Clarity in corporate reporting – August-September 2024 monthly newsletter

Understand the likely final form of the climate and broader sustainability standards

At its meetings held on 19 July 2024 and 26 August 2024, the AASB substantively completed its sustainability reporting redeliberations and is expected to soon be ready to finalise the first Australian Sustainability Reporting Standards (ASRSs).

What Standards will be issued?

The initial ASRSs will be:

• AASB S1 General Requirements for Disclosure of Sustainability-related Financial Information (voluntary)
• AASB S2 Climate-related Disclosures (mandatory).

Are the ASRSs aligned with IFRS Sustainability Disclosure Standards?

The final form of the ASRSs is closely aligned with the equivalent IFRS Sustainability Disclosure Standards. Many of the proposals for departure from IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures were overturned in response to overwhelming constituent feedback that Australia should not depart from the “baseline” of IFRS S1 and IFRS S2.

However, differences remain between ASRSs and IFRS S1 and IFRS S2, including:

• Applicability – AASB S1 will be a voluntary standard, whereas AASB S2 will be a mandatory standard. To give effect to this, AASB S1 has Australian-specific provisions explaining the standard is voluntary even though it uses language such as “shall” and “required”. In addition, relevant material from AASB S1 has been reproduced (using the same paragraph numbers) in a mandatory appendix to AASB S2 to make it operative as a mandatory standard
• Industry-based metrics – AASB S2 will exclude references to industry-based disclosure topics in the SASB Standards and Industry-based Guidance on Implementing IFRS S2 and does not require the disclosure of industry-based metrics determined after considering those disclosure topics. The AASB is undertaking a separate project to consider industry-based disclosures
• Sector neutrality – Limited additional provisions in both ASRSs will cater for not-for-profit and public sector entities. The AASB has agreed to undertake a separate project in this area once the ASRSs are issued
• Statement of compliance – Each of AASB S1 and AASB S2 will require a statement of compliance with each specific Standard, rather than “Australian Sustainability Reporting Standards” or “IFRS Sustainability Disclosure Standards”. Accordingly, an entity complying only with the mandatory AASB S2 would make a statement of compliance with AASB S2
• Transitional provisions – The ASRSs will have fewer transitional provisions (e.g. entities will need to publish their initial sustainability reports at the same time as their financial reports, whereas IFRS Sustainability Disclosure Standards permit initial sustainability reports to be published up to nine months after the end of the reporting period)
• Document versions – Due to Australian legislative requirements, references to external documents such as the Global Industry Classification Standard must specify the version of those documents to apply (whereas IFRS Sustainability Disclosure Standards generally refer to the “latest” version). This referencing is contained within AASB S2, obviating the need for a separate “service standard” as originally proposed in AASB ED SR1.

Each ASRS will contain an appendix outlining IFRS Sustainability Disclosure Standards deleted text, and additional or changed requirements will be presented as “Aus” paragraphs.

The working drafts of AASB S1 and AASB S2 considered at the AASB’s August meeting provide more information on the final form of the Standards. The AASB agreed amendments – which are not substantive – to these Standards at the August meeting, so the final form of AASB S1 and AASB S2 will be slightly different. Nonetheless, the working drafts provide a useful reference for entities planning for the imminent introduction of mandatory sustainability reporting requirements in Australia.

When will the Standards be made?

The ability of the AASB to “make” AASB S2 as a mandatory sustainability standard under the Corporations Act 2001 is dependent on passage of enabling legislation (as the Australian Securities and Investments Commission Act 2001 currently only permits the AASB to “formulate” voluntary sustainability standards).  

What is the progress of the enabling legislation?

The enabling legislation was passed by the House of Representatives on 6 June 2024, and subsequently by the Senate on 22 August 2024. However, because the Senate amended the bill (to mandate high (> 2.5°C) and low (1.5°C) global warming scenario analyses), it will need to return to the House of Representatives (which next sits on 9-19 September 2024) for the amendments to be confirmed. As the amendments were introduced by the government, it appears they will be confirmed, after which Royal Assent will be sought and the Bill will then become law.

The enabling legislation also implements the mandatory sustainability reporting requirements in the Corporations Act 2001 and will solidify the mandatory start of sustainability reporting (for Group 1 entities) of annual reporting periods beginning on or after 1 January 2025.

