Our monthly Clarity in financial reporting newsletter informs you of key focus areas in financial reporting for the month: actions, developments, and dates
Why does it matter? The 2023-2024 Federal Budget contains a number of measures that will impact corporate reporting.
The Federal Government handed down its 2023-2024 Budget on Tuesday 9 May 2023. Whilst the new measures in the budget are largely moderate, there are some implications for financial reporting that should be considered.
Pillar Two implementation
The Budget confirms that the Federal Government will proceed with implementation of Pillar Two minimum tax, with the Income Inclusion Rule and a domestic minimum tax applying to income years beginning on or after 1 January 2024, and the Undertaxed Profits Rule (UTPR) applying a year later (income years beginning on or after 1 January 2025).
The Pillar Two reforms would apply to entities that have global revenue of at least EUR750 million per annum (approximately A$1.2 billion). 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 by the UTPR in future periods.
The IASB held a supplementary meeting in April 2023 to finalise proposals of an mandatory exemption from the recognition of deferred taxes arising from Pillar Two taxes and expects to issue amendments on 23 May 2023. The exemption, and a disclosure requirement to state the exemption has been applied, will be immediately effective, with additional disclosures about the impacts of Pillar Two required once legislation is substantively enacted.
With the Budget focusing on climate transition and support measures for individuals and small businesses, there are few widely impacting measures announced that will have direct corporate reporting consequences.
However, the following measures may affect some entities:
Superannuation – the proposals to require mandatory superannuation contributions to be paid on payday (rather than quarterly) from 1 July 2026 may impact cash flows models used for the assessment of impairment and going concern, and have impacts on liquidity risk management and similar disclosures. These impacts will be most prevalent in industries with high proportion of expenditure on employee benefit costs
Petroleum Resource Rent Tax (PRRT) reforms – the proposal to limit deductible expenditure to the value of 90% of PRRT assessable receipts in respect of each project may impact deferred tax accounting for PRRT (once substantively enacted) and give rise to impairment considerations in some cases
Insurance – the proposal to align tax laws with AASB 17 Insurance Contracts will impact current and deferred tax accounting for insurers once substantively enacted. Additionally, it raises questions of how to forecast future taxable profits for the purposes of assessing the recoverability of any net deferred tax assets in the period prior to substantive enactment
Water market reform – the proposal for a new Water Markets Website would see live water market updates for the first time, which may have considerations for whether water right intangible assets have an active market under AASB 138 Intangible Assets (entities may need to wait for legislation and ASIC perspectives before developing views)
Road user charge – the announcement that the heavy vehicle road user charge will be increased annually by 6% on 1 July in 2023, 2024 and 2025 may impact freight pricing, and this should be considered in cash flow forecasts. Additionally, this measure may change the mix of transport modes (such as substitution of rail transport for road transport) having further indirect impacts on forecasts
Housing incentives – the proposals to increase the depreciation rate for build-to-rent projects from 2.5% p.a. to 4% p.a. would often result in additional deferred tax liabilities as assets are depreciated
Electrification incentive – the additional 20% deduction for electrification spending by entities (with annual turnover of less than $50 million) may be accounted for as either a government grant or income tax incentive (which would give rise to a ‘permanent difference’)
Instant asset write off – small business with a turnover of less than $10 million will be able to immediately deduct the full cost of eligible assets of under $20,000 that are first used or installed ready for use between 1 July 2023 and 30 June 2024, which will give rise to a deferred tax liability to the extent of any capitalised asset.s
Why does it matter? Our new model financial reports are useful resources for the upcoming reporting season.
The following editions of the models have been made available on our model financial statements page:
June 2023 Tier 1 models and reporting considerations publication - in addition to global and Australian-specific illustrative disclosures, this document contains our popular 'what's new in financial reporting' analysis, which provides a summary of key considerations for the June 2023 reporting season
June 2023 Tier 2 model financial report - our Tier 2 model financial report illustrates the disclosures required under AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities.
In addition, we have various editions of model financial reports, and our Australian financial reporting guide, available on our model financial statements page.
Why does it matter? Greenwashing is a key focus area of ASIC and Treasury and entities need to respond effectively to greenwashing pitfalls.
ASIC has released a report outlining its interventions in response to its greenwashing surveillance activities in the nine month period from 1 July 2022 to 31 March 2023.
