This section provides an overview of the key developments relevant to financial reporting since our last edition.
Reporting climate change
Users and other stakeholders are becoming increasingly interested in understanding how the key assumptions and judgments underlying the information disclosed in the front part of the annual report on climate-related matters reconcile with the financial statements – in particular, when they are not consistent. Better connectivity & consistency between the front-end reports and estimates & assumptions in the back-end financial statements is a key are or focus for regulators.
Furthermore, if a company has made and disclosed climate-related commitments in the front part of the annual report, then the assumptions used in the financial statements should be consistent, where appropriate.
Climate-related information is a key area of focus for many regulators. Companies should consider relevant guidance from their local regulators. For example, the European regulator (ESMA) highlights climate-related matters as one of its common enforcement priorities in 2022 annual financial reports & IAASA has also challenged listed companies about their climate related matters. The FRC’s programme of audit quality inspections during 2023 will include attention, amongst other matters, on climate-related risks.
Our climate change resource center provides FAQs to help you identify the potential financial statement impacts for your business and continues to be updated as significant accounting and reporting issues arise.
IFRS Sustainability reporting standards - Introducing a climate-first option
In response to practical concerns about disclosing information about broader sustainability-related risks and opportunities, the International Sustainability Standards Board (ISSB) has agreed a relief that would allow companies to adopt a ‘climate-first’ approach in applying the new IFRS® Sustainability Disclosure Standards.
Companies using this relief would report on climate-related information only in the first year of reporting (The ISSB agreed that the standards will be effective for annual reporting periods beginning on or after 1 January 2024. However, adoption of the standards is dependent on local jurisdictions, so the first application date could differ around the world.). They would have an additional year to report on the full range of sustainability-related risks and opportunities and still state compliance with IFRS Sustainability Disclosure Standards. The relief also includes allowing an additional year before the related comparative information is required.
Getting ready for the new standards
The International Sustainability Standards Board (ISSB) at its February meeting made its last major decisions on finalising the first two standards which were finalised in June 2023.
The ISSB confirmed the:
- effective date as 1 January 2024, subject to adoption by local jurisdictions;
- transition options and proportionality mechanisms available; and
- the sources of guidance companies can use in the absence of IFRS® Sustainability Disclosure Standards.
Impacts of inflation and interest rates on impairment
- For many companies, soaring long-term market interest rates, slowing economic activity and inflation are triggers of possible impairment if they are expected to have (or have already had) a significant adverse effect. This raises the question of how to reflect the potential impacts of these factors in calculating the recoverable amount of non-financial assets and cash-generating units.
- In its enforcement priorities for 2022, the European regulator ESMA urges companies to consider the impacts of the current economic environment (including the effects of increasing interest rates and inflation) and related uncertainties, and to provide relevant disclosures. ESMA expects those companies exposed to high commodity price volatility to provide granular disclosures on how they incorporated this and commodity price increases into their key assumptions (e.g. their cash flow projections, terminal values and growth rates) – both for their costs of production and their ability to pass on higher costs to customers. ESMA expects companies to explain the impact of the increasing interest rates on their impairment testing and consider adjustments to the range of reasonably possible changes in assumptions in their sensitivity analysis.
- Companies that prepare interim financial statements also need to consider whether to update the IAS 36 disclosures included in their most recent annual financial statements.
Actions for management
- any indicators of impairment exist for the company’s non-financial assets or CGUs. If so, perform the impairment test even if recent impairment tests have shown significant headroom;
- cash flow projections used to calculate recoverable amounts have been updated for the effects of rising inflation and interest rates;
- discount rates and long-term growth rates used in valuations have been updated;
- the assumptions used in projecting cash flows and the discount rate are consistent;
- changes are required to the useful lives and/or residual values of assets tested for impairment (or for which indicators of impairment exist); and
- disclosure of key assumptions and judgements is provided as required under IAS 1 and IAS 36.
The KPMG Financial Reporting in uncertain times resource centre identifies and discusses some of the risks – and opportunities which may help you to better understand and to consider the potential financial reporting implications.
