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TAC Public Meeting June 2024 Paper 5: Judgements uncertainties and errors including revising comparatives
UK Sustainability Technical Advisory Committee AGENDA PAPER 5
Executive summary
| Header | Details |
|---|---|
| Date | 18 June 2024 |
| Paper reference | 2024-TAC-007 |
| Project | Technical assessment of IFRS S1 and IFRS S2 |
| Topic | Judgements, uncertainties and errors, including revising comparatives |
Objective of the paper
This paper presents an analysis of the requirements in IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) that require entities to disclose information about the judgements, assumptions and uncertainties used in the preparation and presentation of sustainability-related disclosures. This paper also reviews the requirements for entities to restate comparative amounts to correct material errors, and to revise comparative amounts due to changes in estimates.
The TAC is asked to consider whether these requirements are appropriate and whether further guidance may be required.
Decisions for the TAC
The TAC is asked to tentatively decide to maintain the requirements in IFRS S1 on the disclosure of judgements, uncertainties and errors, including the requirement to revise comparatives due to changes in estimates. However, the TAC is also asked to tentatively decide to provide feedback to the International Sustainability Standards Board (ISSB) about the need for clarification and guidance on the application of the requirements.
Appendices
There are no appendices to this paper.
This paper has been prepared by the Secretariat for the UK Sustainability Disclosure Technical Advisory Committee (TAC) to discuss in a public meeting. This paper does not represent the views of the TAC or any individual TAC member.
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Context
1IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) sets out requirements for the disclosure and application of judgement and the use of assumptions and estimates in the preparation of an entity’s sustainability-related disclosures. IFRS S1 also sets out the requirements for how entities should address errors and changes in estimates in the disclosure of comparative information. The relevant references to the requirements in IFRS S1 are as follows:
- Paragraphs 74–76 Judgements
- Paragraphs 77–82 Measurement uncertainty
- Paragraphs 83–86 and B55–B59 Errors
- Paragraphs B49–59 Comparative information
2Respondents to the Exposure Draft of IFRS S1 indicated that information about how an entity has prepared its sustainability-related disclosures would be useful for users to understand the completeness of the information and would support the assurance of the information. Based on this feedback, the International Sustainability Standards Board (ISSB) introduced requirements in IFRS S1 for an entity to disclose the judgements, assumptions and estimates it has used in the preparation and disclosure of sustainability-related information.
3IFRS S1 requires the disclosure of information about the judgements used to prepare disclosures that have the most significant effect on the information disclosed, apart from those involving estimation. In relation to the use of estimation, IFRS S1 requires the disclosure of information about the significant uncertainties affecting amounts reported in the sustainability-related disclosures. This includes identifying the amounts that are subject to high uncertainty and disclosing the sources of this uncertainty and assumptions, approximations and judgements used in measuring the amount.
4IFRS S1 also requires entities to restate comparative amounts for the prior period(s) to correct material errors, unless impracticable to do so. IFRS S1 also requires an entity to revise comparative amounts for the prior period(s) if the entity identifies new information in relation to an estimate that provides evidence of circumstances that existed in that period—unless impracticable or the metric is forward-looking. Entities are required to disclose the revised comparative amount, including the difference between the amount disclosed in the preceding period and the revised comparative amount, and explain why the amount has been revised. Additionally, entities are required to disclose this information if it redefines or replaces a metric.
Endorsement criteria
5The endorsement criteria applied in the analysis of this technical area include whether:
- use of the IFRS Sustainability Disclosure Standard is likely to result in an improvement in the international comparability of sustainability-related reporting in the UK.
- use of the IFRS Sustainability Disclosure Standard is likely to support companies in making disclosures that are understandable, relevant, reliable and comparable.
- companies are likely to be able to provide the disclosures required by the IFRS Sustainability Disclosure Standard within the timeframes that a company normally reports without undue cost or effort.
Analysis
6In relation to the requirements on judgements, uncertainties and errors, there are two matters for the TAC to discuss, including:
6.1whether requirements in IFRS S1 for the disclosure of judgements and uncertainties are sufficient and clear. Paragraphs 7–13 outline the views from stakeholders which suggest that these disclosure requirements are welcomed, but further guidance on how to apply the requirements to sustainability-related information might be required. The TAC may consider whether to maintain the requirements but request further guidance from the ISSB to support the application of the requirements.
