Investors need to be able to connect the information in the financial statements – e.g. about the assumptions used in calculating the recoverable amount – with the information a company provides outside the financial statements (e.g. in the front part of the annual report).
To tell a connected story, companies need to provide a coherent, connected and integrated picture across their financial statements, management discussion and analysis (MD&A) and sustainability-related disclosures, regardless of the frameworks or standards used outside the financial statements.
New standards for sustainability reporting – including European Sustainability Reporting Standards and IFRS® Sustainability Disclosure Standards – mean that the focus on this topic is increasing rapidly.
Although the data and assumptions used to disclose information in the front part of the annual report (e.g. in the MD&A, management commentary and sustainability reports) may differ from those used in the financial statements (see Question 2), they need to be consistent where appropriate.
If inconsistencies exist, then disclosing the significant differences in assumptions and the reasons for them may be necessary to help stakeholders understand and reconcile the information in the front part of the report to the financial statements. In addition, some sustainability reporting frameworks may require disclosing this information as part of the sustainability report.
Your questions answered
When evaluating the connectivity of its reporting (in the context of impairment testing), a company considers whether:
- there is a material difference between the information on climate-related matters provided outside the financial statements (e.g. in the front part of the annual report) and the inputs and assumptions used to estimate useful lives, residual values or recoverable amounts of the company’s non-current assets (or cash-generating units (CGUs)); and
- the company’s growth rates, profit margins and other cash flow assumptions included in the forecast period and the terminal value formula are consistent, where appropriate, with its climate-related strategy (e.g. its plan to transition to a lower carbon economy) and targets, or with its climate-related commitments, as disclosed outside the financial statements (e.g. in the front part of the annual report).
Yes, there can be apparent differences between the assumptions used to calculate the recoverable amount and the narrative descriptions or quantitative information disclosed outside the financial statements – e.g. for sustainability reporting – even though the facts and circumstances are the same.
This is because the recognition and measurement requirements of IFRS Accounting Standards apply when calculating the recoverable amount.
The following table sets out examples depending on whether the company is calculating the recoverable amount based on value in use (VIU) or on fair value less costs of disposal (FVLCD).
VIU | Under VIU it may not be appropriate to reflect a company’s transition plan to a lower carbon economy or climate-related commitments given the constraints of IAS 36 Impairment of Assets on reflecting certain asset enhancements or improvements (see Cash flow projections: Question 6) and on reflecting uncommitted restructurings (see Cash flow projections: Question 9). Additionally, differences may exist because of the length of the forecast period. Under IAS 36, cash flow projections cover a maximum period of five years when estimating the VIU of an asset (or CGU), unless a longer period can be justified (see Terminal value: Question 2). A similar five-year limit does not exist under European Sustainability Reporting Standards or IFRS Sustainability Disclosure Standards. For sustainability-related financial disclosures, a company may therefore consider a longer explicit forecasting period before any extrapolation. |
FVLCD | Differences in estimates and assumptions may exist when the recoverable amount is calculated under FVLCD. This is because a company may provide information outside the financial statements (e.g. in the front part of the annual report) from its own perspective, but the estimates and assumptions used in a FVLCD calculation are from the perspective of a market participant. |
Not necessarily. Some sustainability disclosure standards require companies to use scenario analysis to assess their climate resilience. If a company performs a 'what-if' analysis of the potential impacts from sustainability-related risks and assumptions to identify and assess uncertain outcomes in a range of hypothetical situations, then this differs from cash flow projections for impairment testing purposes, which are a forecast of what is expected to happen.
The scenarios used to perform climate-related scenario analysis may differ from scenarios used under the expected cash flow approach. Scenario analysis does not rely on probability and does not aim to forecast or predict (by assessing likelihood).
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