Clarity in corporate reporting – July 2024 monthly newsletter

Read our updated Clarity publication to respond to a rapidly changing environment

More guidance has been issued on the recently introduced requirement for public companies to include a consolidated entity disclosure statement (CEDS) in their financial reports.

A media release from Dr Andrew Leigh, Assistant Minister for Competition, Charities and Treasury Assistant Minister for Employment explains the Government’s expectations that:

• The CEDS must disclose all subsidiaries “regardless of size or materiality”
• The reporting and auditing requirements for the CEDS “are purposefully intended to apply a higher standard than for the listing of material entities in a company’s financial statements”
• Auditors are expected to provide their view “without regard to materiality”
• The CEDS is a separate part of a company’s financial report (meaning it cannot be combined with the subsidiary note in the financial statements)
• Tax residency can be determined in accordance with the Commissioner of Taxation’s existing public guidance, and where this is applied in good faith, entities may declare the residency is true and correct for the purposes of the CEDS.

ASIC also released an Information Sheet on its expectations in respect of the CEDS, reinforcing the expectations in the Minister’s media release and further explaining that:

• The CEDS is a separate statement and cannot be combined with the note on controlled entities required by accounting standards
• The CEDS of an investment entity does not need to include subsidiaries that are not consolidated in the financial statements because of the investment entity exemption in AASB 10 Consolidated Financial Statements
• Tax residency is a principal determined under the domestic tax rules of a country and is relevant when considering how business income is taxed.  The ATO’s online guidance assists in assessing whether or not an entity is tax resident in Australia
• “True and correct” is a higher reporting requirement than under a true and fair view or fair presentation framework for directors and executives
• The CEDS must list all entities even if they are newly acquired ‘shelf’ companies, dormant or would otherwise be excluded from the company’s process to prepare consolidated financial statements due to materiality
• The audit work on the CEDS is to obtain reasonable assurance that the CEDS and the director’s opinion in the directors’ declaration on whether the CEDS is true and correct are not misstated.

The Auditing and Assurance Standards Board (AUASB) also discussed possible guidance at a meeting held on 10 July 2024. The AUASB will continue discussions at a future meeting.

Public companies currently preparing their CEDS for June 2024 and later periods should take these expectations into account.

In response to these developments, we’ve updated our Clarity publication New consolidated entity disclosure statement. We have included new frequently asked questions and enhanced our illustrative CEDS to provide more guidance.

We’ve also released a CEDS checklist that entities can use to ensure compliance with the new requirements.

More information:

• Clarity publication New consolidated entity disclosure statement
• The Hon Dr Andrew Leigh MP media release A fairer and more transparent tax system
• ASIC Information Sheet 284 Public companies to include a consolidated entity disclosure statement in their annual financial reports.

Understand the outcomes from the AASB’s late June meeting

At its meeting held on 26 June 2024, the AASB continued deliberations of its forthcoming Australian Sustainability Reporting Standards (ASRSs), furthering its objectives of making a mandatory climate-related disclosure standard that is closely aligned with ISSB standards and introducing a voluntary ASRS 1 dealing with broader sustainability reporting topics. 

Following a similar approach as at its earlier June meeting, the board’s decisions resulted in alignment between the proposed ASRS 2 Climate-related Disclosures and IFRS S2 Climate-related Disclosures on the topics discussed.

Key decisions include:

• Climate-related scenario analysis – to remove Australian-specific requirements and not introduce any mandatory scenarios into ASRS 2.  This decision followed the introduction of proposed legislative amendments into the Senate during the winter sitting that would mandate disclosure of a high (> 2.5°C) and low (1.5°C) global warming scenarios through requirements in the Corporations Act 2001 (rather than the ASRSs). Entities could choose to adopt additional scenarios if desired
• Cross-industry remuneration metrics – to align with IFRS S2 and provide no further guidance or cross references to AASB 124 Related Party Disclosures. This removes the original proposals that would reference the definition of key management personnel and compensation in AASB 124 and does not follow staff suggestions to provide more flexibility in how remuneration linkages were disclosed. This means entities will be required to disclose the percentage of executive management remuneration that is linked to climate-related considerations in line with the IFRS S2 requirement
• Financed emissions – to align with IFRS S2 and require entities participating in financial activities of asset management, commercial banking or insurance to provide additional and specific financed emission disclosures. This removes the exposure draft proposals that these entities ‘consider the applicability’ of the disclosures and instead makes them mandatory (the disclosure of financed emissions will only be mandatory from the second year of compliance)
• Carbon credits – to adopt the IFRS S2 definition of “carbon credits”, thereby excluding non-Kyoto credits (which are not uniquely serialised) arising under the Australian Carbon Credit Unit Scheme, which were originally proposed by the exposure draft to meet the definition
• Scope 3 greenhouse gas emissions – to remove Australian-specific guidance that would permit an entity to measure and disclose scope 3 emissions using data from the immediately preceding financial year, as this was seen as more stringent than IFRS S2 (which requires entities to use the ‘most recent data available’ without undue cost or effort) This change will allow flexibility for entities to use information from earlier than immediately preceding period and from entities in its value chain with differing reporting periods
• Superannuation entities – to not include guidance on which entities will be required to comply with ASRS 2 (leaving the reporting mandate to the legislation) or elaborate on the primary users of superannuation entity financial reports (e.g. current and potential members, employee sponsors and regulators). The staff proposed providing cross-references in the basis of conclusions to AASB 1056 Superannuation Entities on these matters. Guidance may be made available through education material or other means.