6.2whether the requirements in IFRS S1 for the restatement of comparatives due to an error and a revision of comparatives due to a change in estimate are appropriate. Paragraphs 14–26 outline the views from stakeholders and analyse the challenges with restating and revising comparatives. The requirement to restate comparatives due to an error is broadly welcomed by stakeholders who recognise that this is similar to financial reporting requirements. However, stakeholders have raised concerns about the burden of being required to revise comparatives due to a change in estimate and the TAC is asked to consider whether it is necessary to amend or remove this requirement.
Judgements and measurement uncertainty
7Stakeholders that responded to the TAC’s call for evidence and attended the roundtables broadly supported the requirements for entities to disclose information about the judgements and measurement uncertainties used in preparing and presenting sustainability-related disclosures as they are consistent with IFRS Accounting Standards—namely IAS 1 Presentation of Financial Statements (IAS 1) 12—and will likely facilitate a better understanding of any assumptions an entity has used that underpin its preparation and presentation of sustainability-related information. These requirements are also consistent with UK Accounting Standards—namely Section 8 Notes to the Financial Statements of FRS 102. It is important to note that accounting standards (both international and UK) use the term ‘estimation uncertainty’ whereas IFRS S1 uses ‘measurement uncertainty’. The difference in terminology reflects sustainability-related information having other sources of uncertainty, not just those relating to estimates.
8In particular, stakeholders acknowledged that information about judgements and measurement uncertainties would help users understand the assumptions an entity has made in its preparation of the sustainability-related disclosures and the extent that those assumptions may affect its future position, performance and cash flow.
9Whilst stakeholders broadly supported the requirements on judgements and measurement uncertainty, some also suggested that this technical area should be kept under review as practice develops.
Disclosing information about judgements
10Many stakeholders acknowledged the vital importance of judgement in the preparation of sustainability-related information, especially in the first years of reporting. As noted by stakeholders, this is particularly due to the challenges with the availability and quality of data, lack of developed methodologies and the uncertainty associated with forward-looking information. Some stakeholders also noted that significant judgement will need to be applied to the identification of sustainability-related risks and opportunities and in the assessment of what material information should be disclosed. Some stakeholders requested that the government and regulators specifically emphasise the importance of the use of judgement in determining the materiality of sustainability-related information.
11Given the high amount of judgement that will need to be applied in preparing sustainability-related disclosures, it could be suggested that requiring an entity to disclose its judgements would be a significant undertaking. However, IFRS S1 only requires the disclosure of judgements that have the most significant effect on the information. This is similar to the approach in IAS 1 paragraphs 122–124 that requires entities to disclose information about the judgements made in applying accounting policies that most significantly affect the amounts recognised in the financial statements.
Disclosing information about measurement uncertainty
12The use of estimates is a fundamental part of sustainability-related disclosure due to the nature of the information required to prepare the disclosures. IFRS S1 and IFRS S2 Climate-related Disclosures (IFRS S2) require the disclosure of forward-looking information—for example, information about the anticipated effects of sustainability-related risks and opportunities on the entity’s future financial position, financial performance and cash flows—which depends on a number of assumptions about possible events and uncertain future outcomes. Additionally, IFRS S1 and IFRS S2 require the disclosure of historical data that is often reliant on estimates due to challenges with the collection of data—for example, Scope 3 greenhouse gas information is contingent on the availability and quality of data from the entity’s value chain and often relies upon estimation techniques to complete data sets.
13Stakeholders broadly supported the disclosure requirements in IFRS S1 that require entities to identify the amounts in the disclosure that are subject to a high level of measurement uncertainty, and to disclose the sources of the measurement uncertainty and the assumptions, approximations and judgements used by the entity. By providing this information, users will be able to better understand the completeness and reliability of the information in the disclosures and make more informed capital allocation decisions.
Restating comparative information due to material errors
14Stakeholders broadly supported the requirements in IFRS S1 paragraphs 83–86 and B55-B59 on the restatement of comparative amounts due to material errors, as this is consistent with IFRS Accounting Standards—namely IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8)—which requires any prior-period errors to be corrected retrospectively. This is also consistent with UK Accounting Standards—namely Section 10 Accounting Policies, Estimates and Errors of FRS 102.
15However, some stakeholders also requested further guidance on how to assess the materiality threshold for errors in sustainability-related disclosures, which is not as well-established as restating financial statements. Usually an entity will use quantitative, and sometimes qualitative, factors to determine whether an accounting error is material and therefore requires restatement.
