Mandatory climate reporting changes in the wind

By Gary Anders

The theoretical physicist and Nobel Prize winner Albert Einstein had three rules of work: “Out of clutter find simplicity. From discord find harmony. In the middle of difficulty lies opportunity.”

His rules could be applied to impending global changes to presentation and disclosure in financial statements and the separate imminent introduction of new mandatory climate reporting in Australia.

Simplicity, harmony and opportunity, together with the release of further regulatory guidance, may be exactly what’s required to help organisations navigate through what could become a perfect storm of complex disclosure changes.

Introducing IFRS 18

In April 2024, the International Accounting Standards Board issued IFRS 18 Presentation and Disclosure in Financial Statements, a standard designed to improve how entities communicate in their financial statements, with a particular focus on information about financial performance in the statement of profit or loss.

The new standard responds to feedback that statements of profit or loss vary in structure and content, and the calculation and use of performance measures defined by management, which are useful to investors, might not be well explained. 

Additionally, there was feedback that investors would like to see information more appropriately grouped (aggregated or disaggregated) in financial statements.

 

"The question then is whether IFRS 18 helps, hinders or complicates calculating revenue and establishing whether you are over the climate reporting threshold."

 

Mirroring IFRS 18, in June the Australian Accounting Standards Board announced it had issued AASB 18, which will replace AASB 101 Presentation of Financial Statements.

The key presentation and disclosure requirements established by IFRS/AASB 18 are the presentation of newly defined subtotals in the statement of profit or loss. 

It will require entities to classify income and expenses into operating, investing, financing, income tax and discontinued operations categories.

Entities will also be required to present two newly defined subtotals – operating profit, and profit before financing and income taxes.

IFRS/AASB 18 also requires the disclosure of management-defined performance measures and includes enhanced requirements for the grouping of transactions and other events into line items in the primary financial statements and information disclosed in the notes.

Mandatory climate reporting thresholds

Meanwhile, in September this year, Australia’s Parliament voted in favour to introduce mandatory climate-related reporting requirements for companies, with commencement dates based around defined revenue, assets and employee number thresholds.

The Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 marks a shift in corporate reporting and will alter how some Australian companies disclose information about their environmental impact, including emissions and other climate-related risks. 

Most impacted will likely be private firms that have not been compelled to report to date.

The new reporting requirements align with last year’s launch of global sustainability and climate disclosure standards by the International Sustainability Standards Board (ISSB).

Mandatory reporting for Group 1 companies with consolidated revenue of A$500 million or more, gross assets of A$1 billion or more, or 500 or more employees, will begin on 1 January 2025.

For Group 2 companies with consolidated revenue of A$200 million or more, gross assets of A$500 million or more, or 250 or more employees, mandatory reporting will begin on 1 January 2026.

Lastly, for Group 3 companies with consolidated revenue of A$50 million or more, gross assets of A$25 million or more, or 100 or more employees, mandatory reporting will begin on 1 January 2027. 

Potential reporting headwinds

The rollout of AASB 18 from the start of 2027 for for-profit entities will come two years after the introduction of mandatory climate-related reporting for Group 1 companies. 

It will also occur a year after Group 2 companies need to start reporting on their climate footprint and will coincide with the final extension of climate reporting to Group 3 companies. 

A potential sticking point between AASB 18 and mandatory climate-related reporting is the calculation of revenue based on the accounting standard’s requirement to classify it into the operating, investing and financing categories.

“These changes could impact how companies determine revenue for applying the climate reporting thresholds,” says Tiffany Tan FCPA, audit and assurance lead at CPA Australia.

“For instance, income previously reported as part of revenue may now be classified as investing or financing income under IFRS 18. Similarly, income once categorised as ‘other income’ may now be classified as operating revenue, depending how the main business activities are defined.

“If the reclassified income is substantial, this could impact whether a company qualifies as a Group 3 (large proprietary companies) or not.”

Tan says both the climate reporting legislation and IFRS 18 share a common goal of enhancing transparency.

 

"Income previously reported as part of revenue may now be classified as investing or financing income under IFRS 18. Similarly, income once categorised as ‘other income’ may now be classified as operating revenue, depending how the main business activities are defined."

 

“The climate reporting act focuses on increasing transparency and accountability around the climate-related risks and opportunities businesses face, while IFRS 18 aims to improve the comparability and transparency of financial performance across entities.  

“IFRS 18 will likely have a significant impact on how companies present and disclose their financial performance.”

Tan adds that the assessment of main business activities will be crucial for applying IFRS 18 as it directly influences how companies classify their income and expenses in the financial statements.

“For entities with multiple main business activities, including specified ones, the classification process becomes more complex,” she says.

“Take, for example, a developer that builds apartments. The primary business activity is the construction and sale of apartment units, but how should rental income from unsold units be classified?”

“This determination can significantly alter how income statements are structured and how financial performance is reported.” 

The revenue threshold challenges faced in the Australian market are equally relevant to other jurisdictions that use revenue as a criterion for reporting or auditing thresholds.

Questions about revenue

Financial reporting expert David Hardidge says determining revenue size will be critical under the mandatory climate-related legislation. He points out that revenue typically includes sales, interest, dividends, foreign exchange gains, and gains from the disposal of assets.

“The question has been, especially if you are a large proprietary company and have to produce statutory financial statements, are all these revenue items included or not? It is the same issue with the climate reporting,” Hardidge says.

“The question then is whether IFRS 18 helps, hinders or complicates calculating revenue and establishing whether you are over the climate reporting threshold.

“For the majority of companies, it won’t be an issue, but obviously it is an issue if you are on the revenue cusp.”

Shaun Steenkamp CPA, a member of CPA Australia’s External Reporting Centre of Excellence, agrees that a challenge for some companies will be determining what constitutes revenue.

“Operating income under the new standard is going to be, broadly speaking, not limited to revenue from main business activities,” he says. 

“In relation to climate reporting, there are scoping requirements that say if your revenue is in excess of a dollar figure, then you’re in Group 1 of the transition to mandatory climate sustainability reporting. And then if it’s below a certain threshold, you’re in Group 2.

“But there are going to be lot of companies that are on the borderline of the thresholds, and they need to think about any other streams of income that they have and whether this income meets the definition of revenue.”

Tan says that IFRS 18 is not expected to address the ambiguities in determining the revenue amount for the mandatory climate reporting thresholds.

“Guidance on implementation strategies, assessing the impact of IFRS 18 on existing systems and processes is lacking,” she says.

“Regulatory guidance on what should be included in the calculation of revenue for determining reporting thresholds will be essential. 

“We urge regulators to provide clear and detailed guidance, as companies depend on this clarity to determine whether they qualify as a reporting entity and to which group they belong.”