New standards & amendments
For accounting periods beginning on/or after 1 Jan’ 2023
Amendments to IFRS 17 Insurance contracts: Initial Application of IFRS 17 and IFRS 9 – Comparative Information (issued on 9 December 2021): (also relevant for non-insurers)
The new insurance standard, IFRS 17 Insurance Contracts, will apply for all companies for annual reporting periods beginning on or after 1 January 2023. IFRS 17 will apply for all companies including for non-insurers. This is because it applies to contracts, regardless of the issuer, and therefore all companies could be affected, not just insurers. IFRS 17 contains more detailed, complex and prescriptive guidance for recognising, measuring and disclosing insurance contracts.
The definition of an insurance contract will change from that under IFRS 4 Insurance Contracts, meaning that some contracts issued by companies could be an insurance contract, even if they are not called insurance contracts – e.g. product breakdown contracts or warranties.
Our IFRS 17 for non-insurers guide includes a framework for identifying insurance contracts and illustrative examples.
Amended standard: Definition of Accounting Estimate – Amendments to IAS 8
Distinguishing between accounting policies and accounting estimates is important because changes in accounting policies are generally applied retrospectively, while changes in accounting estimates are applied prospectively. The approach taken can therefore affect both the reported results and trends between periods.
The amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors clarify how companies should distinguish changes in accounting policies from changes in accounting estimates, with a primary focus on the definition of and clarifications on accounting estimates.
The amendments are effective for periods beginning on or after 1 January 2023, with earlier application permitted, and will apply prospectively to changes in accounting estimates and changes in accounting policies occurring on or after the beginning of the first annual reporting period in which the company applies the amendments.
Amended standard: Disclosure of Accounting policies – Amendments to IAS 1 and IFRS Practice Statement 2
Amendments to IAS 1 Presentation of Financial Statements and an update to IFRS Practice Statement 2 Making Materiality Judgements will help companies provide useful accounting policy disclosures.
The key amendments to IAS 1 include:
- requiring companies to disclose their material accounting policies rather than their significant accounting policies;
- clarifying that accounting policies related to immaterial transactions, other events or conditions are themselves immaterial and as such need not be disclosed; and
- clarifying that not all accounting policies that relate to material transactions, other events or conditions are themselves material to a company’s financial statements.
The Board also amended IFRS Practice Statement 2 to include guidance and two additional examples on the application of materiality to accounting policy disclosures.
The amendments are effective from 1 January 2023 but may be applied earlier.
Global minimum top-up tax - Relief from deferred tax accounting
Amendments to IAS 12
As jurisdictions prepare to amend their local tax laws to introduce the global minimum top-up tax, the International Accounting Standards Board (IASB) has amended IAS 12 Income Taxes to:
- provide companies with a temporary mandatory relief from deferred tax accounting for the impact of the top-up tax; and
- require them to provide new disclosures.
The relief has, at the date of this publication, not been endorsed by EFRAG or adopted by the UK Endorsement Board. As this has not yet been endorsed a question arises as to what to do in the interim accounts (e.g. June 2023). In situations like this, it would be appropriate to look to guidance in other GAAPs. In the US they have guidance that is very similar to this IAS amendment and, therefore, it would be appropriate to use the guidance in this IAS 12 amendment before it is endorse.
No disclosures are required in interim periods ending on or before 31 December 2023.
- Financial Reporting in uncertain times
- Climate change and financial reporting
- Deferred tax related to Assets and Liabilities arising from a Single Transaction – Amendments to IAS 12, and
- International tax reforms and including a global minimum top-up tax.
- IAASA Financial Reporting Decisions - January 2023
In January 2023 IAAA published a compendium of financial reporting decisions. (PDF, 424KB)
- IAASA published its Outcome of financial statements Examinations completed in 2022
In March 2023 the Irish Auditing and Accounting Supervisory Authority (IAASA) published a summary of the outcomes of its examinations of financial reports completed in 2022 (PDF, 661KB). This summary outlines the findings from financial statement examinations completed by IAASA’s Financial Reporting Supervision Unit in 2022.
- IAASA Publication: IFRS 13 Fair value measurement (PDF, 520KB) information requests
This IAASA publication lists the IFRS 13 fair value information requests that IAASA has made to entities during previous financial statement examinations. Consideration as to how entities might respond to such questioning may assist them in assessing whether they have adequately considered the requirements of IFRS 13 in preparing their financial reports.