16Stakeholders also mentioned that there may be need for regulators to acknowledge that there will be more restatements, particularly in the earlier years of reporting. These stakeholders noted that they would welcome an acknowledgement that restatements are likely in the early years of applying sustainability-related reporting requirements and may even signal improvements in data quality.
Revising comparatives due to change in estimates
17IFRS S1 paragraphs B50–B54 requires entities to revise comparative amounts—except narrative information or forward-looking metrics—due to changes in estimates, which differs from the approach taken in IAS 8, which does not require comparative amounts to be revised when there are changes in accounting estimates.
18There were mixed views on this requirement. Some stakeholders recognised the importance of revising comparatives as a result of a change in estimate to allow users to compare current period amounts and to reflect the heavy reliance on estimation for the calculation of sustainability-related metrics and agreed that changes in comparatives should be accompanied by an explanation. Some stakeholders also agreed that the requirement to revise comparatives and explain changes in estimates will discourage entities from redefining metrics in order to present a better result in their disclosure. One stakeholder recommended that further guidance is provided on how to categorise the different causes that may be relevant to understand the source of restatement.
19There were some concerns about the burden arising from the revision of comparatives as a result of changes in estimates, especially as sustainability-related information is highly dependent on the use of estimates. Some stakeholders requested that changes in estimates should be permitted without the constraint of having to revise the prior period amount to encourage greater adoption of refreshed estimates. These stakeholders suggested that the use of reliable estimates will improve over time and the need to revise comparatives will be less of an issue in the future.
20However, some stakeholders noted that this requirement is different to IFRS Accounting Standards and is a technical area that is likely to be new for entities and will require a steep learning curve. Some stakeholders suggested that this is a technical area that should be kept under review as practice develops, and guidance may be needed to support the application of the requirements.
21In June 2024, the Transition Implementation Group on IFRS S1 and IFRS S2 (TIG) is scheduled to discuss AP1: Revision of preceding period estimated amounts when estimating information from an entity in the value chain. The question and fact pattern presented in the paper demonstrates the complexity that entities may have when revising comparatives due to changes in estimates, especially in relation to data collected in the value chain. This question will be discussed by the TIG on 13 June 2024.
Impracticable
22IFRS S1 paragraph B51 states that an entity need not disclose a revised comparative amount if it impracticable to do so. IFRS S1 paragraph B54 further requires an entity to disclose when it is impracticable to revise comparative amounts for a preceding period. IFRS S1 Appendix A defines 'impracticable' as 'when an entity cannot apply [a requirement] after making every reasonable effort to do so.' Some stakeholders requested guidance on what ‘impracticable' means and how it should be applied in the preparation of sustainability-related disclosures. This request from stakeholders related to all instances of where 'impracticable' is used in IFRS S1 and IFRS S2, not just the requirements on revising comparative amounts.
Difference between an error and an estimate
23IFRS S1 paragraph 85 asserts that corrections of errors—which result from the deliberate or accidental omissions from and misstatements in sustainability-related financial disclosures—are distinguishable from revisions in amounts due to changes in estimates. Estimates, by their very nature, are approximations which might need to be changed as additional or updated information becomes available to the entity. This description of the difference between errors and estimates is aligned to IAS 8 paragraph 48.
24Some stakeholders questioned whether it is possible to adequately differentiate between an error and estimate in relation to sustainability-related information, especially if there is an error in an estimate that is provided by a third-party source. In this circumstance, stakeholders were unclear as to whether this would count as an error or as an update to an estimate. Some stakeholders acknowledged that the distinction between an error and change in estimate is clear in financial reporting, but its treatment is different in sustainability-related reporting. One stakeholder suggested that entities may describe a change in comparative amounts as a change in estimate rather than a material error to avoid having to restate the information and to avoid suggestion of greenwashing. Stakeholders recommended that further guidance is provided on how to distinguish between an error and an estimate, especially when the change in estimate is due to an error.
