One common pitfall that companies need to avoid is the assumption that climate-related disclosures are not mandatory under IFRS.
Added to this, there are emerging accounting issues associated with climate-change initiatives. For example, some companies may have decided to reduce, or offset, their carbon footprint using carbon credits or to enter into various power purchase agreements to acquire electricity from renewable sources. Without explicit guidance in IFRS that specifies the accounting, the appropriate treatment for such emerging issues will depend on the specific fact patterns and careful analysis to identify the relevant accounting requirements.
Another common pitfall is that there may be limited demonstrable connectivity between the disclosures made by companies inside and outside the financial statements. Regulators have recently taken enforcement actions against companies that failed to provide sufficient disclosure of climate-related matters in their financial statements. Therefore, companies need to make transparent and entity-specific disclosures, such as quantifiable information about assumptions and sensitivities, to illustrate the uncertainty embedded into estimates. Companies also need to ensure consistency in both the disclosure of climate-related matters outside the financial statements and how they incorporate climate risk in their financial information. While some companies may have previously concluded that the impact to the financial statements was not quantitatively material, materiality needs to be assessed based on both quantitative and qualitative factors.
While some companies may have previously concluded that the impact to the financial statements was not quantitatively material, materiality needs to be assessed based on both quantitative and qualitative factors.
Implementation of Pillar Two model rules - many countries are implementing the international tax reform Pillar Two model rules which will require large multinationals to be subject to a global minimum tax rate of 15% on their profits in each jurisdiction from 2024. In May this year, the International Accounting Standards Board (IASB) amended IAS 12 Income Taxes to provide a mandatory temporary exception to the accounting for deferred taxes arising from the jurisdictional implementation of the Pillar Two model rules. As a result, the impact of the international tax reform on a company’s financial performance will affect current income tax expenses in 2024.
In addition, companies are required to disclose, for periods in which the relevant legislation is (substantively) enacted, but not yet effective, known or reasonably estimable information that helps users of financial statements understand their exposure arising from Pillar Two income taxes.
Companies affected by the Pillar Two model rules need to monitor the implementation developments in each relevant jurisdiction. They also need to establish processes to calculate the 2024 current income tax expense and obtain the information necessary to present the disclosures required by the amendments in a timely manner.
Pillar Two model rules are complex and their overall impact on a company would depend on implementation at the jurisdictional level among other things. Therefore, companies affected by the Pillar Two model rules need to monitor the developments around their implementation and (substantive) enactment in each relevant jurisdiction. They also need to establish appropriate processes and procedures to calculate the 2024 current income tax expense and obtain the information necessary to present the disclosures required by the amendments in a timely manner.
Given the prevailing economic environment and recent developments, companies may need to allocate more resources and time for year-end financial reporting. Understanding the changing needs and requirements of both stakeholders and regulators would be key to effective communication and continuous improvements in financial reporting.
Summary
Companies preparing for the forthcoming financial reporting season need to consider how economic challenges will affect going concern assumptions, how to ensure climate change disclosures are transparent while monitoring the impact of Pillar Two model rules. It's essential to monitor these changes, allocate resources effectively, and meet evolving stakeholder and regulatory demands for robust financial reporting in the evolving economic landscape.