- ESMA has issued its 2022 Corporate Reporting Enforcement and Regulatory Activities Report
ESMA has published its 2022 Corporate Reporting Enforcement and Regulatory Activities Report, providing an overview of activities carried out by ESMA and enforcers on financial and nonfinancial information and ESEF reporting. ESMA expects issuers, audit committees and auditors to consider the conclusions and recommendations of the report when preparing and auditing financial reports.
- Report -27th Extract from the European Enforcers Coordination Session (EECS’s) Database of Enforcement
ESMA has published extracts from its confidential database of enforcement decision on financial statements (PDF, 630KB). The decisions included in this report were taken by national enforcers in the period from December 2020 to January 2023. This provides the description of the issuer’s accounting treatment, enforcement decision and rational for enforcement decision.
Financial Reporting Council (FRC) Publications
- Annual Review of Corporate Governance reporting 2022 (PDF, 7.4MB)
- FRC issues revised Application Guidance to FRS 100
- FRED 81 FRS 101 Reduced Disclosure Framework – 2022/23 cycle
- Periodic Review of financial reporting standards proposes revised revenue and lease accounting
- FRC announces areas of supervisory focus for 2023/24
- FRC updates 2021 Statement of Intent on ESG
- FRC publishes IFRS 9 Banking Audit Methodology Thematic
Ongoing FRC projects
The FRC continues to have two ongoing projects in respect of local GAAP relating to the:
- FRED 82 Draft amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review
FRED 82 (PDF, 3MB) proposes a number of changes resulting from the second periodic review of FRS 102 and other Financial Reporting Standards. The proposals include: a new model of revenue recognition in FRS 102 and FRS 105; a new model of lease accounting in FRS 102; and various other incremental improvements and clarifications.
The FRED is accompanied by a consultation stage impact assessment. As a result of the amendments set out in FRED 82, FRS 102 will include more transparent reporting of lease obligations, as well as a clear five-step model for determining the recognition of revenue from all contracts with customers.
The proposals have been designed to be proportionate to the size and complexity of the entities applying the standards. The proposed effective date of the amendments set out in the FRED is 1 January 2025. Comments on FRED 82, including the consultation stage impact assessment, closed on 30 April 2023.
- FRED 83 Draft amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and FRS 101 Reduced Disclosure Framework – International tax reform – Pillar Two model rules
The FRC issued FRED 83 Draft amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and FRS 101 Reduced Disclosure Framework – International tax reform – Pillar Two model rules on 5 April 2023. The comment period closed on 24 May 2023. Further detail on the above ongoing projects being undertaken by the FRC can be accessed here.
KPMG Tool for generating newly effective and upcoming IFRS
For further information on new and upcoming IFRS and amendments to IFRS, please refer to the KPMG webtool which allows you to generate a customised list of newly effective and forthcoming IFRS standards for both IASB IFRS and EU IFRS depending on the accounting period of your entity and which contains links to further guidance on each standard or amendment.
Standards available for early adoption from 1/1/2023
Extension of certain Covid-19 temporary measures to 31 December 2023
The interim period of two measures of the Companies (Miscellaneous Provisions) (Covid-19) Act 2020 has been further extended to 31 December 2023 by virtue of the Companies Act 2014 (Section 12A(1)) (Covid-19) (No. 2) Order 2022 [S.I. No. 648/2022] and the Industrial and Provident Societies Act 1893 (Section 14A(1)) (Covid-19) (No. 2) Order 2022 [S.I. No. 649/2022].
The two measures extended are:
- The retention of the increased threshold at which a company is deemed unable to pay its debts, and at which a creditor can seek to put a company into liquidation, to €50,000; and
- The ability for companies and industrial and provident societies in Ireland to hold their AGMs and general meetings virtually up to 31 December 2023.
Extension of the Pension Authority’s existing powers of supervision and enforcement to the provisions of the SFDR Regulation
The European Union (Sustainability-Related Disclosures in the Financial Services Sector) (Occupational Pension Schemes) Regulations 2023 [S.I. No. 86/2023] amend the Pensions Act 1990 to provide that the Pension Authority’s existing powers of supervision and enforcement are extended to the provisions of the Sustainable Financial Disclosure Regulation (as amended by the EU Taxonomy Regulations).