Revising versus restating
25Not only is there a distinction between errors and estimates, the requirements in IFRS S1 also differ in relation to the treatment of the error and change in estimate. When material errors are identified, entities are required to restate the comparative information, whereas a change in estimate only requires entities to revise comparative amounts. In some jurisdictions, a restatement of a material error would require the reissuance of a corrected disclosure, whereas a revision would only require updated comparative amounts in the current period disclosures. However, in the UK, entities usually restate a comparative amount to correct an error in the current period report, rather than reissuing the prior period report (unless an error is very significant). Therefore, there may be no difference in the UK between the requirement to restate a comparative and revise a comparative. As the treatment of an error and change in estimate is therefore likely to be the same in the UK, the concern noted in paragraph 24 about whether a change is categorised as an error or change in estimate may be less relevant in relation to sustainability-related information.
Connectivity with other information
26One stakeholder also highlighted concerns about when comparative information interacts with other reporting areas—in particular, when comparative data is linked to executive remuneration policies. This stakeholder was concerned about the implication for remuneration that has already been paid out if the metric is subsequently revised, and how this information should be reported on in the directors’ remuneration report. This may fall under malus and clawback provision. In The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) Schedule 8 paragraph 26(e), entities are required to explain in the remuneration policy the circumstances in which a payment may be withheld.
Endorsement recommendations
Alternative options considered but not recommended
27In considering the TAC’s endorsement recommendations on the requirements to disclose judgements, uncertainties and errors, the Secretariat considered alternative options that have been disregarded. The criteria for amending the standards—notably that changes are considered necessary for the effective application within the UK and failure to amend the standard would be of detriment to the long-term public good—have not been met in this instance.
28The alternative options that were considered but not recommended included:
28.1to remove the requirement in IFRS S1 to revise comparative amounts due to changes in estimates. This requirement is different to IFRS Accounting Standards which does not require comparative amounts to be revised when there is a change in estimate. However, if the requirement is removed, the quality of reporting may be compromised—especially in relation to the reliability and comparability of the amounts disclosed.
28.2to add additional wording to the requirement in IFRS S1 that further describes the difference between an error and an estimate in relation to sustainability-related information. In particular, additional wording about how to treat errors in estimates could be helpful in the application of the requirements. However, to maintain the global baseline and international comparability of the sustainability-related reporting in the UK, any additional description of the difference between an error and estimate should be drafted by the ISSB. Therefore, rather than add additional wording to the requirements, the TAC may consider providing feedback to the ISSB and requesting clarification.
Suggested endorsement recommendation
29On balance, and based on the analysis provided in this paper, the TAC is asked to tentatively recommend that the requirements in IFRS S1 on judgements, uncertainties and errors are maintained without amendment but note in its advice to the Department for Business and Trade (DBT) that further guidance may be required. The TAC could discuss the content of any suggested guidance at a later time.
30By maintaining the requirements, the UK Sustainability Reporting Standards may support entities in making disclosures that are understandable, reliable and comparable—therefore, improving the quality of corporate reporting in the UK.
31However, by maintaining these requirements, especially the requirement to revise comparative amounts due to changes in estimates, entities may observe challenges in providing disclosures within the timeframes a company normally reports without undue cost or effort. The Secretariat note that these challenges are likely to occur in the first years of applying the standards and may improve over time—especially as the use of reliable estimates may improve and the need to revise comparatives will reduce in the future.
32The TAC may note that this is a technical area that needs to be observed as practice develops in order to provide feedback to the ISSB during their post-implementation review of IFRS S1.
Questions for the TAC
- Does the TAC agree with the analysis in this paper in relation to the requirements in IFRS S1 relating to judgements, uncertainties and errors, including revising comparatives due to changes in estimates?
- Does the TAC tentatively recommend to maintain the requirements in IFRS S1 paragraphs 74–76 relating to judgements?
- Does the TAC tentatively recommend to maintain the requirements in IFRS S1 paragraphs 77–82 relating to measurement uncertainty?
- Does the TAC tentatively recommend to maintain the requirements in IFRS S1 paragraphs 83–86 and B55–B59 relating to errors?
- Does the TAC tentatively recommend to maintain the requirements in IFRS S1 paragraphs B50–B54 relating to revising comparative amounts due to changes in estimate?
- Does the TAC tentatively recommend to flag to DBT that additional guidance may be required?
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The International Accounting Standards Board issued IFRS 18 Presentation and Disclosure in Financial Statements on 9 April 2024 which will replace IAS 1 (subject to an endorsement decision by the UK Endorsement Board). ↩
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UK Accounting Standards also include requirements for the disclosure of judgements and measurement uncertainties in paragraphs 8.6-8.7. ↩