More information:

• AASB Action Alert 233 (July 2024 meeting)
• AASB Action Alert 234 (August 2024 meeting)
• Enabling legislation Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024
• Clarity publication Mandatory climate-related financial disclosures introduced into Parliament.

Understand new proposals for illustrative examples explaining how climate impacts financial statements

Responding to investor and broader calls for more guidance on the impacts of climate-related risks on financial statements, the IASB has issued an exposure draft that proposes eight illustrative examples providing guidance on how IFRS® Accounting Standards are applied in response to climate-related and other uncertainties in financial statements. (The AASB has released an equivalent exposure draft).

The exposure draft proposes including non-authoritative illustrative examples accompanying IFRS Accounting Standards, rather than including them in the authoritative Standards themselves, or publishing them as educational materials. Accordingly, the IASB is not proposing to amend IFRS Accounting Standards, but illustrate how those standards should be applied to common climate-related scenarios. However, the IASB will consider feedback on the exposure draft to determine whether amendments to IFRS Accounting Standards are required.

The examples cover the following situations:

• Materiality judgement leading to additional disclosures (IAS 1/IFRS 18) involving a climate-related transition plan in a capital-intensive industry
• Material judgement not leading to additional disclosures (IAS 1/IFRS 18) involving a service provider with limited exposure to climate-related transition risks and low greenhouse gas emissions
• Disclosure of assumptions: specific requirements (IAS 36) involving an entity with high greenhouse gas emissions subject to specific regulation
• Disclosure of assumptions: general requirements (IAS 1/IAS 8) involving a capital-intensive industry with an impairment indicator
• Disclosure of assumptions: additional disclosures (IAS 1/ IFRS 18) where government regulation will reduce future profits and ability to recover tax losses
• Disclosure about credit risk (IFRS 7) for a financial institution making loans to agricultural and corporate real estate customers exposed to climate-related risks
• Disclosure about decommissioning and restoration provisions (IAS 37) by a petrochemical manufacturer
• Disclosure of disaggregated information (IFRS 18) for long-life property, plant and equipment with both high and lower greenhouse gas emissions.

The proposed examples may inform an entity’s decision making in relation to the disclosure of climate-related risks in periods before any illustrative examples are finalised. If finalised as non-authoritative examples, the changes will have no effective date and so will be relevant from the date of finalisation.

The issue of the exposure draft follows the finalisation of an IFRIC agenda decision earlier in the year, which explores how IFRS Accounting Standards should be applied in the context of an entity’s commitment to reduce greenhouse gas emissions. 

More information:

• IASB/ED/2024/6 Climate-related and Other Uncertainties in the Financial Statements (Proposed illustrative examples)
• IASB media release IASB proposes illustrative examples to improve reporting of climate-related and other uncertainties in financial statements
• AASB ED 331 Climate-related and Other Uncertainties in the Financial Statements (Proposed illustrative examples)
• IFRIC agenda decision Climate-related Commitments (IAS 37) (April 2024)
• iGAAP in Focus IASB proposes illustrative examples for climate-related and other uncertainties in the financial statements.

AUASB bulletin on the consolidated entity disclosure statement

The Auditing and Assurance Standards Board (AUASB) has released a Bulletin providing guidance on the audit implications of the consolidated entity disclosure statement required in the financial reports of public companies reporting under the Corporations Act 2001.

The Bulletin includes example audit procedures that auditors might apply. These procedures may inform public companies’ preparations and planning for the consolidated entity disclosure statement in future periods (e.g. by assisting in developing systems, processes and controls around the statement).

New IFRIC agenda decision on segment reporting

IFRIC has released a new agenda decision dealing with the disclosure of revenues and expenses for reportable segments under IFRS 8 (AASB 8) Operating Segments.

The agenda decision notes:

• IFRS 8 requires the disclosure of specific amounts (e.g. revenue, interest revenue and expense, depreciation and amortisation) for each reportable segment when those amounts are included in segment profit or loss reviewed by the chief operating decision maker (CODM) – even if not separately provided or reviewed by the CODM – or if those amounts are regularly provided to the CODM – even if not included in segment profit or loss
• When disclosing material items of income and expense for each reportable segment, materiality is assessed in the context of the financial statements as a whole, aggregation guidance and guidance on separate disclosure in IAS 1 Presentation of Financial Statements is considered and materiality is assessed based on qualitative and quantitative factors.

Entities reporting segment information should consider whether the agenda decision impacts their segment reporting. Any changes arising from the agenda decision should be implemented on a timely basis.