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Clarity in financial reporting - February 2023 monthly newsletter

"Climate first" sustainability reporting, OECD Pillar Two considerations and more

Our monthly Clarity in financial reporting newsletter informs you of key focus areas in financial reporting for the month: actions, developments, and dates

In this issue

  • AASB adopts a “climate first” approach to sustainability reporting
  • Other sustainability reporting developments
    January ISSB meeting
    Federal Treasurer’s perspectives
  • OECD Pillar Two considerations
  • Two minute update
    ASIC reiterates need for material business risk disclosure, warns on greenwashing

Why does it matter? Entities should understand the rapid evolution of sustainability reporting in Australia as we move towards a possible mandatory sustainability disclosure framework from as early as 2024-25.

What’s happened?

The AASB held a one-day meeting on 1 February 2023 to discuss the implementation of sustainability disclosure standards in Australia.Consistent with the forthcoming introduction into law of a mandate for the AASB to set sustainability disclosure standards (as discussed in our December 2022 newsletter), the AASB discussed both climate-related financial disclosure requirements and a broader sustainability reporting standard-setting framework.
In order to progress climate-related financial disclosure requirements, the AASB decided to adopt a “climate first” approach so that these standards could be finalised as soon as possible to meet investor and government demand for such standards. This is consistent with Federal Government funding announced in the October 2022 Federal Budget and broader Federal Government objectives (currently subject to Treasury consultation).

What decisions have been made?

The AASB affirmed its previous preliminary decisions made in relation to sustainability reporting standards should apply in determining how to implement climate-related financial disclosure requirements, including that sustainability reporting standards would be:

  • A separate suite of standards, separate from Australian Accounting Standards (with climate the first topic addressed)
  • Based on ISSB IFRS Sustainability Disclosure Standards, but could be modified for Australian matters and requirements
  • Focused on sustainability-related financial information (consistent with the ISSB’s focus on the development of a global baseline of sustainability disclosures for capital markets)
  • Initially focused on reporting by for-profit entities.

What Australian specific changes might be made?

As part of debate on a draft of its sustainability reporting standard-setting framework, the AASB decided on a number of criteria that could see a departure from IFRS Sustainability Disclosure Standards in Australia, including:

  • Where user benefits do not outweigh any undue cost or effort for preparers
  • Where the IFRS Sustainability Disclosure Standards will not achieve international alignment or conflict with global sustainability reporting practices
  • Where equivalent disclosure requirements already exist in Australia (e.g. the National Greenhouse and Energy Reporting Act 2007)
  • Where Australia-specific matters are not addressed and diversity in practice warrants Australia-specific requirements or guidance
  • Where transition would impose additional costs and/or time, warranting a deferral of application dates.

What is the likely timing?

One of the agenda papers considered at the meeting outlined a possible issue of a voluntary standard on climate-related financial reporting as early as October-November 2023. The timeline in the paper was developed dependent upon the ISSB finalising its IFRS S1 and IFRS S2 standards by the end of March 2023.
Given the ISSB’s work plan currently indicates that the IFRS S1 and IFRS S2 standards are now expected to be finalised in the second quarter of 2023, the AASB has identified risks to delivery of the climate-related financial disclosure project, and accordingly, the issuance of a climate related financial disclosure standard may potentially push into calendar 2024. (The ISSB considered the effective date for IFRS S1 and IFRS S2 at its February 2023 meeting and the AASB will consider an updated project plan at its March 2023 meeting.)

The Treasury consultation on climate-related financial disclosure suggested, as an ‘example’, the introduction of mandatory climate-related financial disclosures for large listed entities and large financial institutions for the 2024 25 financial year. This consultation paper indicated that a further consultation process would be undertaken once the ISSB had published its first IFRS Sustainability Disclosure Standards.

Therefore it is unclear at this stage when mandatory sustainability reporting will commence in Australia. However, it remains clear that the Federal Government is committed to implementing mandatory reporting as soon as possible, and accordingly, entities should continue to prepare for mandatory reporting.

More information:

  • AASB Action Alert (Issue No. 220)
  • Clarity publication Towards mandatory sustainability reporting in Australia
  • Treasury consultation Climate-related financial disclosure (submissions closed 17 February 2023)

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:

January ISSB meeting

The ISSB met on 17-19 January 2023. The following topics were discussed

  • Metrics and targets – objective of disclosures
  • Disclosure of judgements, assumptions and estimates
  • Reasonable and supportable information that is available at the reporting date without undue cost or effort
  • Commercially sensitive information about opportunities
  • Current and anticipated financial effects and connected information
  • Using scenario analysis to assess climate resilience
  • Greenhouse gas emissions – reporting period relief
  • Climate-related targets – latest international agreement on climate change.

For more information, see the meeting papers, ISSB Update and detailed Deloitte meeting notes.

Federal Treasurer’s perspectives

In an essay titled Capitalism after the crises, published in February 2023 edition of The Monthly, Federal Treasurer Jim Charmers outlines a number of points related to sustainability reporting.

