Australia

Tax transparency meets financial reporting in Australia

Australia has recently adopted a new Consolidated Entity Disclosure Statement (CEDS) to be included in financial reports, aimed at realising international recommendations around tax transparency and to “ensure multinationals pay their fair share in tax”. As well as being informative for other jurisdictions adopting similar tax transparency measures, the project has broader relevance as other topics of public interest are brought into financial reports, such as sustainability, cyber security and modern slavery. 

The CEDS, effective for years beginning on or after 1 July 2023, requires entities in scope to provide the following details for each entity in the group:

• name;
• type of entity;
• where the entity was incorporated or formed;
• percentage ownership held by the parent entity/group;
• details of the entity’s tax residency under Australian law; and
• a list of any foreign jurisdictions where the entity was a tax resident. 

In introducing the requirements last year, the government released a statement emphasising a “higher standard” was needed than in the rest of a company’s financial statements. Legislation requires company directors to declare that the information in the CEDS is “true and correct”, in contrast to the usual “true and fair” view expressed regarding financial reports. While this may seem straightforward on the face of it, having different classes of information within the same document has led to a debate on how to apply existing reporting and audit frameworks. 

Some of the challenges that have arisen include how to interpret the terminology “true and correct”. Does it mean absolute accuracy, and potentially imply absolute assurance? At the same time as guidance on the terminology was being developed by both the Australian Securities and Investments Commission and the Australian Auditing and Assurance Standards Board (AUASB), the government stated that “auditors are also expected to provide their views without regard to materiality”; a substantial departure from the existing internationally equivalent auditing standards in Australia, where the risk-based approach to audit work and conclusions are entirely based on materiality. 

It’s a catch 22: interpreting the government’s words in an overly literal sense could result in widespread qualified auditor’s reports, running counter to the objectives of the regime. On the other hand, regulators, standards setters and preparers are loath to ignore the call for a “higher standard”. The solution in the AUASB’s guidance comes back to the concept of ‘qualitative materiality’ (ISA 320.A2), similar to auditing executive remuneration reports and contingent liabilities. It will be interesting to observe as 2024 CEDS and auditor’s reports are issued. 

We at Chartered Accountants Australia and New Zealand hope the objectives of greater transparency and integrity can be achieved while also delivering financial reports grounded in the reporting and audit frameworks that stakeholders expect and understand. As more public interest topics arise and wider disclosures not primarily driven by investor decision-making are brought into financial reports, we are likely to see more of these debates and the lessons learned now will continue to be pertinent.

Amir Ghandar FCA, Assurance and Reporting Leader, Chartered Accountants Australia and New Zealand

Japan

Recent developments in sustainability disclosure and assurance in Japan

It has become common practice in Japan for entities to voluntarily provide sustainability information based on frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations and Global Reporting Initiative standards. Entities make the disclosures in documents such as integrated reports or sustainability reports and also often obtain assurance on some of the disclosed information. Meanwhile, since late 2021, the Financial Service Agency has been holding formal discussions on mandatory sustainability disclosures. For accounting periods ending on or after 31 March 2023, a new sustainability section has been introduced in the Annual Security Filing, Yuho. All listed companies must disclose their sustainability initiatives in their Yuho under four pillars – governance, strategy, risk management, and metrics and targets.

In July 2022, the Sustainability Standards Board of Japan (SSBJ) was established to develop Sustainability Disclosure Standards for application in Japan and to provide input, such as comment letters, to the International Sustainability Standards Board (ISSB). In March 2024, the SSBJ published three Exposure Drafts (ED), aligning Japanese Sustainability Disclosure Standards with IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. Feedback was invited from the public until 31 July 2024. 

In developing the EDs, assuming that the Standards would be applied by companies engaging in constructive dialogue with global investors (ie, companies listed on the Tokyo Stock Exchange), the SSBJ determined that aligning Japanese standards with the ISSB’s standards would benefit market participants. Accordingly, the SSBJ decided to incorporate all requirements of the ISSB’s standards and to add, where considered necessary, jurisdiction-specific options that an entity can choose to apply. Differences between the ISSB's standards and the SSBJ's EDs are summarised on the SSBJ’s website. 

The EDs maintain the requirement that an entity must refer to and consider the applicability of the disclosure topics in the Sustainability Accounting Standards Board (SASB) standards and the Industry-based Guidance on Implementing IFRS S2, as well as the disclosure requirement for Scope 3 Greenhouse Gas emissions. Nevertheless, the EDs provide alternative options for some disclosure requirements, such as allowing the calculation period for legally required reporting metrics to differ from the entity’s reporting period and, as part of the cross-industry metrics, the disclosure of information about the magnitude or the amount and percentage of the assets or business activities vulnerable to, or aligned with, climate-related risks or opportunities.

In light of the feedback received, the SSBJ are now redeliberating the proposals and intend to finalise the standards by the end of March 2025. Concurrently, the FSA is convening a working group to deliberate on the timing of implementation of the standards and the scope to which they will be applicable. According to proposals at the most recent meeting, the standards will be phased in based on a company’s market capitalisation:

• more than ¥3tn from the fiscal year ending 31 March 2027;
• more than ¥1tn from the fiscal year ending 31 March 2028; and
• more than ¥500bn yen from the fiscal year ending 31 March 2029.

Additionally, the working group will discuss mandatory assurance on the sustainability disclosures in Yuho later this year. 

Yoshinori Minemura CPA (Japan), Technical Director, Corporate Disclosure, Professional Standards and Practices Division, The Japanese Institute of Certified Public Accountants

Ireland

CSRD transposed into Irish Law

On 5 July 2024, Statutory Instrument No. 336/2024 European Union (Corporate Sustainability Reporting) Regulations 2024 was signed into Irish law. The Regulations bring into law the requirements of the Corporate Sustainability Reporting Directive (CSRD) which has been in force across the European Union (EU) since January 2023. 

While the requirements of the CSRD will apply to many companies in Ireland and across the EU, they will be introduced on a phased basis from 2024 to 2028, with the first reporters for 2024 being large Public Interest Entities with more than 500 employees.

Under the CSRD, certain entities are required to report on various environmental, social and governance (ESG) matters in accordance with the European Sustainability Reporting Standards (ESRS). In addition to this, entities who are not reporters under the ESRS itself may still need to provide sustainability information to entities in their value chain who are reporters under the standards. It is a requirement of the CSRD that limited assurance must be obtained in relation to sustainability information reported in the first reporting year with reasonable assurance foreseen once feasible.

The implementation of the CSRD and ESRS will be a challenging task for reporting entities in the initial years. Entities will need to consider their activities from alternative perspectives and, in doing so, will be required to not only consider the financial implications of their sustainability activities, but also the impacts that it has on stakeholders from an ESG perspective. This will be considered via a double materiality assessment. In addition, entities will be required to comply with, and apply, 12 separate standards, each with their own metrics and targets.

The practical implications of the regulations signed on 5 July are still being considered by entities in Ireland, with some seeking clarifications from the Department of Enterprise, Trade and Employment regarding their interpretation and application.

Notwithstanding the challenges, the CSRD and ESRS should provide entities with strategic opportunities as, together with their stakeholders, they learn more about their ESG impacts, risks and opportunities that may support long-term strategic decision making and operational efficiency.

Mike O’Halloran, Technical Manager, Advocacy & Voice, Chartered Accountants Ireland

To read more about how companies, member states and regulatory bodies are preparing for implementation of the CSRD, read CSRD compliance: where are we now?