At the end of the discussions, staff noted that all substantive matters on ASRS 2 had been completed and that the final standard would likely align with IFRS S2 – except for the exclusion of industry-based guidance and references to the SASB Standards.

In addition, the board was given an update on the possible form of the mandatory ASRS 2, which is being considered by a subcommittee of the board. Preliminary views propose an appendix containing extracts from IFRS S1 that are needed to activate the mandatory application of ASRS 2. A further appendix or section may explain what entities need to do to be compliant with IFRS S2.  Entities that wish to be compliant with IFRS Sustainability Disclosure Standards would also need to adopt the voluntary ASRS 1 (which is expected to be compliant with IFRS S1).

The AASB has set additional meeting dates on 19 and 22 July 2024, and planning a further meeting in August 2024, to continue discussions. 

More information: AASB Action Alert 232 (26 June 2024 meeting).

Appreciate the Government’s overall strategy toward net zero

Treasury’s Sustainable Finance Roadmap report sets out the Federal Government’s vision to implement key sustainable finance reforms and related measures.

The report discusses three key ”pillars”:

• Pillar 1: Improve transparency on climate and sustainability, including implementing climate-related financial disclosures, supporting credible net zero transition planning, and developing a sustainable finance taxonomy and sustainable investment product labels
• Pillar 2: Financial system capabilities, including supervision and enforcement, systemic financial risks, data and analytical challenges and regulatory frameworks
• Pillar 3: Australian Government leadership and engagement, including the issue of Australian sovereign green bonds and international engagement.

Corporate reporting highlights include:

• A commitment to implement mandatory climate-related financial disclosures
• Introducing climate disclosure requirements for Commonwealth entities, aligned with those applying in the private sector
• Developing best-practice guidance for disclosure of corporate transition plans by the end of 2025
• Exploring options on sustainability-related data challenges, including the estimate and use of scope 3 emissions and data to inform assessments of physical and transition-related climate risks
• Supporting sustainable finance as a key strategic priority for ASIC, including greenwashing surveillance and enforcement
• Consultation on the proposed consolidation of the financial reporting bodies (AASB, Auditing and Assurance Standards Board and Financial Reporting Council).

Mandatory sustainability reporting clearly forms a key part of the Federal Government’s overall response to its net zero commitment.

More information:

• Treasury report Sustainable Finance Roadmap
• Treasurer’s media release A Sustainable Finance Roadmap to unlock more private capital
• Treasurer’s speech Paving a path to prosperity in the new net zero economy.

New remuneration report checklists available, joining our other resources for June 2024 reporting

We’ve released the following new checklists:

• Listed entity remuneration report checklist. This checklist replicates the remuneration report checklist included in our Tier 1 checklist, adding frequently asked questions and simplifying wording. Either version of the checklist can be used for 30 June 2024 reports
• Registrable superannuation entity (RSE) remuneration report checklist. This checklist outlines the requirements for remuneration reports by RSEs, which will be included in annual reports of RSEs prepared under Chapter 2M of the Corporations Act 2001.

These checklists join our existing resources for June 2024 reporting, including our model financial statements, Clarity publications on particular topics and archive of Clarity newsletters.

Insurers need to change current and deferred tax accounting in June 2024 financial reports

During the last week of June, the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 passed both houses of Parliament. The Bill subsequently received Royal Assent on 28 June 2024 and became law.

The Bill contains a measure to align the tax treatment for insurers with AASB 17 Insurance Contracts, which is effective for income years beginning on 1 January 2023 (i.e. the same date as mandatory application of AASB 17).

Entities impacted by this change will need to recognise an adjustment in their current and deferred tax accounting to reflect the substantive enactment of the changed basis of determining their tax liabilities.

(The Bill also enacts the $20,000 instant asset write-off and energy incentive for small business entities for the 2023-2024 financial year and these should also be considered enacted where relevant.)

Government recasts payment times reporting scheme

Parliament has passed legislation to overhaul the reporting obligations under the Payment Times Reporting Act 2020 (Act). The legislation implements the Federal Government’s response to a statutory review of the Act.

The payment times reporting scheme was introduced to improve payment outcomes to assist Australian small business. In-scope entities with more than $100 million in revenue (previously income) are required to report information to the Payment Times Reporting Regulator about their payment practices (e.g. the proportion of payments made to small entities and the timeframes for payment). Reports are made each six months.

Key changes include:

• Consolidation – the reporting entity will be defined by reference to accounting standards (AASB 10 Consolidated Financial Statements), so only the controlling entity in a consolidated group provides a single report for that group (subsidiary reports would be permitted in some circumstances)
• Determining revenue – the threshold to report under the scheme will be $100 million of consolidated revenue determined in accordance with accounting standards (previously linked to income under tax law).  Voluntary reporting is also available in some circumstances
• Slow and fast payers – in certain cases, “slow payers” will be required to publish on their website and other documents that they are a slow small business payer. In addition, to encourage entities to pay small businesses more promptly, amendments were made in the Senate to also introduce the concept of a “fast small business payer”, a list of which will be included on the regulator’s website.

The changes also include administrative and regulatory changes and come into effect based on a transition day of 1 July 2024. Circumstances of each entity determine when an in-scope entity is required to report under the new requirements. Transitional arrangements would provide an automatic extension of time such that first payment times reports will not be required until 1 July 2025 at the earliest.

Entities exceeding the revenue thresholds should ensure they understand the changes and prepare to report under the new rules over the coming months.