Clarity in corporate reporting – May 2024 monthly newsletter

Plan for implementation of the Australian Sustainability Reporting Standards (ASRSs) considering the AASB’s latest plans

As noted in our April 2024 newsletter, legislation has been introduced into parliament to implement mandatory climate-related financial disclosures in Australia, to be operative no earlier than for financial years beginning on or after 1 January 2025 – six months later than originally signalled by the government.

In response to these developments, the AASB considered a revised timeline for issue of the ASRSs at its April 2024 and May 2024 meetings (the latter being an additional meeting scheduled to deal with ASRSs). After setting an “aspirational” deadline of the end of August 2024 for finalisation of the ASRSs at its April meeting, at its May 2024 meeting, the AASB received an initial quantitative summary of feedback received, discussed the possibility of additional meetings in July 2024 and August 2024, and considered the way forward to finalisation.

As part of this process, the AASB acknowledged underlying feedback that there was broad support for alignment of ASRSs with IFRS Sustainability Disclosure Standards. To this end, the staff raised the possibility of the AASB issuing voluntary sustainability standards that were closely aligned with IFRS S1, and mandatory climate-related financial disclosure standards. Whilst no decisions were made, there was some support from board members to explore this approach.

The ability of the AASB to make mandatory ASRSs depends on the passage of the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024, which is currently before the House of Representatives. The Senate Economics Legislation Committee considered the provisions of the Bill and issued a report on the Bill on 3 May 2024. A majority of the committee recommend the Bill be passed (although a dissenting report suggests several amendments and the possibility of further consultation). In the second reading debate on the Bill in the House of Representatives on 15 May 2024, the Coalition indicated they will move amendments to the Bill and if those amendments are not passed, that the Coalition will oppose the Bill.

The AASB also considered these legislative developments at its May 2024 meeting as part of its planning for the finalisation of ASRSs and noted a “significant expectation” that the AASB should not be a roadblock in the overall process. Accordingly, the AASB will continue to develop the ASRSs based on the existing draft legislation and consider the impacts of any changes to the legislation once it is finalised before issuing the final ASRSs.

More information:

• Clarity publication Mandatory climate-related financial disclosures introduced into Parliament
• AASB Action Alert 229 (April 2024 meeting)
• AASB Action Alert 230 (May 2024 meeting)
• Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024
• Senate Economics Legislation Committee report on the Bill.

Our Corporate reporting update sessions are being held around the country and virtually during May and June 2024. We invite clients and contacts to join our corporate reporting specialists as we step forward into the new sustainability reporting landscape, and also prepare for the upcoming financial reporting cycle.

We encourage you to register for the in-person or virtual events. View dates and register here

Ensure you respond to ASIC’s expectations and surveillance activities in the upcoming corporate reporting season

ASIC has announced a modified approach to its focus areas for financial reporting and flagged an expansion of its broader financial reporting and audit surveillance program.

Approach to focus areas

In relation to focus areas, ASIC is moving away from publishing new financial reporting focus areas each six months, instead publishing “enduring focus areas for financial report reviews” and supplementing those with focus areas for the relevant period where new regulatory requirements or emerging issues arise.

The enduring focus areas – including asset values, adequacy of provisions, subsequent events and disclosures – are outlined on a dedicated web page on the ASIC website. The enduring focus areas have not materially changed from previous periods, which supports the new approach.

ASIC Commissioner Kate O’Rourke noted that ASIC expects “preparers, directors and auditors to pay particular attention to these focus areas in a collective effort to improve financial reporting and audit quality” and that ASIC will focus on areas “that require the most judgement and make the most use of estimates”.