It is clear that a key Federal Government priority for 2023 is the creation of “a new sustainable finance architecture” that will include climate-related financial disclosure (as discussed above). One of the goals of this disclosure is to “ensure regulators can stamp out greenwashing”, which is already a key focus of ASIC with many enforcement actions already publicly announced.

Of interest, the Treasurer notes that the “strategy begins with climate finance, but over time I see it expanding to incorporate nature-related risks and biodiversity goals”. These areas are also on the ISSB’s proposed agenda going forward, so this suggests sustainability disclosure standards on these topics may ultimately be implemented in Australia.

Why does it matter? Entities need to undertake an assessment of the impact of the OECD ‘Pillar Two’ tax reforms and prepare for related financial statement disclosures expected to be soon implemented by the IASB.

What is Pillar Two?

In a nutshell, the OECD Pillar Two tax reforms are a result of a global initiative and would operate to ensure a minimum rate of taxation of 15%. Where entities have operations operating in low tax jurisdictions, the ultimate parent entity would be subject to additional ‘top up’ tax on low or zero taxed profits.

There are numerous complexities (including where the ultimate parent entity operates in a jurisdiction where Pillar Two rules have not been enacted) and exceptions, and many of the tax calculations rely on accounting information.

The new regime is expected to be implemented in 2024. Treasury released an initial consultation in 2022 on the implementation of Pillar One and Pillar Two and is working toward legislation to implement the OECD agreement in the Australian context.

Which Australian entities might be affected?

Broadly, the global Pillar Two regime would apply to entities that have global revenue of at least EUR750 million per annum. As a result, in the Australian context, it may be applicable to many ASX listed entities, investment entities (including superannuation funds) and some large privately held groups.

Australian subsidiaries of ultimate parent entities that operate in a jurisdiction where the Pillar Two rules have not been implemented may also be affected in future periods.

Although a broad group of entities may be within the regime, a smaller subset of entities would be expected to actually pay top up tax amounts. However, entities would be expected to document their assessment in order to meet tax law requirements.

Deferred tax considerations

The Pillar Two reforms act to effectively introduce an additional income tax to impacted entities, at least at the consolidated level. Accordingly, entities would be expected to recognise current and deferred taxes arising from Pillar Two in accordance with AASB 112 Income Taxes once any enabling legislation is enacted or substantively enacted. Given the complexities of the Pillar Two rules, determining deferred taxes arising under existing accounting standards is complex.

As we noted in our January 2023 newsletter, the IASB and AASB have published ‘fast-tracked’ exposure drafts which would exempt Pillar Two taxes from deferred tax accounting. The proposals would be effective immediately on issue, with additional disclosures required in financial reporting periods beginning on or after 1 January 2023.

Preparing for financial statement disclosures

Entities currently assessing the potential impacts of the Pillar Two regime should understand the disclosures required under the exposure draft proposals and ensure sufficient information is collated to provide the necessary disclosures once the disclosures become effective and enabling legislation is substantively enacted.

More information:

  • 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
  • Tax Insights OECD inclusive framework publishes Pillar Two global minimum tax model rules
  • Tax Insights OECD Pillar Two: Information return and safe harbours (30 January 2023)
  • Deloitte tax@hand: OECD releases Pillar Two administrative guidance

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

ASIC reiterates need for material business risk disclosure, warns on greenwashing

ASIC has issued a media release reiterating the need for directors to ensure that material business risks are adequately disclosed in annual reports.

The media release follows the release of ASIC’s focus areas for 31 December 2022 and specific entity actions in response to ASIC’s financial reporting surveillance program, both of which have included a focus on material business risk disclosure and greenwashing.

ASIC notes “the importance of a high-quality operating and financial review, including disclosure of material risks that may affect the achievement of a listed entity’s strategies and prospects”. In its focus areas, ASIC had earlier stated that the operating and financial review must include the “most significant business risks at whole-of-entity level that could affect the achievement of the disclosed financial performance or outcomes should be provided, including a discussion of environmental, social and governance risks”.

ASIC encourages entities to review enhanced disclosures made by entities in response to ASIC queries in order to improve their own disclosure.

ASIC also separately notes business risks media release that an entity provided updated disclosures in response to an ASIC query around insufficient disclosure of adjustments made to disclosed non-IFRS information.

In a later media release accompanying its latest enforcement and regulatory update report, ASIC has reinforced its warning that it will target greenwashing in the coming year and notes "ASIC will have a strong focus on enforcement activity targeting sustainable finance practices and disclosure of climate risks, financial scams, cyber and operational resilience, and investor harms involving crypto-assets".

Given these latest media releases, entities should expect continued ASIC scrutiny in these areas.

More information:

ASIC media release 23-018MR ASIC calls for improved material business risk disclosure in annual reports

ASIC media release 23-026MR ASIC to expand enforcement focus areas in the coming year

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