Deloitte supports consistent reporting of high-quality, relevant, reliable and comparable information that will enable investors and other relevant stakeholders to make decisions that support the transition to a green and inclusive economy. The draft ESRS are comprehensive and generally have the potential to result in relevant information, but we have key concerns that they will create issues for the quality of the information provided, the effective implementation and enforceability of the standards, and consequently will not support the ultimate objective.

We believe that these issues need to be addressed before ESRS are finalised and issued and ask that EFRAG:

• continues to work closely with the International Sustainability Standards Board (ISSB) to drive convergence and achieve a global baseline of sustainability information, taking advantage of the current window of opportunity to align before the respective standards are finalised;
• addresses the overall volume of required disclosures in the proposed package of ESRS and ensures they are practical for companies to implement and relevant to users considering costs and benefits, particularly in the first years; and
• allows for a more reasonable timeline to finalise the standards and adhere to the due process.

Please click to download the full comment letter here.

ESMA highlights its support for a strong materiality assessment but expresses its concern with the suggested ‘rebuttable presumption’ approach. ESMA also encourages EFRAG to keep engaging with the International Sustainability Standards Board (ISSB) to ensure further alignment of the ESRS and the IFRS Sustainability Standards to benefit both users of sustainability reporting and the companies that prepare the reporting. The letter notes:

[W]hile both EFRAG and the ISSB built on the TCFD structure, EFRAG has decided to depart from it and develop a more complex architecture. If this architecture is retained, the reconciliation between ISSB standards and the ESRS will not be seamless which may be to the disadvantage of users and preparers. ESMA encourages EFRAG to undertake the necessary work to minimise the differences in architecture while recognising the fact that the TCFD structure was originally developed for financially material information on climate- related issues and that it may, therefore, need adaptations to reflect the European specificities.

Please click to access the full comment letter on the ESMA website.

Please click to access the video (approx. 4 minutes) on YouTube.

The VRF was formed in June 2021 with the merger of the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB). The consolidation with the IFRS Foundation will inform the work of the IFRS Foundation through the industry-based approach of the SASB Standards and the Integrated Reporting Framework.

The consolidation is part of a COP26 objective to consolidate leading investor-focused sustainability disclosure organisations with the IFRS Foundation. 

For more information, see the press release on the IFRS Foundation website.

High­lights of the podcast include dis­cus­sions on:

• Analysis of feedback provided on the post-im­ple­men­ta­tion review of IFRS 9 — clas­si­fi­ca­tion and mea­sure­ment project.
• IFRS 9 requirements for assessing a financial asset’s contractual cash flow characteristics.
• Proposed project plan for dynamic risk management.
• Deliberations on the financial instruments with characteristics of equity, primary financial statements, rate-regulated activities, and goodwill and impairment projects.
• Possible steps forward related to disclosure initiative — targeted standards-level review of disclosures.
• Feedback on Exposure Draft, Supplier Finance Arrangements.
• Updates on maintenance and consistent application.

The podcast can be accessed through the press release on the IFRS Foundation website.

Please click to view the detailed notes taken by Deloitte observers for the IASB meeting.

High­lights of the podcast include dis­cus­sions on:

• ISSB background information. 
• Reaction and highlights from the discussion in the first ISSB meeting.
• Impressions of initial feedback to the ISSB exposure drafts.
• Forward-looking expectations and agenda setting.
• Role of industry-based standard setting and SASB standards.

The podcast can be accessed through the press release on the IFRS Foundation’s website.

Please click to view the detailed notes taken by Deloitte observers for the ISSB meeting.

Background

In the request for views published in March 2021, the Board asked broad questions on the strategic direction and balance of the IASB’s activities; the criteria for assessing the priority of financial reporting issues that could be added to the IASB’s work plan; and financial reporting issues that could be added to the IASB’s work plan. The Board received 124 comment letters and 37 responses to its related online survey.