Particular focus areas and other matters for consideration over and above the enduring focus areas for the current period include:

• Grandfathered large proprietary companies – reminding entities that this is the second year in which these entities are required to lodge financial reports with ASIC
• Registrable superannuation entities – noting that superannuation entities are required to lodge financial reports with ASIC under Chapter 2M for the first time, within three months of the end of a fund’s financial year
• Disclosure of climate-related risks – particularly the need for entities to prepare for the forthcoming mandatory climate-related financial disclosures, considering implementing governance arrangements and considering capability and data requirements. ASIC continues to encourage voluntary climate reporting until the new requirements come into force
• Consolidated entity disclosure statement – ASIC reminds public companies that this new requirement applies for the first time at 30 June 2024. For more information, see our Clarity publication New consolidated entity disclosure statement.

The areas above have been published through a combination of ASIC’s media release and their financial reporting and audit focus areas webpage.

Financial reporting and audit quality program

ASIC has also announced changes to its surveillance activities around financial reporting and auditing, including:

• Confirming that the scope of ASIC’s surveillance activities extends to grandfathered large proprietary companies and registrable superannuation entities
• Announcing a new review of auditors’ compliance with ethical and independence standards to support the overall surveillance program, including compliance with Auditing Standard ASQM 1 Quality Management for Firms that Perform Audits or Reviews of Financial Reports and Other Financial Information, or Other Assurance or Related Service Engagements.

More information:

• ASIC Media Release 24-101MR ASIC announces 30 June 2024 focus areas and expanded program to support financial reporting and audit quality
• ASIC Speech ASIC’s Financial Reporting and Audit Surveillance Program
• ASIC regulatory resources web page Financial reporting and audit focus areas
• Clarity publication ASIC releases results of first integrated surveillance program and December 2023 focus areas.

Entities making commitments to reduce or offset greenhouse gas emissions need to understand the implications of the recently finalised agenda decision on climate-related commitments

Background

At its April 2024 meeting, the IASB did not object to the finalisation of two agenda decisions of the IFRS Interpretations Committee (the Committee), one of which was focused on the recognition of provisions in respect of climate related commitments.

The climate-related agenda decision considers whether an entity’s commitment to reduce or offset its greenhouse gas (GHG) emissions creates a constructive obligation under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and if so, whether this can give rise to the recognition of a provision in relation to the commitment.

What does the agenda decision say?

The agenda decision considers a particular fact pattern and considers the following questions:

• Does the entity have a constructive obligation?

The agenda decision notes that the existence of a constructive obligation (which could be to the public at large) depends on the facts of the commitment and the circumstances that surround it (and that the conclusion could change from period to period)

• Does the constructive obligation satisfy the criteria for recognising a provision? The Committee considered provision recognition criteria:
  • The Committee first considered the nature of the past event required for a present obligation to exist, concluding that a constructive obligation to reduce or offset GHG emissions of itself does not create a present obligation. Only when the entity has emitted GHG emissions can a present obligation arise
  • Secondly, the Committee considered the probable outflow of resources criterion, noting that expenditure that creates another asset (such as property, plant, equipment, energy, product ingredients), which can be used to generate profits, does not create an outflow of resources. It is only any residual constructive obligation to buy and retire carbon credits that gives rise to an outflow
  • Finally, the Committee considered whether a reliable estimate can be made of the obligation, noting that it would be likely that such an estimate could be made.

On the basis of the above assessment, the Committee concluded that existing IFRS® Accounting Standards provide an adequate basis to address the issues raised and decided not to add a standard-setting project to the work plan.

What other standard setting activities are being undertaken in this area?

The IASB decided at its April 2024 meeting not to add any requirements relating specifically to net zero transition commitments in its provisions project. 

In our Deloitte submission on the draft agenda decision, we noted that this issue “highlights the need for connectivity between broader corporate reporting (including sustainability reporting) and information in the financial statements to, in this case, provide clarity for the broad range of interested stakeholders on whether statements made as part of a sustainability report do, or validly do not, affect the recognition and measurement of items in the financial statements”, specifically calling for an acceleration of the IASB’s broader climate and other uncertainties project.

However, whilst this broader project seeks to develop illustrative examples of how IFRS Accounting Standards are applied to report the effects of climate related and other uncertainties in financial statements, the draft staff examples considered at the April 2024 meeting do not specifically address the provisions aspects.

