The EU Accounting Directive (as amended by the Corporate Sustainability Reporting Directive (CSRD)) requires large companies and listed small and medium-sized companies, as well as parent companies of large groups, to include in a dedicated section of their management report the information necessary to understand the entity’s impacts on sustainability matters, and the information necessary to understand how sustainability matters affect the company’s development, performance and position.

The European Commission is required to adopt the first set of sustainability reporting standards specifying the information that companies are to report in accordance with the CSRD. These draft European Sustainability Reporting Standards (ESRS) have been developed by EFRAG and were submitted to the European Commission in the form of technical advice. The European Commission has taken into account the technical advice provided by EFRAG. In addition, the European Commission has consulted various European agencies and other stakeholders subsequent to EFRAG submitting its technical advice in November 2022.

To ensure proportionality and to facilitate the correct application of the standards by undertakings, the European Commission has introduced modifications to EFRAG’s technical advice with regard to the materiality approach, the phasing-in of certain requirements, the conversion of certain requirements into voluntary datapoints, the introduction of flexibilities in a number of disclosure requirements, the introduction of technical modifications to ensure coherence with the EU’s legal framework and enhance interoperability with global standard-setting initiatives, as well as editorial modifications.

The ESRS to be used by entities for their sustainability reporting are set out in Annex I and Annex II of the draft regulation.

The regulation would enter into force four months after the date of adoption. The regulation, and therefore the ESRS, would apply from 1 January 2024 for financial years beginning on or after 1 January 2024. The regulation would be binding in its entirety and directly applicable in all Member States.

The draft regulation is open for feedback until 7 July 2023, which will be taken into account when finalising the regulation.

Please click for the following additional information:

• European Commission consultation page
• Our related Need to know publication

The TAC will provide recommendations for endorsing the International Sustainability Standards Board's (ISSB) IFRS Sustainability Disclosure Standards for use in the UK.

Both the Chair and member positions offer an opportunity to influence the development of sustainability disclosures in the UK.

A press release with further detail is available on the FRC website.

The report revisits key themes from the Lab's previous report on the disclosure of dividend policy and practice. 

It reiterates the message that disclosure around the dividend policy and the decisions that a company makes in determining whether to pay a dividend are important to investors and other stakeholders.  However, in light of the current economic environment, investors and other stakeholders expect companies to consider, and disclose how they have considered, the wider macro-economic environment (such as higher interest rates and inflation on the business, cost of living pressures on employees, support for customers), when determining whether to make a distribution.  

The report identifies three factors that are changing the context in which investors are assessing dividend policy.  These are:

• Macro: How does the policy reflect Macro factors such as economic slowdown, inflation and interest rate environment, etc
• Market: How does the policy reflect market factors such as peer comparison, the need to respond to industry trends, etc.
• Entity: How does the policy reflect company factors such as the need to invest in green transition, financing and debt repayments, staff and customer support, etc.

In concluding the report states:

High-quality disclosure helps investors assess dividends as a source of consistent and sustainable returns. However, returns are always considered in the context of the wider economic environment, and not just on year-on-year basis. Better disclosure reflects and adjusts to the changing context. Whilst many companies have promised a progressive dividend policy, investors also expect disclosure to progress.

The report comes at a time when proposed new reporting regulations will legally require in-scope companies to disclose their dividend policy as well as profits available for distribution as highlighted in the Government’s Response to its consultation on the March 2021 White Paper on ‘Restoring Trust in Audit and Corporate Governance’.

Please click to access Insight report: Disclosure of dividends revisited on the FRC website.

In light of the challenging economic environment and the risks posed by climate change, the degree of estimation uncertainty and management judgement is likely to increase.  As a result, all companies must ensure that they provide clear and transparent disclosures about the uncertainties, risks and significant assumptions underlying fair value measurements reported in the financial statements.

Through the use of examples illustrating better practice, the FRC‘s review seeks to improve disclosure in this area.  Whilst the FRC was generally satisfied with the application of IFRS 13 by larger companies and those in specific sectors such as banking, insurance and real estate, it identified that application of the standard by smaller companies continues to be a challenge. The thematic identifies a number of areas where the FRC expects improvements to be made:

• Ensuring that fair value measurements represent market participant, rather than company-specific, assumptions and reflect the characteristics of the relevant assets, liabilities or equity instruments subject to the fair value measurements.
• Ensuring that information on fair value measurements is consistent across the annual report and accounts and reflects the significant risks facing the business, including management commentary necessary to complement and further explain fair value measurements.
• Considering obtaining specialist third party advice, when the fair valuation is likely to be material and where no internal expertise exists.
• Disclosing any significant estimation uncertainty in relation to fair value measurements.
• As a minimum, providing disclosures required by the standard, including the following information for recurring Level 3 measurements: quantitative information about significant unobservable inputs and adjustments, quantitative sensitivity for financial instruments and a reconciliation of movements in fair value.
• Providing additional information beyond the specific disclosure requirements where this is necessary to meet the overall disclosure objective of the standard, and avoiding boilerplate and immaterial information.
• Explaining how management considered climate-related matters in fair value measurements where this information is material.
• Ensuring that the level of aggregation of information on fair value measurements results in useful disclosures.

The FRC encourages companies to consider the findings in their future reporting.  As well as providing examples of better disclosure, the review also includes two case studies to highlight measurement issues the FRC found in its routine monitoring of corporate reporting. 

A press release and the full thematic review are available on the FRC website.

A press release with further information is available on the FRC website.

The project will commence on 1 August 2023 and should be completed by 1 December 2023.