The report notes that ASIC’s interventions resulted in 23 corrective disclosure outcomes, 11 infringement notices issued and one instance of the commencement of civil penalty proceedings. The matters noted by ASIC include references to:
In a speech coinciding with the release of the report, ASIC Deputy Chair Karen Chester noted an ‘antidote’ to greenwashing focused on transparent disclosure, policy-installed ‘bright lines’ supporting that disclosure, and effective regulator activity.
The speech also noted that more than 400 listed companies referenced the terms ‘carbon neutral’ or ‘net zero’ in price sensitive announcements in 2022 – compared with fewer than 50 companies doing so in 2019.
The release of the report follows the 2023-2024 Federal Budget confirming $4.3 million in additional funding for ASIC to “ensure the integrity of sustainable finance markets by investigating and undertaking enforcement action against market participants engaging in greenwashing and other sustainable finance misconduct”.
ASIC’s Information Sheet INFO 271 How to avoid greenwashing when offering or promoting sustainability-related products provides guidance to entities issuing sustainability-related products issued by funds. However, ASIC notes that the principles may apply to other entities including companies listed on a securities exchange or entities issuing green bonds.
ASIC media release 23-121MR Update on ASIC’s recent greenwashing actions
ASIC Report REP 763 ASIC’s recent greenwashing interventions
ASIC Deputy Chair speech ASIC and greenwashing antidotes
ASIC Information Sheet INFO 271 How to avoid greenwashing when offering or promoting sustainability-related products.
Why does it matter? Entities have the opportunity to have input into the next steps in sustainability reporting.
The International Sustainability Standards Board (ISSB) is seeking feedback on its priorities for the next two years.
The ISSB Request for Information Consultation on Agenda Priorities puts forward four possible projects that could be considered:
Biodiversity, ecosystems and ecosystem services - with possible subtopics on water (including freshwater and marine resources and ecosystems used), land use and land use change (including deforestation), pollution (including air, water and soil emissions) and resource exploitation (including material sourcing and the circular economy)
Human capital - with possible subtopics on worker wellbeing, diversity, equity and inclusion, employee engagement, workforce investment, the alternative workforce, labour conditions in the value chain and workforce composition and costs
Human rights - noting the market’s understanding of human rights and its link to investor-relevant sustainability-related risks and opportunities is still maturing
Integrated reporting - to explore how to integrate information in financial reporting beyond the requirements for connected information in the forthcoming IFRS Sustainability Disclosure Standards, IFRS S1 and IFRS S2.
The first three projects would explore the sustainability-related risks and opportunities associated with each topic. These would push the work of the ISSB beyond its current focus in what the ISSB Chair, Emmanuel Faber, terms addressing "climate first, but not climate only" in the ISSB's mission.
Interestingly, the consultation notes that the ISSB's focus for the remainder of 2023 and into 2024 will be the effective implementation of IFRS S1 and IFRS S2. Therefore, the consultation notes that there is limited capacity to progress all four projects, and the consultation paper questions whether a single project out of the four should be progressed, or if more than one, which two projects. Accordingly, much of the feedback sought is on priorities between the various projects.
The consultation paper also notes various synergies with the ISSB's existing projects, and notes and intention to leverage and build upon other materials and existing guidance in each topic area.
Furthermore, in relation to the three possible sustainability-related projects, the consultation questions explore if sustainability-related risks and opportunities are substantially different across business models, economic activities and other common features such that tailoring of any developed requirements would be required (in a similar way to industry based requirements under the forthcoming IFRS S2 Climate-related Disclosures).
The consultation paper is open for comment until 1 September 2023.
Why does it matter? Being aware of recent developments allows a timely and informed response.
New IFRIC agenda decision on leases
The IFRS Interpretations Committee has published an addendum to its IFRIC Update for March 2023 to include a finalised agenda decision on the definition of a lease and substitution rights under IFRS 16 Leases. The release of the finalised decision follows the IASB's consideration of the agenda decision at its April 2023 meeting.
The agenda decision deals with a fact pattern where a customer enters into a 10 year contract with a supplier for the use of 100 similar new assets, being batteries used in electric buses. The supplier can substitute the batteries, subject to compensation for lost revenue and costs.