What are the impacts?

Entities must consider the implications of the agenda decision when preparing financial statements, subject to allowing entity’s sufficient time to consider the implications.

In essence, if an entity has made a GHG reduction or offset commitment that has sufficient specificity to create a constructive obligation, a provision may need to be recognised, but only as GHG emissions occur. However, to the extent GHG emission reductions are expected to be achieved through capital or other expenditure (e.g. changing fuel sources, installing solar cells or entering into power purchase agreements), this anticipated expenditure of itself would not give rise to a provision (unless it results in an onerous contract).

If an entity has applied a different accounting policy, it would be required to reflect a change in accounting policy in its financial statements.

Understanding the financial reporting implications of the 2024-2025 Federal Budget announced on 14 May 2024

The Federal Treasurer handed down the 2024-2025 Federal Budget on Tuesday 14 May 2024. The budget focused on two key measures: a range of measures designed to ease cost of living pressures, and the ‘Future Made in Australia Act’ incentives.

Outlined below is an overview of some of the corporate reporting considerations arising from the Budget:

• Impact of incentives – entities eligible for ‘Future Made in Australia Act’ programs such as the hydrogen production tax incentive or critical minerals production tax incentive may need to consider how to account for those incentives. This will depend on the final form of the legislation to implement these incentives, but may typically result in the incentives being accounted for as a government grant, or potentially an income tax offset. Similarly, entities receiving concessional loans under those or other programs may also need to consider whether any below-market rate loans should be accounted for as a government grant
• Immediate instant asset write-off – small businesses with aggregated annual turnover of less than $10 million will continue to be able to immediately deduct the full cost of eligible assets costing less than $20,000 where they are installed or ready for use by 30 June 2025. Such deductions will result in the recognition of a deferred tax liability in relation to any capitalised asset
• Impact on forecasts and models – models used for impairment testing, expected credit losses, deferred tax asset recoverability and others should reflect any directly impacting Budget initiatives. More broadly, the Budget forecasts may inform key assumptions and variables used in these models
• Greenwashing – the Budget announces $10 million over four years from 2024-2025 (and $1.9 million ongoing) for additional resourcing for ASIC to investigate and take enforcement action against market participants engaging in greenwashing and other sustainability-related financial misconduct. This measure will dovetail with the introduction of mandatory climate-related financial disclosures and indicates a need for strong commitment by entities to clear and supportable sustainability disclosures of all types.

More information:

• Deloitte Budget Alert
• 2024-2025 Federal Budget.

Use our latest models and checklists to help you develop your financial reports under Australian Accounting Standards – Simplified Disclosures

We’ve published our June 2024 Tier 2 model financial report.

This edition includes updates for:

• The new consolidated entity disclosure statement required to be included in the financial report of all public companies (listed and unlisted) – collating information to respond to this new requirement may be time consuming
• Illustrative material accounting policies to assist entities to respond to changing to material accounting policy information from significant accounting policies – this represents an opportunity to reduce clutter and provide more useful, entity-specific information to users
• Example Pillar Two disclosures, which are especially relevant to entities that are part of a group with more than €750 million (approximately A$1.2 billion) in revenue
• Updates for various legislative, regulatory and accounting standard developments since the previous edition, or which apply for the first time in the current year.

Changes have been highlighted throughout the document using a blue bar in the left-hand margin.

In addition, the 2023-2024 Tier 2 Simplified Disclosures checklist is available and is applicable for entities reporting at June 2024.

More information:

• June 2024 Tier 2 model financial report
• 2023-2024 Tier 2 Simplified Disclosures checklist.

IASB issues new standard on reporting by subsidiaries without public accountability

The IASB has released IFRS 19 Subsidiaries without Public Accountability: Disclosures, which introduces a reduced disclosure regime in IFRS Accounting Standards for certain subsidiaries of entities reporting under IFRS Accounting Standards. Subsidiaries applying IFRS 19 are able to make a statement of compliance with IFRS Accounting Standards (and IFRS 19).

