Clarity in financial reporting - January 2023 monthly newsletter

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

As announced in our December 2022 newsletter, ASIC released its focus areas for financial reports for the December 2022 reporting season in early December 2022.

ASIC has emphasised a stronger focus on the impact of current economic conditions on the entity’s operations, including increasing interest rates, availability of skilled staff and expertise, general inflationary pressures, geopolitical risk, volatile global energy and oil prices and the impacts of climate and climate-related events, and made a number of changes from the June 2022 reporting period.

To assist entities to understand and respond to the updated focus areas, we’ve published an edition of our Clarity publication, Putting ASIC areas into focus.

The publication:

• Provides an overview of the ASIC focus areas for December 2022, including the key changes from prior periods
• Outlines the areas of most surveillance attention from ASIC in 2022
• Draws out critical matters that should be considered in responding to the focus areas
• Includes an appendix summarising matters raised by ASIC in current and past periods.

We have also made available a recording of our November 2022 Client financial reporting update. In addition to discussing ASIC focus areas, the approximate one hour session covers broader themes in financial reporting relevant for December 2022 financial reporting.

More information:

• Clarity publication Putting ASIC areas into focus
• November 2022 Client financial reporting update.

Why does it matter? Entities need to prepare for the rapid introduction of mandatory sustainability reporting in Australia.

Consistent with Federal government announced policies, Treasury has released two consultations that seek to introduce mandatory sustainability reporting in Australia.

The consultations would introduce a standardised and internationally-aligned framework for disclosing sustainability related risks and opportunities, underpinned by four pillars: governance, strategy, risk management, targets and metrics.

Mandatory reporting would initially be focused on large listed entities and large financial institutions, and may later be extended to other entities and government.

Initial application has not been determined, but it is suggested as an example, that first reporting could be required for the 2024-25 financial year.

In order to provide an overview of the proposals, we have published an edition of our Clarity publication, Towards mandatory sustainability reporting in Australia.

The broader consultation closes for comment on 17 February 2023 and impacted entities – which may ultimately extend to include most larger entities – should familiarise themselves with the proposals, consider making a submission, and prepare for implementation.

More information:

• Clarity publication Towards mandatory sustainability reporting in Australia
• Treasury consultation Climate-related financial disclosure (submissions close 17 February 2023)
• Treasurer/Minister for Climate Change/Minister for Financial Services joint media release More transparency and more investment in cleaner and cheaper energy.

Why does it matter? The move toward a global baseline of sustainability-related disclosure standards continues rapidly and will impact Australian entities.

Below is a summary of recent sustainability reporting related developments:

ISSB December meeting

At its December meeting, the ISSB continued redeliberations on its draft IFRS Sustainability Disclosure Standards, IFRS S1 (general sustainability disclosures) and IFRS S2 (climate-related disclosures). Notably, the ISSB tentatively decided to provide a temporary exemption from the requirement for an entity to disclose Scope 3 greenhouse gas emissions for a minimum of one year from the effective date of IFRS S2.

The ISSB also agreed to seek feedback in its forthcoming agenda consultation on biodiversity, human capital (initial focus on diversity, equity and inclusion) and human rights (initial focus on labour rights and communities’ rights in the value chain).

Deloitte observer notes from the meeting are available here.

COP 15 meeting outcomes

At the United Nations Biodiversity Conference (COP 15) held on 7-19 December 2022 in Montreal, Canada, governments agreed to a global biodiversity framework that addresses the key drivers of nature loss.

Included in the agreed targets is a goal to require transnational companies and financial institutions to monitor, assess, and transparently disclose risks and impacts on biodiversity through their operations, portfolios, supply and value chains. (This is consistent with the ISSB’s proposed inclusion of biodiversity in its forthcoming agenda consultation noted above.)

Concurrent with the meeting, the United States and Australian governments announced an agreement on working together to better measure the value of nature, including natural capital accounting, environmental-economic accounting and environmental-economic statistics.