General messages

On the three major areas consulted on, the following general messages were received:

• Strategic direction and balance of the IASB’s activities. Respondents generally supported the Board’s current strategic direction. They also indicated that the balance of the IASB’s activities is about right, however, there were calls for increasing the efforts on digital reporting and on understandability and accessibility of the standards. Therefore, the IASB will provide for a modest increase in these two areas.
• Criteria for assessing the priority of financial reporting issues that could be added to the IASB’s work plan. Almost all respondents agreed with the criteria proposed by the Board. Many noted that the criteria were well-balanced and adequate. Some suggested that the IASB rank the criteria or split them into essential and secondary criteria. 
• Financial reporting issues that could be added to the IASB’s work plan. Most respondents rated potential projects on climate-related risks, cryptocurrencies and related transactions, and intangible assets as high priority. Also high on the list were going concern, pollutant pricing mechanisms, and the statement of cash flows and related. At the end of the list were potential projects on borrowing costs, commodity transactions, employee benefits, expenses — inventory and cost of sales, foreign currencies, government grants, negative interest rates and separate financial statements, inflation, and interim financial statements.

The IASB was also very pleased about the responses received through the survey as they included responses of stakeholders that do not normally respond to consultations. Providing the possibility to reply by way of a survey will also be considered for future consultations as it encouraged a broader stakeholder base to respond.

IASB decisions

The comment period on the request for views ended in September 2021. The IASB considered the feedback received from November 2021 to April 2022 and decided:

• to add to its work plan a maintenance and consistent application project on climate-related risks;
• to add to the research pipeline projects on:
  1. intangible assets; and
  2. the statement of cash flows and related matters;
• to create a reserve list of projects that could be added to the work plan only if additional capacity becomes available, which would include projects on:
  1. operating segments; and
  2. pollutant-pricing mechanisms; and
• not to add to its work plan projects on:
  1. cryptocurrencies and related transactions; or
  2. going concern disclosures.

Other feedback

Respondents also commented on:

• Collaboration with the International Sustainability Standards Board (ISSB). The IASB and the ISSB expect to collaborate to support complementary standard-setting and reporting. The IASB thinks that coordination and resources will be needed to support collaboration with the ISSB alongside the IASB’s existing activities. This would relate to and be reflected in new accounting standards and major amendments to the accounting standards, digital financial reporting, the understandability and accessibility of accounting standards, and stakeholder engagement.
• Enhancing partnerships with national standard-setters. The IASB's partnership with national standard-setters already supports all of the IASB’s main activities. However, the IASB concluded that the resources of national standard-setters would not enable the IASB to increase the number of projects it could add to its work plan for 2022 to 2026. In the longer term, national standard-setters’ support, particularly during the research phase of a project, could allow for faster completion of projects, however, and thus provide capacity for more projects to be added to the IASB’s work plan as part of future agenda consultations.
• Priority of matters identified in post-implementation reviews. Respondents suggested, in managing stakeholders’ expectations, it would be helpful if the IASB clearly set out the objectives of a post-implementation review and explained better
  what the outcome of a post-implementation review can be. The IASB has discussed with the Trustees’ Due Process Oversight Committee (DPOC) how to communicate more clearly the objective, process and possible outcomes of a post-implementation review.

Additional information

Please click for the following documents on the IASB website:

• Press release
• Feedback statement
• A Snapshot summarising the IASB’s technical priorities for 2022 to 2026

The Board specifically discussed three key practical issues of proportionality and implementation to be considered:

The statement on the IOSCO website notes that the due process for potential endorsement will begin after the ISSB has issued its final standards. It also states that IOSCO has begun work in collaboration with the international standard setters for audit and assurance to promote a common global approach to independent and high-quality assurance of issuers’ sustainability disclosures.

Please click to access the full statement on the IOSCO website.

