Thursday 28 July 2022
A few weeks ago we looked at the set of questions the newly formed International Sustainability Standards Board (ISSB) raised to constituents in relation to their exposure draft IFRS S2 Climate-related Disclosures. The responses - comments from preparers, users, auditors etc - are expected to help shape the final standard. Below we’ll look at IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information. As with S2 the ISSB is asking for comments on a series of (mostly different) questions. The majority of those require a response as to whether the respondent agrees or disagrees with the ISSB’s intended approach, and if not, then an explanation as to why the alternate view. An ‘any other comments’ section is provided as a catch-all. All of this allows us a summarised view of what the proposals are seeking to achieve and how that objective is intended to be met.
It is worth noting that in terms of the ISSB’s sustainability reporting ‘jigsaw’, S1 is intended to provide a comparative role to that of IAS 1 Presentation of Financial Statements for general-purpose financial reporting – i.e., S1 is a broad set of principles for what should be disclosed, when it should be disclosed and how (writers emphasis). We should also be aware of the overall aim of the ISSB to create a ‘global baseline’ of high-quality sustainability-related financial disclosure standards. In doing so, the objective is to provide disclosure guidance that could be applied in any / all jurisdictions (if required or permitted), regardless of whether the entity applies IFRS for its financials.
The following bulleted points relate to the chronological order of the questions raised in the ED, and broadly follow the order in which the paragraphs have been drafted. Only the main points are included. We will dig further into the requirements in a later article.
The overall objective of S1 is to require the entity to disclose sustainability-related financial information that is useful to the primary users of the entity’s general-purpose financial reporting for the assessment of the entity’s enterprise value and for deciding whether to provide resources to it. The entity would be required to disclose material information about all the significant sustainability-related risks and opportunities to which it is exposed. This requirement would hold true even if such risks and opportunities are not addressed by a specific IFRS Sustainability Disclosure Standard. To help ensure the objective is met the ED provides definitions as to enterprise value, primary users, and materiality. Further, it signals how to determine specific sustainability related risks and opportunities when not addressed by ISSB standards.
The ED explains that sustainability-related financial information is broader than information reported in the financial statements. If we consider the (very) wide range of issues that could be encapsulated within the ‘sustainability umbrella’ the use of ‘broad/ broader’ would appear appropriate. The ED states that it is all this information, combined with the financial statements, that influences the assessment of enterprise value by the primary users. Such is the significance of this information on the enterprise value assessment the ED requires that sustainability-related financial information should include information about the entity’s governance of and strategy for addressing sustainability-related risks and opportunities. This would include information about decisions made that could result in future inflows and outflows that have not yet met the criteria for recognition (demonstrating again the broader disclosure concepts than those applied to the financials).
Whilst considering the points above, it might appear that an unlimited amount of information will now be required to be disclosed. Information overload? Not necessarily. The ED makes clear that sustainability-related risks and opportunities not reasonably expected to affect the assessment of enterprise value are outside the scope of these sustainability-related financial disclosures. To emphasise - the entity must consider (only) material information for (all) the significant sustainability related risks and opportunities identified. As noted above, if within scope, then the requirements should be capable of being applied anywhere, whether or not the entity applies IFRS for its general-purposes financial statements.
In terms of the overall structure of sustainability-related financial disclosures the ISSB takes its lead here from the guidance provided by the Task Force on Climate Related Financial Disclosures (TCFD) – i.e., the structure of the core content is focused around four ‘pillars’ that, typically, mirror the way in which an entity operates - governance, strategy, risk management, metrics and targets. Unsurprisingly these are the same core areas identified within the proposals for IFRS S2 Climate-related Disclosures (also based on TCFD recommendations).
The proposal is for sustainability-related financial information to be provided for the same reporting entity as the related general-purpose financial statements (and for the same reporting period). Thus, for a group, the information disclosed would be that for the parent and all its subsidiaries (and if currency is an issue then the presentation currency would be applied). Information relating to associates and joint ventures would also be required. The disclosures would relate to significant sustainability-related risks and opportunities to which that entity is exposed along the life of its value chain (again, a term defined by the ED); as such this would include disclosures relating to direct risks and opportunities as well as the indirect ones arising through, for example, the suppliers the entity transacts with.
The proposals state that applying IFRS Sustainability Disclosure Standards, with additional disclosure when necessary, is presumed to result in sustainability-related financial disclosures that achieve a fair presentation. To this end, in identifying sustainability-related risks and opportunities, the entity would (typically, though not apparently mandatorily) consider the disclosure topics in the industry-based Sustainability Accounting Standard’s Board (SASB) Standards. The entity would also consider other guidance such as the Carbon Disclosure Standard’s Board (CBSB) Framework application guidance (for water and biodiversity-related disclosures), the most recent pronouncements of other standard-setting bodies and sustainability-related risks and opportunities identified by entities that operate in the same industries or geographies.
Further, to achieve fair presentation the entity shall apply judgement in identifying disclosures that are relevant to the decision-making needs of users, that faithfully represent the entity’s risks and opportunities (in relation to the specific sustainability-related risk or opportunity identified) and are neutral.
We should note that materiality, in terms of what is to be reported under the ED is, at least initially, aligned with the definition in the Conceptual Framework for General Purpose Financial Reporting and IAS 1 Presentation of Financial Statements. Thus, information ‘is material if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that the primary users of general-purpose financial reporting make on the basis of that reporting, which provides information about a specific reporting entity’. However, there is a difference. For the ISSB’s purposes whether information is material also needs to be judged in relation to the user’s assessment of enterprise value. Further, the information disclosed may change from period to period as circumstances, assumptions and expectations (of the primary users) change. The entity will use judgement to identify what is material and reassess those judgements at each reporting date.
Frequency of reporting
Any sustainability-related financial disclosures would be reported at the same time and for the same period as the financial statements. This would present a change for entities that currently report sustainability information in a separate sustainability report at a different time from the financials.
Location of information
Information required by IFRS Sustainability Disclosure Standards will be presented as part of its general-purpose financial reporting, i.e., within the same package of reporting that is targeted at primary users. However, the Exposure Draft does not mandate specifically where within the pack the disclosures will be located. The idea of allowing latitude is to enable the entity itself to determine the best way to effectively communicate sustainability information in a coherent manner (and to prevent conflicts with any regulatory requirements). For example, the necessary disclosures might be contained within Management Commentary (or similar device). The proposal permits an entity to disclose required sustainability information in the same location as information disclosed to meet other requirements, such as information required by regulators. It could be disclosed in the related financial statements. Wherever, and however the location criterion is met, the sustainability-related financial disclosures must clearly be identified as such and not obscured by any additional information.
Comparative information, sources of estimation and outcome uncertainty, and errors
The concepts underpinning the requirement for presentation of comparative information are based on corresponding ones within IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors – with a significant difference. That difference is this; for any changes in estimates, the ED proposes that comparative information is updated to reflect that change (except when this would be impracticable), i.e., the comparatives would be retrospectively restated to reflect the updated estimate, as opposed to the prospective adjustments required by IFRS.
The proposed effective date is not explicitly mentioned in the ED. However, the Basis for Conclusions does mention an ‘example’ effective date of 1st January 2024. Based on the short timeframe within which the ISSB has been created, and its speed of delivering exposure drafts to constituents, it should not surprise anyone if 2024 does become the real effective date. To ease application, no comparatives would be required for the first year. Early adoption is permitted (though surely unexpected?)
For both Exposure Drafts S1 and S2, the Board’s redeliberation’s leading to final standards are (currently) expected before the year is out. In terms of getting ready, clearly, there is no time to lose.
Click here to read Part 1 of this article