Clarity in financial reporting - December 2022 monthly newsletter

AASB set to make sustainability disclosure standards

Why does it matter? Creating a legal framework for Australian versions of international sustainability standards represents a significant step toward mandatory sustainability reporting in Australia.

Treasury is consulting on proposed legislative changes that will enable the AASB to make sustainability standards.

The AASB does not currently have any specific function to make sustainability standards under the Australian Securities and Investments Commission Act 2001 (which gives the AASB authority to made Australian Accounting Standards). The proposed legislation would amend that Act and give the AASB additional functions in relation to sustainability standards, including:

• Developing conceptual frameworks for the purpose of evaluating proposed sustainability standards and international sustainability standards
• The formulation of sustainability standards, which may be by issuing the text of an international sustainability standard made by the ISSB (or another body specified by the regulations)
• Participating in and contributing to the development of a single set of sustainability standards for world-wide use
• Expanding the qualification requirements for appointment to the AASB to include people that have science, sustainability or climate change knowledge or experience.

Whilst sustainability standards would be based on the ISSB's IFRS® Sustainability Disclosure Standards, the proposed legislation would permit modifications if necessary to consider the Australian legal or institutional environment. The AASB would also be required to have regard to the suitability of a proposed sustainability standard for different types of entities, and may apply different sustainability requirements to different types of entities.

Importantly, the proposed legislation would not give legal effect to any sustainability standards, but they may be applied or adopted by some other authority. This means that sustainability standards would not be enforceable until further legislative changes are made.

STOP PRESS: On 12 December 2022, Treasury released a Consultation Paper Climate-related financial disclosure, which seeks feedback on the design and implementation of standardised disclosure for climate-related financial risks and opportunities in Australia.  The paper puts forward a possible implementation date of 2024-25 financial years, to initially apply to large listed and large financial institutions.  We will provide further analysis of the Consultation Paper in our January 2023 newsletter.

In addition, the AUASB will also be given authority to make auditing and assurance standards for sustainability purposes and the Financial Reporting Council (FRC) will be given oversight of the process of developing sustainability standards.

The consultation is open for comment to 16 December 2022.

More information: Treasury consultation

Why does it matter? Entities must ensure they respond to ASIC’s expectations in financial reporting for the December 2022 reporting season.

Summary

ASIC has released its focus areas for financial reports for the December 2022 reporting season.

ASIC expects preparers and auditors to assess whether companies’ financial reports provide useful and meaningful information for investors and other users, highlighting the following areas for attention:

• Asset values – impairment of non-financial assets (including appropriate assumptions and disclosures), values of property assets, expected credit losses (ECLs) and the value of other assets (e.g. inventories, deferred tax assets)
• Provisions – adequacy of provisions for matters such as onerous contracts, make good provisions under leases, mine site restoration, financial guarantees and restructuring
• Solvency and going concern assessments
• Subsequent events
• Disclosures in the financial report and operating and financial review (OFR) – directors and preparers “should put themselves in the shoes of investors” and ensure information responds to their needs. Particular attention is drawn to matters such as the disclosure of uncertainties, current and non-current classification (including debt covenant compliance) and disclosure of significant business risks (on which ASIC has also released a separate media release).

ASIC also notes that it will not provide extended deadlines for unlisted entities for the December 2022 reporting period.

Changes from the focus areas announced for June 2022 include:

• An increased focus on the impact of current economic conditions, including inflationary impacts, increases in energy and oil prices and the impact of climate change and climate related events
• Continuing support for climate related disclosures using the Task Force on Climate-related Financial Disclosures (TCFD), now noting this will help to position companies for any future reporting under IFRS Sustainability Disclosure Standards being developed by the ISSB
• The need for cyber security risks to be disclosed in the OFR where they may have a material impact for the entity (including considering the impacts of the loss of personal data or denial of service attacks, and the possible impacts on revenue)
• Adding audit focus areas, including the need for auditors to use their knowledge of the entity’s business, risks and strategies in auditing the financial report and in reviewing the OFR, the need for documentation and consideration of ‘greenwashing’
• Noting that ASIC expects insurers to disclose the impact of AASB 17 Insurance Contracts, including the quantification of the impact
• Advising private health insurers should consider the impact of delayed procedures on deferred claims liabilities, and the need for a liability for any commitment to return premiums for savings during the pandemic.

More information: ASIC media release 22-333MR ASIC highlights focus areas for 31 December 2022 reporting, ASIC media release 22-332MR ASIC calls for greater focus on material business risk disclosure in annual reports.

Two minute update

Why does it matter? Being aware of recent developments allows a timely and informed response.
A summary of recent developments:

IASB to fast track deferred tax exemption for OECD ‘Pillar Two’
The IASB decided at its November 2022 meeting to release an exposure draft that would introduce a temporary exemption from the requirement to account for deferred taxes arising from the OECD Pillar Two model rules. The exposure draft would also require various disclosures including:

• Information about legislation enacted or substantively enacted to implement the Pillar Two model rules in jurisdictions in which the entity operates
• Whether the entity operates in jurisdictions where it expects to be taxed at less than the minimum Pillar Two rate
• The jurisdictions in which the entity’s effective tax rate for the current period is below 15%
• Whether the work it has already done in preparing to comply with the Pillar Two model rules indicates that there are jurisdictions in relation to which the entity might or might not be subject to top up tax.

The exposure draft is expected to be issued in January 2023 with a 60 day comment period (subject to approval of the Due Process Oversight Committee, which considered the shortened period at its December 2022 meeting).

The temporary exemption would be applicable from the issue of any amending standard (with disclosure required where applied), and the remaining disclosure requirements would be applicable for annual reporting periods beginning on or after 1 January 2023.

Corporations Act financial reporting requirements to apply to superannuation funds

The Federal Government has introduced Treasury Laws Amendment (2022 Measures No. 4) Bill 2022 into the Parliament. Included in the Bill are amendments to the Corporations Act 2001 to apply the financial reporting requirements in Chapter 2M to registrable superannuation entities.

Regulated superannuation funds, approved deposit funds and pooled superannuation trusts would be required to prepare and lodge financial reports for each financial year with ASIC (within three months after the end of the financial year) and make the financial report, directors’ report (including a remuneration report) and auditor’s report publicly available on the entity’s website.

The new requirements would apply from 1 July 2023. The Bill would also enact the Digital Games Offset and other measures proposed in previous Federal Budgets.

Global sustainability reporting developments

Recent updates on progress toward new global sustainability reporting disclosure standards:

Mandatory European sustainability reporting will impact Australian entities

The EU Council has given its final approval to the corporate sustainability reporting directive (CSRD), which will introduce mandatory sustainability reporting in Europe, including environmental rights, social rights and governance factors.

Australian and other non-European companies will be required to comply with the CSRD if they generate net turnover over EUR 150 million in the European Union (EU) and have at least one subsidiary or branch in the EU.

Reporting under the CSRD will be phased in from the 2024 financial year (affecting Australian subsidiaries of impacted entities), with first reports due in 2029 for third-country undertakings (in respect of the 2028 financial year).