In a welcome and opening remarks session at the beginning of the meeting, the Chair said that the remaining four ISSB positions would be taken by two Europeans, one Japanese and one “at large”. The ISSB then discussed the following technical topics:

Agenda priorities

The ISSB intends to publish a Request for Information (RFI) in the second half of 2022, to help it develop its work programme. The RFI will seek public views on (a) the strategic direction and balance of ISSB activities, (b) the suitability of proposed criteria for assessing the priority of sustainability-related matters and (c) a preliminary list of potential priority matters. The RFI will include a list of potential priority matters identified by the ISSB. The ISSB discussed a preliminary list to consider that includes general topics: biodiversity, ecosystems and nature loss; circular economy, materials sourcing and value chains; climate change; cybersecurity, data security and customer privacy; economic inequality; human capital; human rights; and water and marine resources. The list also includes the existing standards and portfolio of standard-setting and research projects of the Value Reporting Foundation’s (VRF) Sustainability Accounting Standards Board (SASB) as well as potential projects to undertaken in coordination with the International Accounting Standards Board (IASB). The ISSB was not asked to make any decisions at this meeting. It was clear that some ISSB members prefer to focus on industry-based standards whereas others are more focused on topical standards.

Overview of exposure drafts (S1 and S2) and feedback received as at 7 July 2022

On 31 March 2022, the ISSB published two exposure drafts (EDs): ED IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and ED IFRS S2 Climate-related Disclosures The ISSB conducted outreach events including webinars, panel discussions, large group meetings and targeted meetings in order to educate stakeholders, drive engagement and obtain technical input. At this meeting, a summary of preliminary feedback gathered to date was provided and the ISSB was not be asked to make any decisions. ISSB members made their own observations about the drafts, and these comments are summarised in the more detailed summaries.

Please click to access the detailed notes taken by Deloitte observers for the entire meeting.

The following topics were discussed:

Primary Financial Statements

The IASB discussed entities with specified main business activities—issues specific to the investing category; entities with specified main business activities—issues specific to the financing category; disclosure of operating expenses by nature in the notes; and unusual items. The IASB supported all of the staff recommendations. The IASB discussed the definition of unusual items, but it remains unclear as to the direction the IASB will take.

Maintenance and consistent application

At this meeting, the IASB discussed feedback received in response to ED/2021/10 Supplier Finance Arrangements. The IASB also approved the remaining due process steps to finalise the amendment to IAS 1 for Non-current Liabilities with Covenants. The IASB will require entities to apply the amendments for annual reporting periods beginning on or after 1 January 2024. No IASB members objected to the finalisation of three agenda decisions: Negative Low Emission Vehicle Credits (IAS 37); Classification of Public Shares as Financial Liabilities or Equity (IAS 32); and Transfer of Insurance Coverage (IFRS 17). Note that the agenda decision relating to the transfer of cash was not presented to the IASB at this meeting.

Post-implementation Review (PIR) of IFRS 9—Classification and Measurement

In September 2021, the IASB published Request for Information (RFI) Post-implementation Review—IFRS 9 Financial Instruments—Classification and Measurement. At this meeting, the IASB discussed the feedback on the accounting for modifications of financial assets and financial liabilities. The staff will also provide preliminary views in relation to the key application challenges identified. The IASB decided to add a project to its research pipeline to explore potential clarification of the requirements for assessing modification of financial assets and financial liabilities and the application of the effective interest method.

PIR of IFRS 9—Impairment

In November 2021, the IASB decided to begin the PIR of the IFRS 9 impairment requirements in the second half of 2022. The anticipated timeline is that between September 2022 and February 2023, IASB members and the staff will perform outreach with preparers, auditors, users of financial statements, regulators and standard-setters. In addition, the staff will review academic research and other materials relevant to this PIR. The publication of the RFI is targeted for the first half of 2023 with the comment period being 120 days.

Disclosure Initiative— Targeted Standards-level Review of Disclosures

The purpose of this meeting was to analyse the possible courses of action available to the IASB to respond to the feedback provided by the Accounting Standards Advisory Forum (ASAF) on Exposure Draft ED/2021/3 Disclosure Requirements in IFRS Standards—A Pilot Approach. The staff sought feedback on which aspects of the project the IASB should proceed with, and which aspects should stop. There seemed to be little to no support for finishing the project but more support for a “middle ground” approach to drafting disclosure requirements with the aim of providing a better framework for entities to use judgement to identify and disclose useful information to users of financial statements. There were also reservations around IAS 19 and IFRS 13 that would need to be considered.

