Disclosing judgements, assumptions and estimates

Under the proposals, companies would need to:

• apply judgement – e.g. when identifying relevant disclosures and material sustainability-related financial information;
• make assumptions – e.g. when considering whether information about possible future events that have uncertain outcomes is material; and
• use estimates – e.g. when metrics cannot be measured directly and measurement uncertainty arises.

Companies would need to disclose:

• assumptions about the future and other sources of significant outcome uncertainty;
• metrics that have significant estimation uncertainty (companies would also need to explain the sources and nature of estimation uncertainties, and the factors affecting the uncertainties); and
• the sustainability-related risks and opportunities that could reasonably give rise to a material adjustment to the carrying amounts of assets and liabilities in the next financial year.

A company would need to ensure that its sustainability-related data and assumptions are consistent with those used in its financial statements ‘to the extent possible’. For example, information disclosed as part of sustainability-related reporting about a company’s plan to replace its existing machinery with a greener alternative – e.g. in the next five years – would need to be consistent with assumptions and estimates made in relation to that machinery in the financial statements.

In addressing the feedback, the ISSB agreed to add requirements for companies to:

• disclose information about the judgements that had the most significant effects;
• identify the sources of guidance used in preparing sustainability-related financial information; and
• explain any differences in assumptions used in preparing sustainability-related information, compared with those used for the financial statements.

It agreed to clarify that the disclosure requirements related to estimation uncertainty will also be relevant for current and anticipated financial effects, in addition to metrics.

It also agreed to clarify the meaning of ‘to the extent possible’ by making clear that this was intended to cover situations in which the requirements of IFRS® Accounting Standards (or other generally accepted accounting principles) differ from IFRS Sustainability Disclosure Standards.

These additional requirements would support users in understanding the decisions management has made and allow them to make informed judgements.

Although new disclosure requirements would be added, they are based on the information that companies already have.

Generally, sustainability-related financial information should be based on the same set of facts and circumstances as the financial statements – and financial and sustainability reporting teams need to work together to ensure that this is the case.

However, in some circumstances, financial and sustainability reporting standards may require different data and assumptions to be used. For example, multiple sets of assumptions may be used as part of scenario analysis to inform the assessment of resilience, including assumptions that are not consistent with those used to prepare impairment analysis.

If a company uses different financial data and assumptions, then it will need to explain this. 

• Understand the proposed requirements on using consistent data and assumptions. See our guide for more detail.
• Identify reporting areas that involve judgements, assumptions and estimates and document the key factors and decisions required.
• Make sure that financial and sustainability reporting specialists work together so that sustainability-related financial information is prepared based on the same set of facts and circumstances as the financial statements.
• Identify areas where reporting standards require different data and assumptions to be used. Make sure that such differences can be explained and justified.