The report, titled The Heat is On: Disclosures of Climate-Related Matters in the Financial Statements, aims to assist and to enhance the ability of issuers to provide more robust disclosures and create more consistency in how climate-related matters are accounted for in financial statements drawn up in accordance with IFRS. The report focuses on disclosures related to climate matters included in the 2022 annual financial statements of European non-financial corporate issuers.

Although ESMA considers that IFRSs are fit for purpose and provide sufficient basis for issuers to account for and to disclose climate-related matters in financial statements, ESMA also believes that real life illustrations of disclosures may assist issuers to better communicate such impacts and investors and other stakeholders to better understand them and take them into account when making informed decisions.

ESMA expects issuers and auditors to consider the illustrative examples of the report when considering how to assess and disclose the degree to which climate-related matters play a role into the preparation and auditing of IFRS financial statements. ESMA also stresses that the guidance addressing climate impacts is not exhaustive and is developing at a fast pace. Issuers should closely follow the developments of standard setters in this area, and their connection with sustainability reporting.

Please click to access the report on the ESMA website.

For more information, please see the consultation page on the European Commission website. The consultation is open for comments until 19 December 2023.

The Burden Reduction Package, which aim is to reduce and streamline reporting across multiple policy areas, has implications for the implementation of the Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy Regulation. Some of the key proposals include:

• Targeted amendments to the Accounting Directive adjusting the size criteria for companies that fall under the reporting requirements of the CSRD, and therefore reducing the scope of application of the CSRD, as follows:
  • Small undertakings: The balance sheet total goes from EUR 4 million to EUR 5 million and the net turnover threshold from EUR 8 million to EUR 10 million.
  • Medium-sized undertakings and groups: The balance sheet total goes from EUR 20 million to EUR 25 million and the net turnover threshold from EUR 40 million to EUR 50 million.
  • Large undertakings and groups: The balance sheet total goes from EUR 20 million to EUR 25 million and the net turnover threshold from EUR 40 million to EUR 50 million.
• Postponement of the deadline for the adoption of sector-specific and third country European Sustainability Reporting Standards (ESRS) to June 2026 from June 2024. The latter does not defer the effective date of the CSRD for third country undertakings.
• Publication of a call for evidence to identify reporting requirements in the general EU framework that can be removed or rationalised.
• Clarification regarding the EU Taxonomy Regulation which states that no assessment is needed for activities that are not material to business or where companies lack evidence or data to prove compliance.

For more information, access the 2024 Commission Work Programme on the European Commission website.

Deloitte are proud to partner with ICAEW and Accounting for Sustainability on the awards which celebrate the leaders putting sustainability at the heart of financial decision making. They share examples of best practice to inspire, inform and influence others to take action.

This year the awards also recognised leaders in climate, social impact and nature and biodiversity.

Visit financeforthefuture.org to see who won and watch highlights from the ceremony.

The FRC is consulting on strengthening both ISA (UK) 250 Section A and ISA (UK) 250 Section B.

For both standards, the FRC is proposing an effective date for audits of financial statements for periods beginning on or after 15 December 2024.

Comments on the consultation are requested by 12 January 2024.

The press release and full consultation are available on the FRC website.

Update 15/11/2023 - The FRC will be holding a webinar and two virtual roundtables on its consultation.  Further details are available on the FRC website.

The FRC indicates that despite the challenging reporting environment that companies find themselves within, there has not been a decline in the quality of corporate reporting by FTSE 350 companies.  It highlights that there has been a ‘gradual fall’ in issues related to revenue, leasing and financial instruments with improvements in the reporting of alternative performance measures, which fall outside of its ‘top-ten’ issues for the first time in a number of years.

Impairment and judgements and estimates continue to be areas where the FRC raises challenges.  Cash flow statement errors continue to persist which has resulted in a number of companies having to restate their results.  These issues will remain areas of focus for the FRC’s Corporate Reporting Review team this coming reporting season.

Regarding climate-related disclosures, the FRC indicates that companies are at very different stages of maturity in their reporting.  This coming reporting season, as reporting becomes more established, the FRC is likely to enter into substantive correspondence with companies where their disclosures do not meet its expectations.

Against the backdrop of heightened uncertainty from higher inflation, slowing economic growth, higher interest rates, stresses in supply chains, constraints in the labour market, changing consumer behaviour and climate change, the FRC expects companies to clearly articulate the impact of these risks on their strategy, business model, principal risks and uncertainties, viability and going concern assessments and in the recognition and measurement of assets and liabilities, ensuring consistency across the annual report and accounts. 

The report identifies that the ten most frequently raised topics where improvements to reporting quality are needed are:

• Impairment of assets
• Judgements and estimates
• Cash flow statements
• Strategic report and other Companies Act 2006 matters
• Financial instruments
• Income taxes
• Revenue
• Provisions and contingencies
• Presentation of financial statements
• Fair value measurement

For each of these topics, the report includes the key findings and significant issues encountered from the reviews.  The FRC has also highlighted points, including specific considerations relating to inflation and interest rates (where applicable), for companies to consider when preparing their forthcoming annual report and accounts.

