feedback on a possible phase-in of assurance requirements. For financial years commencing on or after 1 July 2030, the sustainability report is required to be audited. In addition, the auditor is now required to form an opinion as to whether the entity has kept sustainability records sufficient to enable the sustainability report to be prepared and audited
• Directors’ declaration on sustainability reports. A modified form of the directors’ declaration will apply for the first three years, whereby the directors will declare “the entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with” the Corporations Act 2001, rather than “the substantive provisions of the sustainability report are in accordance with” the Act
• Deferral of matters to the AASB. A number of definitions (such as Scope 1, 2 and 3 greenhouse gas emissions) are now linked to sustainability standards, rather than being defined in legislation. However, the legislation retains the ability for Group 3 entities to comply in a limited way where they do not have any material financial risks or opportunities relating to climate
• Broadened modified liability. The proposed modified liability arrangements would apply for the first three years and would cover statements related to transition plans (in addition to Scope 3 emissions and scenario analysis).  In addition, modified liability is also extended to cover all forward-looking statements related to climate made for the purpose of complying with sustainability standards for financial years commencing during the first 12 months after the start date (effectively for Group 1 entities). Modified liability is also extended to statements made in the auditor’s report.

The legislation needs to be debated and passed by the House of Representatives and Senate, and receive Royal Assent, before it becomes law. The passage of the legislation will depend on government priorities and scheduling of legislation for debate across both chambers. The Treasurer's media release announcing the introduction of the legislation focuses on a start date of 1 January 2025, which implies the legislation would be passed by the end of 2024.

For more information, see our Clarity publication Mandatory climate-related financial disclosures introduced into Parliament.

More information:

• Clarity publication Mandatory climate-related financial disclosures introduced into Parliament
• Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024
• Treasurer’s media release
• Clarity publication Treasury’s final consultation on climate-related financial disclosures (for details of the exposure draft proposals).

Public companies need to act quickly to collate and verify the information needed to comply with the new requirements at June 2024

As foreshadowed in our February 2024 newsletter, the Federal Government has made legislative changes to the Corporations Act 2001 to require all public companies (listed and unlisted) to include a new “consolidated entity disclosure statement” in financial reports. The changes are part of broader multinational tax reforms and are effective for annual reporting periods beginning on or after 1 July 2023 – and so will apply for the first time at 30 June 2024.

The new statement will be subject to audit and will include details of all consolidated entities as at the end of the financial year, including names, ownership interests, place of incorporation and tax residency. However, where consolidated financial statements are not required to be prepared, the statement will only require a statement to that effect (i.e. no detail of subsidiaries would be provided).

With a short timeframe to initial compliance, public companies should immediately put governance, resources and systems in place to collate and support information disclosed. There are also a number of interpretative matters arising from the requirements.

Our Clarity publication New consolidated entity disclosure statement provides more information about the new requirements, how clients can prepare for compliance, and a series of frequently asked questions about the new statement.

Download the publication to learn more.

Use the June 2024 version of our Tier 1 models and reporting considerations publication to prepare for the upcoming reporting season

We’ve released the June 2024 edition of our Tier 1 models and reporting considerations publication.

This publication assists entities with public accountability and those choosing to prepare Tier 1 financial statements with an illustrative guide when developing their own disclosures for the June 2024 reporting season.

The publication also provides an easy-to-read and focused summary of key considerations for the June 2024 reporting season, including our popular ‘What’s new in corporate reporting’ analysis.

We’ve also streamlined the introductory section of the publication to make it easier to navigate and more succinct, and included an illustrative example of the new consolidated entity disclosure statement.

Download the publication to learn more.

IASB proposes significant changes to business combination disclosures and impairment

The IASB has published IASB/ED/2024/1 Business Combinations – Disclosures, Goodwill and Impairment which seeks to implement important changes to business combination disclosures and impairment.

In summary the proposals would:

• Introduce new disclosure requirements for business combinations to allow users to make a better assessment of the success of a business combination, including the benefits expected from the business combination and, for ‘strategic business combinations’, the extent to which those benefits are being obtained in periods after the combination
• Amend impairment testing requirements to change the allocation of goodwill to cash-generating units and revise the calculation of value in use, e.g. to remove the prohibition on including future cash flows arising from future restructurings or improving or enhancing an asset’s performance and allow post-tax discount rates.

The proposals are open for comment until 15 July 2024.

For more information, see iGAAP in Focus IASB proposes amendments to improve reporting on acquisitions.

IASB finalises new standard on presentation and disclosure

On 9 April 2024, the IASB issued IFRS 18 Presentation and Disclosure in Financial Statements, which replaces IAS 1 Presentation of Financial Statements for annual reporting periods beginning on or after 1 January 2027. The AASB is expected to make an equivalent standard in due course.