Other developments

• Deloitte 2023 CxO Sustainability Report – Deloitte’s 2023 CxO Sustainability Report: Accelerating the Green Transition finds global C-level business leaders (or CxOs) view climate change as a top priority for their organisations amid global uncertainty. When asked to rank the issues most pressing to their organisations, many CxOs rated climate change as a “top three issue,” ahead of seven others, including innovation, competition for talent, and supply chain challenges. Moreover, 75% of CxOs said their organisations have increased their sustainability investments over the past year, nearly 20% of whom said they’ve increased investments “significantly”
• Sustainability Standards Advisory Forum (SSAF) – The IFRS Foundation has announced the composition of the new SSAF, with representatives from 13 jurisdictions and regions and observers from the European Commission, IOSCO and US Securities and Exchange Commission (SEC)
• New Zealand climate reporting standards finalised – The New Zealand External Reporting Board (XRB) has published three Aotearoa New Zealand Climate Standards, which apply to annual reporting periods beginning on or after 1 January 2023. The Standards are based on the Taskforce on Climate-Related Disclosures (TCFD) recommendations, but in some cases have been aligned with the ISSB proposals in (draft) IFRS S1 and IFRS S2.

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

A quick summary of recent developments:

Exposure drafts to fast track exemption for deferred taxes arising from the OECD Pillar Two rules

Further to the update in our December 2022 newsletter, the IASB has published Exposure Draft ED/2023/1 International Tax Reform — Pillar Two Model Rules to respond to stakeholders’ concerns about the potential implications of the imminent implementation of the OECD Pillar Two model rules on the accounting for income taxes. The AASB has published an equivalent exposure draft, ED 322 International Tax Reform – Pillar Two Model Rules.

The IASB proposes to provide a temporary exception to the requirements in IAS 12 Income Taxes that an entity does not recognise and does not disclose information about deferred tax assets and liabilities related to the OECD Pillar Two income taxes. An entity would disclose that it has applied the exception and make a number of additional disclosures.

The IASB proposes that an entity would retrospectively apply the exception immediately upon issuance of the amendments and apply the disclosure requirements for annual reporting periods beginning on or after 1 January 2023.

Comments are requested to the AASB by 24 February 2023 and to the IASB by 10 March 2023.

More information can be found in iGAAP in Focus IASB proposes amendments to IAS 12 to introduce a temporary exception from accounting for deferred taxes arising from OECD Pillar Two model rules.

Five new Standards issued by the AASB

The AASB announced the issue of five new Accounting Standards immediately before the holiday period shutdown (effective dates mentioned are for annual periods beginning on the dates noted):

• AASB 2022-6 Amendments to Australian Accounting Standards – Non-current Liabilities with Covenants (amendments effective 1 January 2024) – clarifies previous amendments to the classification of liabilities and requires disclosures about certain covenants. With the making of this Standard, Australian entities can now elect to early adopt these and the previous amendments
• AASB 2022-7 Editorial Corrections to Australian Accounting Standards and Repeal of Superseded and Redundant Standards (amendments effective 1 January 2023) – makes editorial corrections to six Standards and Practice Statement 2 Making Materiality Judgements
• AASB 2022-8 Amendments to Australian Accounting Standards – Insurance Contracts: Consequential Amendments (amendments effective 1 July 2026) – defers the application of AASB 17 Insurance Contracts for public sector entities until periods beginning on or after 1 July 2026
• AASB 2022-9 Amendments to Australian Accounting Standards – Insurance Contracts in the Public Sector (amendments effective 1 July 2026) – makes public-sector-specific amendments to AASB 17
• AASB 2022-10 Amendments to Australian Accounting Standards – Fair Value Measurement of Non-Financial Assets of Not-for-Profit Public Sector Entities (amendments effective 1 January 2024) – amends AASB 13 Fair Value Measurement for fair value measurements of non-financial assets of not-for-profit public sector entities not held primarily for their ability to generate net cash inflows.

For more information, refer to the AASB media release.

A separate not-for-profit edition of our newsletter will not be published in respect of the December 2022 quarter. Below is a brief summary of developments related to not-for-profit reporting over recent months in addition to developments noted in our monthly newsletters:

New AASB consultative documents

• Discussion Paper Development of Simplified Accounting Requirements (Tier 3 Not-for-Profit Private Sector Entities) (comments close 31 March 2023)
• ITC 49 Post-implementation Review of AASB 1059 Service Concession Arrangements: Grantors (comments close 28 February 2023)
• ITC 50 Post-implementation Review – Income of Not-for-Profit Entities (comments close 31 March 2023)
• ITC 51 Post-implementation Review of Not-for-Profit Topics – Control, Structured Entities, Related Party Disclosures and Basis of Preparation of Special Purpose Financial Statements (comments close 31 March 2023).