New requirement for company directors to provide their PPS numbers to the CRO
From 11 June 2023, when filing Forms A1 (Company incorporation), B1 (Annual return), B10 (Change of director and/or secretary or their particulars) and B69 (Notification by individual that he/she has ceased to be a director or secretary) with the CRO, company directors will be required to provide their PPS numbers.
This requirement arises from Section 35 the Companies (Corporate Enforcement Authority) Act 2021 which did not originally commence with the other provisions of this Act. Section 35 inserts a new Section 888A into Companies Act 2014.
The PPS numbers will be used by the CRO for identity verification purposes to ensure that the company director is alive and is a natural person.
Where a director does not have a PPSN but has been issued with an RBO number in connection with filings with the Central Register of Beneficial Ownership, the RBO number can be included as the Verified Identity Number (VIN) for the relevant CRO filings. Where a director does not have a PPSN or an RBO number they must apply to the CRO for a Verified Identity Number by means of a Form VIF (Declaration as to Verification of Identity).
Addition of a new targeted greenhouse gas emission - nitrogen trifluoride (NF3) - to the Climate Change Act 2008
The Climate Change (Targeted Greenhouse Gases) Order 2023 [UK S.I. 118/2023] came into force on 3rd February 2023 and adds a new targeted greenhouse gas emission - nitrogen trifluoride (NF3) - to the list of targeted greenhouse gases in Section 24 and Section 92 of the Climate Change Act 2008.
UK entities reporting under SECR (Streamlined Emission Carbon Reporting) must report on their annual quantities of greenhouse gas emissions in tonnes of carbon dioxide equivalent as defined in the Climate Change Act 2008. While this was not previously a legal requirement, it was recommended in the past that companies in scope of SECR should consider including nitrogen trifluoride (NF3) as part of their calculations, especially if material to their operations. This Order now makes that a legal requirement.
Adoption of the EU Directive on improving gender balance among directors of listed companies
Directive (EU) 2022/2381 of the European Parliament and of the Council of 23 November 2022 on improving the gender balance among directors of listed companies and related measures was adopted by the EU on 23 November 2022. Member States are required to transpose the Directive into national law by 28 December 2024.
- This Directive sets out objectives that must be met in respect of more balanced gender representation on the boards of ‘listed’ companies. ‘Listed’ companies are defined in the Directive as being companies with a registered office in an EU member state and whose shares are admitted to trading on an EU Regulated Market. Micro, small and medium-sized listed entities are excluded. These entities are defined in the Directive as entities with less than 250 employees and either annual turnover of less than €50m or balance sheet total of less than €43m.
- It lays down that at least 40% of non-executive director positions in listed companies should be held by members of the underrepresented sex by the 30 June 2026. If member states choose to apply the new rules to both executive and non-executive directors, then the target would be 33% of all such positions.
- The core of the directive stipulates that listed companies which do not achieve the objectives will need to adjust their selection process. However, a country which has either come close to achieving the objectives or put in place equally effective legislation before the Directive enters into force, may suspend the requirements relating to the appointment or selection process.
- Once a year, companies will have to provide information to competent authorities about the gender representation on their boards and the measures they are taking to achieve the 33% or 40% objective. Where a in scope company has not achieved one of the objectives, they must include the reasons for not achieving the objectives and a comprehensive description of the measures which the company has already taken or intends to take in order to achieve them. The relevant information must also be published on the Company website. Where applicable, the information should also be included in the Company’s Corporate Governance Statement.
Corporate Sustainability Reporting Directive (CSRD)
Adoption of the EU Corporate Sustainability Reporting Directive (CSRD)
DIRECTIVE (EU) 2022/2464 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting was adopted on 14 December 2022 and came into force on 5 January 2023. Member States are required to transpose the Directive into national law within 18 months.
