Clarity in financial reporting – September 2023 monthly newsletter

Understand the recent key decisions made by the AASB on how to implement the ISSB’s IFRS Sustainability Disclosure Standards in Australia.

The AASB’s August 2023 and September 2023 meetings saw the AASB make a number of important decisions on climate-related financial disclosures.

During these meetings, the AASB considered its approach to Australian adoption of the baseline of IFRS Sustainability Disclosure Standards IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. 

Key decisions included:

• Climate-first (and initially only) approach. The AASB agreed to focus only on climate-related financial disclosure at this stage.  Accordingly, a limited-scope Australian equivalent to IFRS S1 will be developed, but will focus on the general requirements for climate-related financial disclosures only, rather than the broader sustainability disclosures envisaged by IFRS S1.  Discussion at the meeting noted that this ‘climatisation’ of IFRS S1 will likely be achieved by replacing references to ‘sustainability-related’ with references to ‘climate-related’, but otherwise the layout, headings and paragraph numbers of IFRS S1 will be retained wherever possible.  For more information, see this agenda paper that was discussed at the August meeting
• Remove industry guidance (SASB Standards).  The AASB confirmed that it would remove references to the SASB Standards from Australian equivalents to IFRS S1 and IFRS S2, pending further consideration of those standards by the ISSB and the AASB’s due process
• Defer development of Australian-specific guidance.  The AASB agreed not to develop non-authoritative guidance to accompanying the baseline of IFRS Sustainability Disclosure Standards.  Instead, feedback from the forthcoming Exposure Draft will be used to identify where additional guidance should be developed
• Retain remuneration disclosures.  The AASB decided to retain the requirement for executive remuneration disclosure requirements (i.e. the requirement to disclose whether and how climate-related considerations are factored into executive remuneration as well as the percentage of remuneration linked to climate-related considerations) in the Australian equivalent to IFRS S2, but will refer to “key management personnel” rather than “executives”.  Specific feedback will be sought from constituents on this aspect
• Introduce specific not-for-profit requirements.  The Australian equivalents to IFRS S1 and IFRS 2 would be made sector neutral by referring to the effect of climate-related risks and opportunities on “the entity’s ability to further its objectives”, amend some definitions and to provide that a not-for-profit entity would not need to undertake an exhaustive search for information to identify climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects\
• Comment period and timeline.   The AASB decided that the Climate Exposure Draftanticipated exposure draft will be exposed for a 90 day comment period.  The exposure draft is expected to be finalised issued in October 2023 and be open for comment until January 2024.  The AASB expects to finalise draft its first Australian Sustainability Reporting Standards (ASRSs) at itsno later than its June 2024 meeting (it may be earlier if the comment period is not subsequently extended and re-exposure is not necessary). , This will make the ASRSs available in time for their expected mandatory application for the first group of entities for the 2024-2025 financial year.  For more information, see this AASB Agenda Paper.

More information:

• AASB Action Alert 225 AASB Meeting 198 (September 2023)
• AASB Action Alert 224 AASB Meeting 197 (August 2023)
• Clarity publication Action now for mandatory climate reporting in Australia
• Treasury consultation paper Climate-related financial reporting.

Understand key changes to enforcement revealed in ASIC’s recently released corporate plan

In late August, ASIC released its Corporate Plan 2023-27 – Focus 2023-24, which follows a new ASIC organisation structure implemented in July 2023.

The corporate plan outlines ASIC’s strategic priorities for the next four years and its plan of action for the year ahead.

From a corporate reporting perspective, the following priorities are important for boards, preparers and auditors to consider:

• Environmental, social and governance (ESG).  ASIC will continue proactive supervision over entities’ ESG disclosures (including greenwashing), undertaking enforcement actions where necessary, but supporting industry in adapting to the new climate-related financial disclosure requirements.  See our Clarity publication Action now for mandatory climate reporting in Australia
• Financial reporting monitoring.  Consistent with ASIC’s digital strategy finalised in July 2022 (and outlined in the 2022-23 corporate plan), ASIC intends to use data and natural language processing to enhance its ability to identify risks in financial reports and audits.  ASIC will also continue its focus on information disclosed in operating and financial reviews, with emphasis on risk management strategies and future prospects.  See our Clarity publication Navigating ASIC’s regulatory expectations
• Non-lodgement of financial reports.  ASIC intends to take action, including enforcement action, against companies and Australian Financial Services (AFS) licensees who do not comply with obligations to lodge  financial reports.  For assistance with understanding reporting obligations, see our Australian financial reporting guide
• New superannuation fund financial reporting and audit requirements.  ASIC will monitor the implementation of new obligations on registrable superannuation entities (through their trustees) to file financial reports, directors’ reports and audit reports with ASIC and also publish them on the fund’s website.  For more information, see our June 2024 superannuation entity model financial report.

Be aware of important developments

AASB finalises Pillar Two amendments for Tier 2 financial reports
At its September 2023 meeting, the AASB agreed to finalise amendments to AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities to introduce additional requirements in Tier 2 financial reports for ‘Pillar Two’ income taxes.

The amendments require Tier 2 entities to state they have applied the exception to recognising and disclosing information about deferred taxes related to Pillar Two income taxes and also disclose its current tax expense related to Pillar Two income taxes.

The AASB agreed to amendments that align with recent decisions the IASB made in relation to the IFRS for SMEs (on which AASB 1060 is based) and to provide additional explanation of how Tier 2 entities can respond to the requirements for 30 June 2023 and other periods ending before 30 September 2023 (when the amendments will become effective).

For more information, see our Clarity publication Responding to Pillar Two.

ACNC AIS and financial report review
The Australian Charities and Not-for-Profits Commission (ACNC) has recently published the outcomes of its review of charities’ annual information statement (AIS) and annual financial reports for the 2021 reporting period.

The review for this period was expanded to include examination of the reporting of related party transactions and key management personnel compensation in annual financial reports.  The ACNC is expected to continue to focus on these disclosures for the 2022 and 2023 reporting periods as they are required for the first time for more entities.

The review identified a number of improvements over prior years, but identified a number of observations where compliance had reduced or disclosure issues were identified.  New observations included that related party disclosures were largely correctly disclosed, some early adoption of AASB 1060 and a trend away from review reports to audit reports.

More information can be found on the ACNC website.  We have also recently published Clarity publication Not-for-profit 2023 financial reporting update which discusses key issues for not-for-profit entities and is a useful resource for not-for-profit entities in responding to the ACNC’s surveillance.

IOSCO endorses IFRS Sustainability Disclosure Standards
In a final step toward global adoption, the International Organization of Securities Commissions (IOSCO) has endorsed IFRS Sustainability Disclosure Standards IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures.

In the media release announcing the endorsement, IOSCO calls upon its 130 member jurisdictions (which includes Australia) to “consider ways in which they might adopt, apply or otherwise be informed by the ISSB Standards… in a way that promotes consistent and comparable climate-related and other sustainability-related disclosures for investors”.