Contractual Cash Flow Characteristics of Financial Assets

In May 2022, the IASB decided to start a standard-setting project to clarify particular aspects of the IFRS 9 requirements for assessing a financial asset’s contractual cash flow characteristics (i.e. the ‘solely payments of principal and interest’ (SPPI) requirements). In June, the IASB agreed that specific SPPI requirements should not be developed for ESG-linked features, but clarification should be provided as application guidance on the concept of a basic lending arrangement; whether and how the nature of a contingent event (i.e. the trigger for a change in the timing or amount of contractual cash flows) is relevant to determining whether the cash flows are SPPI ; and examples in paragraphs B4.1.13 and B4.1.14 of IFRS 9 of applying the SPPI requirements to specific fact patterns (including adding additional examples for financial assets with ESG-linked features). At this meeting, the staff outlined their preliminary analysis of the first two concepts. IASB members were very positive about the preliminary analysis and supported the direction of the project.

Financial Instruments with Characteristics of Equity

At this meeting, the IASB continued its discussions on the feedback received in response to DP/2018/1 Financial Instruments with Characteristics of Equity. Paragraph 23 of IAS 32 requires a contract that contains an obligation for an entity to purchase its own equity instruments for cash or another financial asset to be recognised as a financial liability. The financial liability is recognised initially at the present value of the redemption amount and is reclassified from equity. There is evidence of accounting diversity in practice in the application of the requirements in paragraph 23 of IAS 32. At this meeting the staff set out the current requirements in IAS 32, a brief history of the requirements for contracts containing an obligation to redeem own equity instruments, summary of past IASB and IFRS Interpretations Committee discussions and feedback on the proposals in the 2018 DP. IASB members were generally supportive of the project direction. The staff will continue to work on specific proposals.

Rate-regulated Activities

The IASB decided that the application guidance in the final Standard should not specify the components of total allowed compensation, but rather should focus on helping entities identify differences in timing. The application guidance will focus on the most common differences in timing that may arise from different types of regulatory schemes. The IASB asked the staff to give further thought as to how to word this section and to bring the topic back at a later date. The IASB also decided that when an entity has an enforceable present right to regulatory returns on an asset not yet available for use, those returns form part of the total allowed compensation for goods or services supplied during the period in which the entity provides the capital to construct the asset (the construction period).

Dynamic Risk Management

At this meeting, the IASB continued its deliberations on Discussion Paper DP/2014/1 Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging. The staff set out the areas and topics that need to be further considered in order to complete the development of the DRM model together with a proposed order of future discussions for the next stage of the project. IASB members were generally supportive of the direction being taken.

Management Commentary

In April 2022, the IASB completed its discussion of feedback on ED/2021/6 Management Commentary. The next milestone in the project is for the IASB to determine the project direction. In determining how to progress the project, the IASB will need to consider the evolving reporting landscape as well as stakeholders’ calls for the IASB to collaborate with the ISSB in developing the final requirements. The IASB will also need to consider the possible implications of the commitment to consider opportunities to address similarities and differences between the <IR> Framework and the proposals developed in the Management Commentary project. To facilitate the discussion about possible ways forward on the Management Commentary project in the light of the feedback received on ED/2021/6 and the evolution in the reporting landscape, the staff plan to develop alternatives and present them to the IASB at a future meeting. IASB members acknowledged that the landscape has changed significantly since the ED was published and also noted that the feedback received, although only 8 months old, could be significantly outdated. IASB members agreed that this was an area where the IASB and the ISSB would have to work together and that the IASB would have to make a series of decisions, including whether to finalise parts of the proposals that relate to financial statements only and what the status of the Practice Statement will be.

Goodwill and Impairment

As part of the IASB’s work, the staff have performed further research on disclosures about business combinations. The purpose of this meeting was to provide the IASB with additional research and analysis in response to comments by IASB members in the April 2022 meeting. The IASB was not asked to make any decisions during this session. Most IASB members felt that sufficient research had been done for a tentative proposal to brought to the September meeting that IASB members could decide on, observing that there is unlikely to be additional information that would lead to people changing their general views.

An analysis of how the IASB’s work plan has changed as a result of the meeting is available here.

Please click to access the detailed notes taken by Deloitte observers for the entire meeting.