IFRS 18 seeks to introduce enhanced requirements for the presentation of financial statements, including:

• In the statement of profit or loss, requiring new categories (operating, investing and financing) and subtotals ('operating profit' and ‘profit before financing and income taxes’)
• Requiring new disclosures about management-defined performance measures (MPMs), limited to subtotals of income and expenses and requiring:
  • A reconciliation of the MPM to an IFRS-defined subtotal
  • An explanation of why the MPM is reported
  • An explanation of how the MPM is calculated
  • An explanation of any changes to the MPM
• Including enhanced guidance on the grouping of information (aggregation and disaggregation), including guidance on whether information should be presented in the primary financial statements or disclosed in the notes, and disclosures about items labelled as ‘other’.
  

For more information, see IAS Plus article IASB issues new standard on presentation and disclosures in financial statements.

Fifth edition of ASX Corporate Governance Council Principles and Recommendations proposed

The ASX Corporate Governance Council has released a consultation draft of a proposed fifth edition of the Corporate Governance Principles and Recommendations.

The Principles and Recommendations are used by ASX listed entities when preparing their annual Corporate Governance Statement under ASX Listing Rule 4.10.3. The Principles and Recommendations are applied on a ‘follow or explain’ basis, i.e. if a recommendation is not followed, the entity must state the reasons for not following the recommendation and what (if any) alternative governance practices it has adopted in lieu of the recommendation.

The exposure draft proposes to retain the eight ‘core’ corporate governance principles, but would change many recommendations across those core principles. In doing so, recommendations would be removed or limited in scope where they duplicate regulations or other requirements.

There are new and revised recommendations, including gender diversity, disclosure of the outcomes of code of conduct breaches and performance-based remuneration clawbacks, and information about the audit tenure review process. Changes to the layout, language and ordering of the document is also proposed.

The closing date for submissions is 6 May 2024.  The Council envisages finalising the new Principles and Recommendations early in calendar 2025 with a likely start date of 1 July 2025.

More information can be found on the ASX website.

ASIC extends and amends parent entity financial statements and auditor independence instruments

ASIC has issued an instrument to extend the application of two existing Corporations Instruments, which were due to expire during April 2024, for a further five year period:

• ASIC Corporations (Parent Entity Financial Statements) Instrument 2021/195, which allows a parent entity, which is required to include consolidated financial statements in its financial report to also include its single entity financial statements in that report. This instrument is now effective until 1 April 2029
• ASIC Corporations (Auditor Independence) Instrument 2021/75, which provides the lead auditor for an audit relief from the requirement to disclose a contravention of paragraph R510.4(c) of APES 110 Code of Ethics for Professional Accountants (including Independence Standards). This instrument is now effective until 30 April 2029.

The Corporations Instrument also extends the relief in the two instruments to apply to registrable superannuation entities in addition to companies, registered managed investment schemes and other disclosing entities.

For more information see ASIC news ASIC extends and amends parent entity financial statement and auditor independence instruments.

Pillar Two draft legislation released

In March 2024, Treasury released two consultations on proposed legislation and subordinate legislation to implement the OECD Pillar Two rules in Australia.

The proposed income inclusion rule (IIR) and domestic minimum tax (DMT) will commence for income years starting on or after 1 January 2024, whilst the undertaxed profits rule (UTPR) will commence for income years starting on or after 1 January 2025.

For more information about the legislation, see Tax Insights Australia introduces Pillar Two Exposure Draft legislation. For more information about the related financial reporting considerations, see Clarity publication Responding to Pillar Two.

Sustainability reporting developments

The following global developments may impact Australian entities in some instances:

• SEC climate rule. In March 2024, the United States Securities and Exchange Commission (SEC) released final rules to implement mandatory climate-related risk disclosures for SEC registrants. The rules would require disclosures in the financial statements (e.g. impacts due to severe weather events and other natural conditions and a roll-forward of carbon offsets and renewable energy credits) and outside of the financial statements (including Scope 1 and Scope 2 GHG emissions – but not Scope 3 GHG emissions – governance and oversight of material climate-related risks, material impacts of climate risks, risk management processes and material climate targets and goals). The new rules will be phased in from 2025 to 2033. For more information, see iGAAP in Focus SEC adopts rule that requires climate-related disclosures
• Greenhouse Gas Protocol Scope 3 emissions. The Greenhouse Gas Protocol secretariat has released a draft summary report providing a detailed overview of stakeholder feedback from a survey it conducted on its Scope 3 Standard. In addition, the secretariat has released a proposal summary giving an overview of proposal submissions related to the Scope 3 Standard. These reports will help inform the process of updating the Scope 3 Standard
• EFRAG proposes ESRS for small and medium-sized entities (SMEs). EFRAG has released two exposure drafts on European Sustainability Reporting Standards (ESRS) for listed SMEs and a voluntary reporting standard for non listed SMEs. The consultation is open until 21 May 2024. For more information, see iGAAP in Focus EFRAG proposes ESRS for listed small- and medium-sized enterprises.