The researchers will collect data from listed companies on how these entities provide credit risk-related information in their annual financial statements and how they apply the credit risk disclosure requirements in IFRS 7. The findings of this research will be summarised in a report that will be used by IASB staff and the IASB to inform the post-implementation review of IFRS 9 Financial Instruments.

Please click for more information in the press release on the IFRS Foundation website.

Mr Barckow noted that the IFRS Foundation is fully aware of the current backdrop to companies’ operations and the uncertainties that seem to increase everywhere. And he stated that when conditions change, the need for information you can rely on increases. Useful and trustworthy information enables informed decisions. He gave three examples how the IASB is trying to serve the public interest by helping companies and investors by provide or receive better information for better decisions.

• Moving urgently when required. The example Mr Barckow gave in this context were the recent amendments to the requirements for accounting for taxes in the financial statements. The IASB amended IAS 12 in about half a year to provide temporary reliefs for companies ― making it easier for them to account for deferred taxes stemming from new OECD requirements. At the same time, the IASB developed some new disclosure requirements so investors can understand how the tax reform will affect companies. 
• Prioritising projects. The IASB also acts by focusing its resources on the projects that are most important, based on stakeholder feedback from the IASB's agenda consultation that called for focusing on issues that really matter while being mindful of the resources of all those affected new requirements as well as the IASB's own. The IASB also aims at removing uncertainty by making smaller but important improvements to its requirements. The example Mr Barckow gave were the new disclosure requirements for supply chain financing arrangements.
• Helping companies tell their story. Mr Barckow pointed out that as the IASB's standards are required in more than 140 jurisdictions, global investors can track and compare financial statements. He noted that investors appreciate transparency even when companies tell them the situation as it is ― or exactly because of that. Here, Mr Barckow pointed to the IASB's primary financial statements project where the forthcoming standard will require companies to report operating profit, but will also allow companies to report some of their own performance measures in the financial statements.

Mr Barckow concluded his remarks by stating:

I think we can all agree that better information enables better decisions. We are collectively and collaboratively developing accounting solutions that improve the ways companies and investors exchange information ― improve the way they communicate. Good communication is especially important when dealing with challenges.

Please click to access the full transcript of his speech on the IFRS Foundation website.

Highlights of the podcast include discussions on:

• discussions on the primary financial statements project;
• decisions made in the equity method project;
• developments on the project on subsidiaries without public accountability;
• progress in the rate-regulated activities project; and
• key takeaways from the discussion on the second comprehensive review of the IFRS for SMEs Accounting Standard.

The podcast can be accessed here on the IFRS Foundation website.

Background

In March 2022, the OECD released technical guidance on its 15% global minimum tax agreed as the second ‘pillar’ of a project to address the tax challenges arising from digitalisation of the economy. This guidance elaborates on the application and operation of the Global Anti-Base Erosion (GloBE) Rules agreed and released in December 2021 which lay out a co-ordinated system to ensure that multinational enterprises with revenues above €750 million pay tax of at least 15% on the income arising in each of the jurisdictions in which they operate.

The IASB took up a maintenance project and released final amendments to IAS 12 to respond to stakeholders’ concerns about the potential implications of the imminent implementation of these rules on the accounting for income taxes.

Subsequently, the IASB came to the conclusion that the pillar two model rules (and the amendments to IAS 12) are also relevant to entities applying the IFRS for SMEs and added to its work plan a narrow-scope standard-setting project to amend Section 29 Income Tax of the IFRS for SMEs.

Suggested changes

The proposed amendments in exposure draft International Tax Reform — Pillar Two Model Rules (Proposed amendments to the 'IFRS for SMEs' Standard) are:

• The IASB proposes to provide a temporary exception to the requirements in the IFRS for SMEs that an SME does not recognise and does not disclose information about deferred tax assets and liabilities related to the OECD pillar two income taxes. An SME would disclose that it has applied the exception.
• The IASB proposes:
  • to clarify that ‘other events’ in the disclosure objective in section 29 of the standard include enacted or substantively enacted pillar two legislation;
  • not to introduce new disclosure requirements in periods when pillar two legislation is enacted or substantively enacted but not yet in effect; and
  • to require an SME to disclose separately its current tax expense (income) related to pillar two income taxes when pillar two legislation is in effect.
• The IASB proposes that an SME applies the exception immediately upon issuance of the amendments retrospectively (and discloses immediately that it has done so) and applies the other disclosure requirements for annual reporting periods beginning on or after 1 January 2023.

Comments on the proposed changes are requested by 17 July 2023.

Additional information

Please click for:

• IASB press release (link to IFRS Foundation website)
• Access to the exposure draft on the IFRS Foundation website
• Our related Need to know publication
• Our UK Accounting Plus project page on IFRS for SMEs — OECD pillar two model rules

IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers.

In the post-implementation review of the standard the IASB wants to assess:

• whether there are fundamental questions (fatal flaws) about the clarity and suitability of the core objectives or principles in the new requirements;
• whether the benefits to users of financial statements of the information arising from applying the new requirements are significantly lower than expected; and
• whether the costs of applying the new requirements and auditing and enforcing their application are significantly greater than expected.

The questions in the RFI now published regard stakeholders’ overall views and experiences relating to IFRS 15, specific areas of IFRS 15, interaction with other standards, the convergence with US GAAP, and possible other matters stakeholders have identified.

Accordingly, the RFI is structured into the following questions:

Comments on the RFI are requested by 27 October 2023. The request for information and a corresponding press release are available on the IFRS Foundation website. There is also a short video with IASB Board member Patrina Buchanan explaining the RFI. In addition, see Deloitte's Need to know newsletter.