The agenda decision notes that each battery should be assessed in its own right (i.e. separately, not together as a group of 100 items) to determine if there is a lease.
The agenda decision concluded that in this fact pattern each battery is an 'identified asset' for the purposes of IFRS 16. Furthermore, in the specific fact pattern in the decision, the Committee determined that the supplier did not have a substantive right to substitute a battery during the period of use.
Entities may need to change their accounting policies as a result of the agenda decision, but are entitled to 'sufficient time' to do so.
The application of the lease definition and substantive substitution rights requirements of IFRS 16 (AASB 16) are fact specific and can be complex in practice and care should be taken when applying the guidance provided in the agenda decision.
ISSB proposals to internationalise SASB® Standards industry-specific requirements
The International Sustainability Standards Board (ISSB) has released an exposure draft that seeks feedback on its proposed methodology to adapting the Sustainability Accounting Standards Board (SASB®) Standards for international use.
The SASB Standards set out specific sustainability disclosure topics and metrics for 77 industries, including metrics for topics like air emissions, biodiversity, community engagement and human capital management. These metrics were developed in the context of the United States legislative and economic environment and so contain some metrics that are not readily applied in other jurisdictions.
The Exposure Draft, ISSB/ED/2023/1 Methodology for Enhancing the International Applicability of the SASB® Standards and SASB Standards Taxonomy Updates focuses on non-climate related sustainability-related financial information. As a result, the revised SASB Standards to be developed using the methodology outlined in the Exposure Draft would assist entities when applying IFRS S1 General Requirements of Sustainability-related Financial Information, by helping entities produce relevant and comparable disclosures in the absence of specific IFRS Sustainability Disclosure Standards.
The Exposure Draft is open for a 45 day comment period which closes on 9 August 2023. The ISSB will then apply the methodology (based on the outcomes of the consultation) to the non-climate related SASB Standards and publish further exposure drafts of the proposed changes, with an aim to finalise the amendments prior to IFRS S1 coming into effect in January 2024.
Reminder on financial instruments proposals
A quick reminder that the AASB Exposure Draft ED 324 Amendments to the Classification and Measurement of Financial Instruments closes for comment on 31 May 2023 (with the equivalent IASB exposure draft closing for comment on 19 July 2024). The exposure draft proposes:
European Union (EU) carbon border adjustment mechanism finalised
In late April 2023, the European Council adopted new laws that include a carbon border adjustment mechanism (CBAM), as part of its ‘Fit for 55’ package. The legislation will be published in EU’s Official Journal and entered into force soon afterwards.
The CBAM aims to avoid ’carbon leakage‘ by imposing an obligation on entities importing emission intensive goods into the EU to purchase ‘CBAM certificates’ where they are sourced in countries with environmental and climate policies that are less stringent than in the EU. The goods captured include oil and gas, steel products, hydrogen, cement and paper (among many others).
The CBAM will initially operate as a reporting obligation and be phased in gradually.
Entities exporting affected goods into the EU should take the new regime into account in forecasts used for financial reporting purposes, and also consider its impact on business risk and ESG disclosures.
IAASB to fast-track an exposure draft on sustainability assurance
The International Auditing and Assurance Standards Board (IAASB) has announced plans to bring forward an International Standard on Sustainability Assurance™ (ISSA) on the general requirements for sustainability assurance engagements.
The consultation is expected in July 2023 (around three months earlier than originally expected) in order for the finalised ISSA to be issued in 2024 in preparation for sustainability reporting at December 2024.
The International Organization of Securities Commissions (IOSCO) welcomed the bringing forward of the finalisation plans and also welcomed close coordination by the IAASB with the International Ethics Standards Board for Accountants (IESBA) in order to “help to ensure robust standards applicable to all providers of sustainability assurance within the parameters of existing governance, due process and public interest mechanisms”.
IVSC proposes updated valuation standards
On 28 April 2023, the IVSC announced a consultation on its proposed changes to its International Valuation Standards (IVS).
Among other proposals, the exposure draft would:
The consultation closes on 28 July 2023.
CDP expands disclosures to plastics
CDP, the global environmental disclosure platform, has announced a new reporting module focusing on the plastic-related impacts. Information that will be disclosed by CDP signatories will include the production and use of the most problematic plastics, i.e. plastic polymers, durable plastics, and plastic packaging.