Subsidiaries eligible to apply IFRS 19 comply with the recognition and measurement requirements of IFRS Accounting Standards, but make fewer disclosures based on the IFRS for SMEs Accounting Standard. To this end, the standard was developed in a process that ostensibly follows the approach adopted by the AASB in developing AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities. However, disclosure differences exist between IFRS 19 and AASB 1060 (e.g. IFRS 19 requires more disclosures about financial instruments, impairment and pronouncements on issue which have not yet been applied). 

Furthermore, the scope of IFRS 19 is significantly narrower than AASB 1060 (as AASB 1060 applies to all entities without public accountability that are required to comply with Australian Accounting Standards).

The AASB has considered whether, and if so, how, to introduce IFRS 19 in the Australian context. At its November 2023 meeting, the AASB considered a paper on this topic and decided to consider the issues as part of the post-implementation review of AASB 1060. However, since amendments may be needed to AASB 1060 to reflect changes to the IFRS for SMEs Accounting Standard arising from the IASB’s review of that Standard, the AASB will also consider the outcomes of that review in making a decision. Accordingly, amendments to AASB 1060 may be made, AASB 1060 replaced, or IFRS 19 issued alongside AASB 1060 in due course. The paper considered at the November 2023 meeting indicated a possible decision on the way forward being made by the end of 2025.

IFRS 19 is applicable to annual reporting periods beginning on or after 1 January 2027, but may be applied earlier.

For more information about IFRS 19, see iGAAP in Focus IASB introduces reduced disclosure framework for subsidiaries.

IASB proposes to allow ‘own use’ and hedge accounting in relation to power purchase agreements (PPAs)

On 8 May 2024, the IASB issued IASB/ED/2024/3 Contracts for Renewable Electricity, which proposes to amend IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures (and IFRS 19) to alter the treatment of certain renewable energy power purchase agreements (PPAs).

The proposals are broadly limited to contracts for renewable energy (both physical and virtual PPAs), where the source of production is nature-dependent (such as wind, solar and hydroelectricity) and the purchaser is exposed to substantially all of the volume risk (i.e. the risk the volume produced does not coincide with the purchaser’s demand) through ‘pay-as-produced’ features.

The exposure draft proposes to permit:

• The application of the ‘own-use’ requirements in IFRS 9 to eligible power purchase contracts, subject to certain considerations from contract inception and throughout its duration 
• The designation of a variable nominal volume (or quantity) of forecast sales or purchases of renewable electricity as the hedged item in a cash-flow hedging relationship with the PPA as the hedging instrument, subject to meeting certain criteria. Furthermore, the hedged item can be measured using the same volume assumptions as those used for the hedging instrument (PPA).

In addition, the exposure draft proposes including specific disclosures about eligible PPAs in IFRS 7.

The exposure draft follows an earlier IFRIC agenda decision that confirmed the treatments proposed by the current exposure draft were not permitted.

The IASB is fast-tracking the amendments, and the exposure draft is open for a shortened 90 day comment period until 7 August 2024. The exposure draft indicates that the IASB intends to issue the amendments in the fourth quarter of 2024 and asks whether it would be appropriate to set an effective date of the amendments to apply to annual reporting periods beginning on or after 1 January 2025.

For more information, see IAS Plus article IASB proposes amendments to IFRS 9 and IFRS 7 regarding power purchase agreements.

ISSB adds new research projects on nature and human capital

Following an agenda consultation process, the ISSB has announced it will commence research projects on disclosure about risks and opportunities associated with:

• Biodiversity, ecosystems and ecosystem services (BEES)
• Human capital.

Any proposals arising out of these projects will seek to build from existing initiatives, such as the SASB Standards, Climate Disclosure Standards Board (CDSB) guidance and the Task Force on Nature-related Financial Disclosures (TNFD).

In deciding on this approach at its April 2024 meeting, the ISSB decided not to add projects to its work plan that were also included in the consultation process, including projects on human rights and integration in reporting.