Europe

The EU turns its attention to rationalising reporting obligations and reducing unnecessary burdens

With next year’s European Parliament elections looming large, the EU institutions are focusing on wrapping up the significant volume of draft laws still being negotiated. At the same time – and in recognition of shifting political winds – the European Commission has acknowledged the need to stem the regulatory demands on businesses across the continent. As Brussels waits to discover the details of an announced initiative to rationalise reporting obligations and reduce related unnecessary burdens by 25%, the first impacts are becoming visible when it comes to sustainability reporting.

The first set of European Sustainability Reporting Standards (ESRS), which were adopted by the Commission as draft secondary legislation in June following weeks of delay, bear the signs of streamlining. Subject to much lobbying from different quarters, the 12 sector-agnostic ESRSs (ie, those that define disclosures that are considered relevant across all sectors) include important changes compared to the original drafts developed by the European Financial Reporting Advisory Group (EFRAG) last autumn. Modifications cover a broad extension of the materiality assessment, more phasing in and proportionality mechanisms, and the convergence of a number of mandatory data points into voluntary ones. 

While NGOs criticised the watering down of the original proposals, the Commission pointed to estimated savings of €1.2bn during the phase-in period – and a further €230m annually thereafter – in comparison to the EFRAG draft standards. The final delegated acts, following a short feedback period, must be published by the end of August with a two-month accept-or-reject period for EU member states and MEPs.

In the spirit of simplification, the Commission also asked EFRAG to pause work on the next package of sector-specific ESRS and instead to focus on supporting implementation – work that will include the creation of a documentation hub, an ESRS digital reporting forum and other education initiatives.

Meanwhile, over at the European Securities and Markets Authority (ESMA), the latest annual corporate reporting enforcement report is still showing significant material departures from the International Financial Reporting Standards for selected issuers, and continues to suggest there is significant room for improvement in disclosures of climate-related matters by issuers in their financial statements. A progress report on greenwashing in the financial sector identifies high-risk areas for issuers, with ESMA pointing to the lack of expertise and skills when it comes to sustainability disclosures, especially among smaller issuers. A final report, which may include recommendations to adapt the current legal framework, is due in May 2024 – but at that point it will still be too early to tell whether the application of the Corporate Sustainability Reporting Directive is helping limit intentional and unintentional greenwashing.

Susanna Di Feliciantonio, Head of European Policy, ICAEW

United States

Towards better communication

In response to continued requests for additional transparency in financial statements, the Financial Accounting Standards Board (FASB) has several projects in the works, focused on clearly communicating the information that is most important to financial statement users.

The following FASB projects propose additional disaggregated disclosures.

Segment reporting

In October 2022, the FASB issued a proposed Accounting Standards Update (ASU): Improvements to Reportable Segment Disclosures, that focused on improvements to the disclosures about a public entity’s significant segment expenses. The proposed incremental segment information included disclosing significant segment expenses that are regularly provided to the chief operating decision-maker. The FASB is expected to finalise the standard later this year after discussing feedback received. 

Tax disclosures

In March 2023, the FASB issued a proposed ASU: Improvements to Income Tax Disclosures, that includes new requirements for public business entities to disclose specific categories in the rate reconciliation, and provide additional information for reconciling items within the reconciliation that meet a quantitative threshold. The proposal would also require that all entities disclose disaggregated income taxes paid by national, state and foreign taxes, and individual jurisdictions in which income taxes paid is equal to or greater than 5% of total income taxes paid. Comments were due by 30 May 2023.

Disaggregation of income statement expenses

The FASB is expected to expose a proposed ASU in the summer of 2023 regarding the disaggregation of any relevant expense line item that contains certain types of underlying information, such as employee compensation, depreciation of property, plant and equipment, amortisation of intangible assets, and inventory. The disaggregation requirements would apply only to public business entities. 

Kim Kushmerick, Director, Accounting Standards, American Institute of Certified Public Accountants

Australia & New Zealand

New Zealand’s climate-related disclosure standards effective, while progress in Australia picks up pace

The New Zealand External Reporting Board’s (XRB) climate-related disclosure standards became effective on 1 January 2023. Mandated by the NZ Government, the standards align with the Taskforce on Climate-related Financial Disclosures recommendations, and focus both on the environment’s impact on business and on requiring businesses to disclose their plans to transition to a low emissions future. 

Climate Standards 1, 2 and 3 will apply to certain large, listed entities and large financial institutions. The XRB has released guidance to support these entities preparing their disclosures.

In March 2023, the XRB closed its consultation on Assurance over GHG Emissions Disclosures. The final standards are expected to be issued in June 2023, with assurance commencing from October 2024. 

The Australian Treasury is also considering mandatory climate disclosures for certain entities. The first consultation, in December 2022, considered scope, international alignment, assurance and governance. It’s anticipated that a follow-up consultation will be announced soon.

The Australian Accounting Standards Board has decided to take a climate-first approach to sustainability reporting. A separate suite of standards will be developed, founded on the IFRS Sustainability Disclosure Standards. 

The Australian Securities and Investments Commission has also stepped up its surveillance and enforcement activities, including a focus on net zero statements; targets without a reasonable basis or which were factually incorrect; and entities describing their operations as carbon neutral, clean or green with no apparent reasonable basis. 

Karen McWilliams, Sustainability and Business Reform Leader, Chartered Accountants Australia and New Zealand

Japan

Qualified support for the proposed changes to the IFRS for SMEs

In September 2022, the International Accounting Standards Board (IASB) published an exposure draft (ED) as part of its Second Comprehensive Review of the IFRS for SMEs Accounting Standard. Although the IFRS for SMEs has not been adopted in Japan, the Japanese Institute of Certified Public Accountants supports this review of the standard as the proposed changes should enable SMEs to produce better-quality financial statements without undue additional cost or effort.

As explained in more detail in an article from the December 2022 edition of ‘By All Accounts’, the ED proposes major changes to, among other things, Section 2 Concepts and Pervasive Principles and Section 23 Revenue to align them with, respectively, the 2018 Conceptual Framework and IFRS 15 Revenue from Contracts with Customers. 

We generally support the idea of aligning the IFRS for SMEs with full IFRS Accounting Standards. However, revising Section 2 to align it with the 2018 Conceptual Framework would bring inconsistencies – which exist between the 2018 Conceptual Framework and IFRS Accounting Standards – into the IFRS for SMEs. Accordingly, certain footnotes or exceptions need to be provided in Section 18 Intangible Assets other than Goodwill, Section 19 Business Combinations and Goodwill, and Section 21 Provisions and Contingencies. Alternatively, for simplification purposes, if the IASB retained the definitions of an asset and of a liability from the previous version of Section 2, which is based on the 1989 Conceptual Framework, they would avoid such complexities. We highly recommend that the IASB carefully consider the pros and cons that come with aligning this section of the standard with the 2018 Conceptual Framework.

Furthermore, we agree with the plan to revise Section 23 Revenue, in principle, as the proposals aim to simplify IFRS 15’s requirements, while retaining the standard’s basic principles. JICPA believes the IASB should consider making further simplifications regarding contract modifications, identifying performance obligations, the timing of revenue recognition (such as the shipping point), shipping and delivery activities, and allocating the transaction price to performance obligations.

Takashi Matabe, Technical Director, Japanese Institute of Certified Public Accountants