The CSRD proposes a phased-in implementation of the rules as follows:
- From 1 January 2024 for large public-interest companies (with over 500 employees) already subject to the non-financial reporting directive, with reports due in 2025;
- From 1 January 2025 for large companies that are not presently subject to the non-financial reporting directive (with more than 250 employees and/or €40 million in turnover and/or €20 million in total assets), with reports due in 2026;
- From 1 January 2026 for listed SMEs and other undertakings, with reports due in 2027. SMEs can opt-out until 2028.
Sustainable Finance Disclosure Regulation (SFDR)
Further Q&As issued by the European Commission on the application of SFDR
On 14 April 2023, the European Commission published a further set of Q&As on the SFDR (PDF, 611KB) in response to the joint ESA’s (EBA, ESMA and EIOPA) questions submitted on 9 September 2022. At the same time, they also published a second annex (PDF, 533KB) containing certain changes to the answers it had provided in previously issued FAQs. See links below for further information.
On 17 May 2023, the European Commission published a set of consolidated Q&As on the SFDR and the RTS on SFDR which incorporates (a) responses given by the European Commission to questions requiring interpretation of EU law (these are coloured blue in the document) and (b) responses generated by the joint ESAs, which relate to the practical application or implementation of the relevant rules (these are left uncoloured). This set of consolidated Q&As replaces the previous versions issued by the EC/joint ESAs, albeit that there has been no newly added guidance or interpretations.
Joint ESA’s proposals to amend the SFDR Level 2 measures
On 12 April 2023, the joint ESAs (EBA, ESMA and EIOPA) published a consultation paper, "Review of SFDR Delegated Regulation regarding PAI and financial product disclosures" (PDF, 1.6MB). This proposes significant changes to the existing disclosures required under the SFDR. In summary, the proposals include substantial changes to the PAI indicators (including additional social indicators, and refinements to calculation methodologies), proposed changes to the do no significant harm (DNSH) aspect of the sustainable investments definition, and material amendments to the mandatory disclosure templates for article 8/9 products. For further information, this consultation paper is set out at the link below.
EU Taxonomy Regulation
Proposed amendments to the Taxonomy Climate Delegated Act
- The proposed ‘Taxonomy Climate Delegated Act’ amends the original ‘Taxonomy Climate Delegated Act’ mainly by establishing the technical screening criteria for climate change mitigation and climate change adaptation for economic activities that are not yet included in that Delegated Act. It also introduces limited amendments of a technical nature to some of the technical screening criteria for activities which were already included in the Taxonomy Climate Delegated Act to improve the usability, coherence and implementation of that Delegated Act.
- The proposed Delegated Act lays down amendments to:
- Annex I to the Taxonomy Climate Delegated Act - by adding or complementing technical screening criteria for climate change mitigation for certain economic activities in the transport and manufacturing sectors; and
- Annex II to the Taxonomy Climate Delegated Act - by adding the technical screening criteria for climate change adaptation for certain economic activities that are adapted to climate change or enable the adaptation of other economic activities from the water, construction, disaster risk management, information and communication, and professional services sectors. Annex II also includes targeted amendments of existing provisions that address certain technical and legal inconsistencies identified since the application of the Taxonomy Climate Delegated Act.
- It also includes targeted amendments to both Annex I and II of existing provisions that address certain technical and legal inconsistencies identified since the application of the Taxonomy Climate Delegated Act.
- It is proposed that these amendments will apply from 1 January 2024.
Proposed new Taxonomy Environmental Delegated Act
The proposed new 'Taxonomy Environmental Delegated Act' specifies the technical screening criteria for the remaining four environmental objectives (i.e. sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems).
This Act also specifies criteria for determining whether those economic activities cause significant harm to any of the other environmental objectives. This Act prioritises those economic activities and sectors that were identified as having the biggest potential to make a substantial contribution to one or more of the four environmental objectives and for which it was possible to develop or refine the recommended criteria without further delay. For certain sectors and activities, such as agriculture, forestry or fishing, as well as certain manufacturing activities, a further assessment and calibration of criteria will be required at a future date.
It also proposes some minor amendments to both the ‘Taxonomy Climate Delegated Act’, and to the Annexes to the Article 8 Taxonomy Disclosures Delegated Act to provide certain clarifications and some correction of errors.
It is proposed that these amendments will apply from 1 January 2024, but on a phased-in basis.