Europe

European sustainability reporting: small and medium-sized enterprises 

Under the Corporate Sustainability Reporting Directive (CSRD), not only do large companies have to provide disclosures in line with European Sustainability Reporting Standards (ESRS), but plans are underway to also introduce requirements for small and medium-sized enterprises (SMEs). Proposals are split in two: mandatory requirements applicable to listed SMEs and requirements for non-listed SMEs, which would be applied on a voluntary basis.

The European Financial Reporting Advisory Group (EFRAG) has published the Exposure Draft, ESRS for listed small and medium-sized enterprises (ESRS LSME), which addresses SMEs that are classified as public-interest entities. Designed as a delegated act, this ESRS is set to become effective on 1 January 2026, with an additional two-year opt-out period. It aims to provide reporting requirements tailored to the scale and complexity of the activities of LSMEs, supporting them in gaining better access to finance, and provide standardised sustainability information.

The ESRS LSME mirrors the structure of the first set of ESRS and is divided into the six sections below:

1. general disclosures; 
2. disclosures on policies; 
3. actions and targets; 
4. environmental disclosures; 
5. social disclosures; and
6. disclosures on business conduct.

In developing the draft ESRS LSME, EFRAG prioritised simplification of full ESRS requirements over interoperability with ISSB standards; an approach supported by Accountancy Europe (of which ICAEW is a member) in its response to the proposals. The potential for divergence as the ISSB issues more standards in the future was noted, which will necessitate keeping interoperability under review.

Alongside the draft ESRS LSME, EFRAG published the Exposure Draft, Voluntary ESRS for non-listed small and medium-sized enterprises (VSME ESRS), outlining voluntary sustainability reporting standards designed for non-listed SMEs. While this standard will be optional, its purpose is to assist SMEs in providing sustainability information upon request from business counterparts and to support their involvement in the shift towards a sustainable economy. 

The VSME ESRS proposes a simple reporting tool to assist SMEs not in scope of the ESRS LSME to respond to requests for sustainability information from stakeholders in an efficient and proportionate manner. Those stakeholders might include banks, investors, or larger companies whose supply chain the SME is part of. The VSME ESRS is built around three modules: 

• Basic module: entry level for non-listed SMEs; 12 disclosures including ESG topical metrics. 
• Narrative – policies, actions and targets (PAT) module: SMEs undertakings that already have PAT in place and to report; five disclosures.
• Business partner module: for SMEs facing questionnaires from business partners; 11 disclosures.

In responding to the VSME ESRS, Accountancy Europe fully supported EFRAG’s modular framework, stating: “The option to start with the basic module and then to build on it based on the priorities of, and the demands on, the entity helps reduce the initial sense of complexity when viewing the standard, which should help reduce the anxiety of businesses taking the first steps in sustainability reporting.”

The consultation period closed in May 2024 with publication of the final VSME ESRS standard expected to be released later in the year. 

Lina Konstantinopoulou, Head of European Policy, ICAEW

Southeast Asia

ESG reporting in Vietnam

Vietnam, recognised for its high degree of economic openness and vulnerability to climate change, has committed to achieving net-zero emissions by 2050, reflecting its dedication to global sustainability goals. It is not surprising, therefore, that environmental, social and governance (ESG) reporting has garnered significant attention, driven by the Vietnamese government's proactive stance and increasing investor demand for sustainable practices.

The Vietnamese government has established frameworks to support sustainable business practices, such as the National Green Growth Strategy for 2021-2030 and the National Strategy on Climate Change for 2050. While these strategies do not directly mandate ESG reporting, they encourage businesses to integrate ESG into their operations, laying the groundwork for a robust reporting landscape. Recent surveys indicate that 94% of participating enterprises acknowledge the critical importance of sustainable development, with 51% actively implementing ESG business practices that are to be reflected in ESG reporting.

ESG reporting extends beyond traditional financial disclosures, enabling stakeholders to assess an organisation’s sustainability initiatives, risk management practices and ethical conduct. Investors are increasingly aware of the correlation between sustainability and corporate success, favouring companies with strong ESG credentials and reliable reporting. Businesses are under pressure, therefore, to provide comprehensive ESG information to attract investment and financing, appeal to climate-conscious consumers, enhance their reputation and maintain a competitive edge. 

As it stands, Vietnam has certain guidelines for ESG reporting, such as the Sustainability Reporting Handbook for Vietnamese Companies, Environmental and Social Disclosure Guide, and Vietnam Corporate Governance Code Of Best Practices. However, these are not comprehensive frameworks for ESG reporting and the absence of a mandatory reporting framework may result in varying quality of disclosures across companies. To attract high-quality capital, particularly green loans, Vietnamese companies could benefit from producing sustainability reports aligned with international standards, addressing stakeholders’ needs both domestically and globally. 

Collecting and analysing ESG data remains a challenge for many Vietnamese organisations, especially smaller ones, due to limited resources and experience in generating comprehensive ESG reports. Nonetheless, as Vietnam integrates into the global economy, robust ESG reporting will be essential for sustainable development and attracting international investment. The earlier companies adopt ESG business practices and reporting, the better positioned they will be to compete globally and contribute to Vietnam’s long-term sustainability goals. 

Nguyen Huu Nam Ninh, ACA, BFP, Audit Director, KPMG Vietnam

Japan

IASB’s proposed disclosures on business combinations

In March 2024, the International Accounting Standards Board (IASB) issued the Exposure Draft Business Combinations – Disclosures, Goodwill and Impairment (ED) that proposes requiring entities to provide users of financial statements with information about the performance of a business combination. 

The proposed disclosure requirements provide more direct information on the success, or otherwise, of a business combination than the impairment test. The proposals are in response to concerns about impairment losses on goodwill sometimes being recognised too late and would see the following information being disclosed, some of which would be exempted if certain conditions are met:

• the entity’s acquisition-date key objectives, and the related targets, for a strategic business combination;
• the extent to which those objectives and targets are met in the year of acquisition and subsequent periods; and
• for a material business combination, the strategic rational and quantitative information about expected synergies in the year of acquisition. 

While the Japanese Institute of Certified Public Accountants (JICPA) understands the purpose of the ED, it believes the introduction of these disclosures is likely to increase the cost of conducting an audit. Even though the content of the proposed disclosures might be confirmed by comparison with documents such as the valuation report and internal approval documents for the business combination, it will be difficult for auditors to judge the reasonableness of the information disclosed and judgement exercised by management.

JICPA thinks the disclosures should specify that their content is management’s view of the business combination; the reasonableness of this view is then to be judged by the users themselves. JICPA believes this is necessary to ensure users do not have an expectation that the possibility of achieving the synergies disclosed in the notes has been assured by the auditors. 

Furthermore, some stakeholders – especially preparers – strongly insist that information on the performance of a business combination and expected synergies be provided outside of the financial statements as it contains highly subjective information.

JICPA anticipates that the IASB will consider the proposed goodwill disclosures further following receipt of feedback to the ED. The consultation closes on 15 July 2024.

Takashi Matabe, Technical Director, JICPA (IFRS Desk and JICPA research lab)