General Sustainability-related Disclosures
Cover note and summary of redeliberations (Agenda Paper 3)
At this meeting, the ISSB continued redeliberating the proposals in the Exposure Draft IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information ([draft] S1), including beginning redeliberations on the requirements relating to current and anticipated effects of sustainability-related risks and opportunities on financial performance, financial position and cash flows and the connected information requirements. The ISSB also redeliberated on the requirement to disclose comparative information that reflects updated estimates and the timing of reporting requirements.
Comparative information and updated estimates (Agenda Paper 3B)
[Draft] S1 requires an entity to revise comparative information for metrics disclosed in the current period in the following instances:
- To reflect a redefined or replaced metric or target (paragraph 34 of [draft] S1)
- To correct material prior period errors (paragraphs 84–90 of [draft] S1)
- To reflect updated estimates (paragraphs 63–65 of [draft] S1)
The proposed requirement set out in paragraph 64 of [draft] S1 received mixed feedback from the public consultation. In particular, many respondents, including preparers, audit firms and accounting standard-setters, have raised concerns about the proposed requirement due to inconsistency with IAS 8, potential costs and complexity, unclear meaning of the term ‘impracticable’ and difficulty in distinguishing correction of errors and updating estimates.
Therefore, the staff recommended that the ISSB amend the proposed requirement to clarify that the requirement to revise comparative information to reflect updated estimates applies to current period estimates that were disclosed in prior periods (historic estimates), and does not apply to forward-looking estimates. Appendix B paragraph B1 of Agenda Paper 3B provides examples for distinguishing these estimates and discusses the application of the recommended approach.
The staff further recommended that the ISSB provide illustrative guidance to help an entity apply the proposed requirement such as:
- Examples of the situations when revising comparative information to reflect updated estimates would be required (paragraph B1 of Appendix B)
- Examples and explanations of the approach to presenting revised comparative information to reflect updated estimates (paragraph B2–B9 of Appendix B)
- Explanations to distinguish the requirement on revising comparative information to reflect updated estimates from other requirements to revise comparative information described in [draft] S1
At this meeting, the ISSB was asked for any comments or questions on this matter and decisions on the staff recommendations, but the ISSB was not be asked to vote on the examples provided which are intended to provide an illustration of possible guidance that could be developed.
ISSB discussion
All ISSB members supported the staff recommendations with following comments and suggestions.
Firstly, ISSB members suggested that the staff provide guidance on how to distinguish between replacement or refinement of metrics and revision on estimates.
Secondly, ISSB members asked for clarification and examples on the differences between “impracticable” and “unable to do so”. One of the Vice Chairs and the staff explained that the term “impracticable” is a good reference from IFRS Accounting Standards but it is not a must for IFRS Sustainability Disclosure Standards to exactly tie in with the accounting standards. Materiality assessment is also important for considering whether all changes in estimates should be disclosed. They confirmed to follow up and provide more clarity in future.
Thirdly, ISSB members emphasised the importance of proper development of examples (e.g. develop governance-related or other qualitative topics) since they are expected to be widely used by preparers in the future. The staff acknowledged the importance and confirmed to follow up on these in the future, however they also emphasised that extra care should be exercised to avoid the illustrative examples being a pro forma approach.
Lastly, one ISSB member asked whether the previous estimates should be revised or removed if there are jurisdicational policy changes which result in the metric being no longer material in the particular jurisdiction. One of the Vice Chairs and the staff explained that the previous estimates should not be updated because the new information is irrelevant to the past. Also, such estimates may not be removed since it may still be considered material information for that business to attract global investment.
Timing of reporting (Agenda Paper 3C)
[Draft] S1 requires an entity to report its sustainability-related financial disclosures at the same time as its related financial statements. Almost all users of general purpose financial reporting that responded in the public consultation acknowledged that ideally the timing of reporting would be simultaneous. However, many respondents expressed their concerns about the practical application of this requirement, including increased reporting burden and significant costs, additional reliance and assurance to be obtained and insufficient preparation time.
Therefore, the staff recommended that the ISSB:
- To confirm the proposed requirement for an entity to report its sustainability-related financial disclosures at the same time as its related financial statements
- To introduce transitional relief for a limited period of time to permit an entity to report sustainability-related financial disclosures up to three months after the publication of its financial statements. When an entity takes advantage of this relief by publishing its sustainability-related financial disclosures within three months after the publication of its financial statements, and therefore is unable to meet the requirements on location of reporting (i.e. the requirement that the disclosures be presented as part of the entity's general purpose financial reporting), the sustainability-related financial disclosures are required to be authorised by the same bodies or individuals that authorise the entity’s financial statements
At this meeting, the staff sought decisions from the ISSB on the recommendations but did not ask ISSB to make a decision on how long the transitional relief should last.
ISSB discussion
All ISSB members agreed with the first staff recommendation in relation to time of reporting. There were mixed views for the second staff recommendation in relation to transitional relief as below.
- One of the Vice Chairs considered that only a short transitional relief (i.e. a relatively short gap between the publication of the financial statements and the reporting of sustainability-related financial disclosures allowed by a transitional relief) should be provided for a limited period of time. How long that transitional relief should apply for would be discussed at a future ISSB meeting as part of deliberations on effective date and considered alongside any other transitional reliefs being provided
- Some ISSB members believed that providing transitional relief would not help preparers to better comply with the requirements. All companies are in the journey of disclosing sustainability information and they are not always perfectly ready for all disclosure requirements. If the reporting entity is not yet ready for the disclosure requirements, this is also a material piece of information for investors to understand in terms of the readliness of that reporting entity. Also, it is believed that issues arising from obtaining data from the value chain would not be resolved within a short transitional relief
- Investor groups and shareholders strongly indicated that they would not tolerate a 3-month gap between the publication of the financial statements and the reporting of sustainability-related financial disclosures
- Instead of setting a fixed date or period for the gap as basis for transitional relief, it was suggested that the staff should consider the dates of key events for reporting entities, for example, the date of the shareholder meeting. The Chair then suggested that the timing of sustainability reporting could be linked to the release of the first half year results after considering the timing for obtaining and preparing sustainability information
- Status or progress updates before the release of the sustainability report were recommended to the staff if transition relief was applied by the reporting entity. One of the Vice Chairs confirmed that the staff could consider this suggestion but emphasised that it could result in piecemeal information disclosed in a complicated way
- It is believed that large corporates would probably not apply the transational relief even it is available to them. Therefore, the transitional relief could ease the reporting burden of preparers with less resources and experience
- One of the Vice Chairs considered that a one-year gap as transitional relief would be even better than three or six months because it could provide preparers with time to obtain sufficient resources and create relevant systems. That Vice Chair also made reference to a longer transitional relief provided to entities of global south countries (normally two to three years) for implementing other reporting frameworks
- The Chair and one of the Vice Chairs observed a lot of anxiety raised by preparers during the outreach activities and believed that providing transitional relief could demonstrate respect and support from the ISSB to the preparers. They were concerned that it could otherwise result in a delay on the effective date if no transtional relief is provided
- A balance between concerns from the users and preparers and a balance between the timeliness and quality of reporting should be carefully considered and weighted
After considering the explanation made by the Chair and one of the Vice Chairs for the significant comments received during outreach activities, most of the ISSB members (i.e. 11 out of 13) agreed with the transitional relief recommendation. In addition, they asked the staff to develop the wording for the transitional relief based on the timing of sustainability reporting being linked to the release of the first half year result. The length of that relief would be further discussed at a future ISSB meeting as part of its deliberations on the effective date and considered alongside any other transitional reliefs being provided.