The report also highlights the FRC’s key disclosure expectations for 2023/24. It expects companies to:

• ensure disclosures about uncertainty are sufficient to meet the relevant requirements and for users to understand the positions taken in the financial statements. In particular:
  • The values of key assumptions and sensitivities or a range of reasonably possible outcomes, must be provided, where required for impairment tests and major sources of estimation uncertainty.
  • Significant accounting judgements must be described.
  • Disclosures should be re-assessed each year to ensure they remain relevant and assumptions, and the range of outcomes used for sensitivity disclosures, remain appropriate.
  • Better disclosure helps users understand the linkage between narrative reporting on uncertainties such as inflation and climate change, and the assumptions made in the financial statements.
• give a clear description in the strategic report of risks facing the business, their impact on strategy, business model, going concern and viability, cross-referenced to relevant detail in the reports and accounts.
• provide transparent disclosure of the nature and extent of material risks arising from financial instruments, including changes in investing, financing and hedging arrangements; the use of factoring and reverse factoring in working capital financing; the approach to and significant assumptions made in the measurement of expected credit losses; concentrations of risks and information about covenants (where material).
• provide a clear statement of consistency with Task Force on Climate-related Financial Disclosures (TCFD) which explains, unambiguously, whether management considers they have given sufficient information to comply with the framework in the current year. The FRC may challenge companies which have not disclosed information the Financial Conduct Authority (FCA) ‘particularly expects’ to be provided.  Companies must, also comply with the new mandatory Climate-related Financial Disclosure (CFD) Regulations.
• perform sufficient critical review of the annual report and accounts, including;
  • taking a step back to consider whether the report as a whole is clear, concise and understandable, omits immaterial information and whether additional information, beyond the requirements of specific standards, is required to understand particular transactions, events or circumstances.
  • a robust pre-issuance review to consider issues the FRC commonly challenges including: internal consistency; whether accounting policies address all significant transactions; and presentational matters, such as cash flow and current/non-current classification.

A press release and the full report are available on the FRC website.  The FRC will also be holding a webinar on 1 November to discuss the report in more detail.

Drawing on the lessons learned from Financial Reporting Lab participants, the report, Materiality in practice:applying a materiality mindset, is intended to act as a toolkit to help companies apply a materiality mindset to reporting.  The report covers three key areas:

• Think about investor needs and decision-making.  Understanding how investors use information to make decisions helps boards and management when making materiality assessments.  This aspect of the toolkit provides readers with an understanding as to what information investors look for in an annual report and how they use that for decision-making.   
• Take a holistic approach to materiality.  The report encourages companies to think holistically about what information is material to their stakeholders when preparing annual reports.  It identifies that boards and management can benefit from aligning their materiality assessments more with investor needs and explores how companies can take a more holistic and connected approach to materiality.
• Embed a materiality mindset.  This part of the report provides guidance and tips on how to embed a materiality mindset into corporate reporting.

Applying a holistic mindset is also important for sustainability-related reporting as highlighted in two previous reports by the Financial Reporting Lab (ESG data production and ESG data distribution and consumption).  The findings of those reports have now been brought together into one useful summary.

A press release, the full report and the summary of the previous two Financial Reporting Lab reports are available on the FRC website.

The revisions reflect recent enforcement findings as well as ensuring that modern approaches to obtaining external confirmations are considered, with additional material in respect of digital means of confirmation, enhanced requirements in relation to investigating exceptions and a prohibition on the use of negative confirmations.

Click for (all links to FRC website):

• Press release
• Feedback statement
• The revised standard

The FRC welcomes the oppportunity to engage with the ISSB on the development of the IFRS Sustainability Disclosure Taxonomy and believes that ensuring that the ISSB disclosures can be digitally reported and consumed is 'key to optimising the usability and usefulness of sustainability reporting'. 

In its comment letter the FRC:

• believes that the IFRS Sustainability Disclosure Taxonomy broadly reflects the requirements in IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures but notes that it is limited to the disclosure requirements in the standards.  The FRC believes that it is important that taxonomy modelling considers how the tags are expected to be used in practice to best serve the end user and recommends that design improvements could be made to entity-specific metrics and targets.
• suggests that field trials should be undertaken during the impementation phase and that a regular review of emerging reporting practice should start as soon as the taxonomy is issued.  The FRC suggests that the results of field testing could be used to form the basis of continuous improvement.
• strongly supports the work and plans set out in the consultation to facilitate digital reporting of sustainability-related disclosures globally.

The FRC's response is available on the FRC website.

In the report, the FSB welcomes the publication of the ISSB Standards, which will serve as a global framework for sustainability disclosures and, when implemented, will enable disclosures by different companies around the world to be made on a common basis. The FSB will work with the ISSB, International Organization of Securities Commissions (IOSCO) and other relevant bodies to promote the timely and wide use of the standards. Interoperability of the ISSB standards with jurisdictional disclosure frameworks is necessary in order to achieve global comparability of climate-related disclosures. The report also notes encouraging progress on development of a global assurance, ethics and independence framework for sustainability disclosures.

In keeping with previous years, this year’s progress report highlights the findings of the 2023 TCFD Status Report. The TCFD Status Report, which has been published alongside the progress report, reveals that the percentage of public companies disclosing TCFD-aligned information continues to grow, but more progress is needed. With the ISSB’s inaugural standards having been released, the TCFD’s work is now complete, and the FSB has requested the ISSB to assume responsibility for monitoring progress on the state of climate-related financial disclosures by companies as of 2024, which will help to support adoption of IFRS S1 and IFRS S2.

For more information, please see the press release on the FSB website.