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TAC Public Meeting June 2024 Paper 6: Reporting entity boundary and consolidated reporting
Executive summary
| Date | 18 June 2024 |
| Paper reference | 2024-TAC-008 |
| Project | Technical assessment of IFRS S1 and IFRS S2 |
| Topic | Reporting entity boundary and consolidated reporting |
Objective of the paper
This paper presents an analysis of the reporting entity boundary and consolidated reporting issues that have been raised by stakeholders in relation to the requirements in IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-related Disclosures (IFRS S2).
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 relating to reporting entity boundary and consolidated reporting.
The TAC may also include in its advice to the Department of Business and Trade (DBT) a number of additional observations and issues that are noted in relation to reporting entity boundary and consolidated reporting.
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 the requirements for the entity for which sustainability-related reporting should be disclosed. The requirement in IFRS S1 is that an entity's sustainability-related financial disclosures should be prepared and disclosed for the same reporting entity as the related financial statements. The relevant references in IFRS S1 are as follows:
- Paragraph 20 Reporting entity
- Paragraph B38 Reporting entity (paragraph 20)
2This paper refers to the 'reporting entity boundary' which, for the purposes of this paper, identifies the set of economic activities that should be captured within an entity's sustainability-related reporting. The paper also considers issues raised about consolidated reporting and the extent to which subsidiaries within a group should be required to make entity-level sustainability-related disclosures.
Endorsement criteria
3The 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;
- use of the IFRS Sustainability Disclosure Standard is likely to improve the quality of corporate reporting within the UK in the long-term; and
- 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
4In relation to the requirements on reporting entity boundary and consolidated reporting, there are three matters for the TAC to discuss, including:
4.1Feedback on the application of IFRS S1 and IFRS S2 Climate-related Disclosures (IFRS S2) to subsidiaries when the parent prepares group accounts that include the subsidiary.
4.2Differences in the reporting entity requirements set out in IFRS S1 and IFRS S2 which may lead to the entity reporting boundary for financial disclosures differing from the entity reporting boundary for sustainability-related disclosures.
4.3How to treat changes in group structures (e.g., acquisitions and disposals) and whether additional guidance should be sought.
Subsidiary-level reporting
5Where financial statements are prepared for subsidiaries within a group, as part of UK implementation, consideration could be given to requiring these subsidiaries to also prepare for sustainability-related financial disclosures. Under the climate-related financial disclosures in the Companies Act, companies are expected to report at the group level (or at the company level if not included within consolidated group reporting). Subsidiaries whose activities are included within the consolidated group report of a UK parent that complies with the climate-related financial disclosures requirements are not required to report separately.
6Although this is an implementation issue, stakeholders have provided feedback that there should be an exemption for subsidiaries from making sustainability-related disclosures when their parent prepares these disclosures at a consolidated level. There would be a number of advantages to this approach as explained in the following paragraphs.
6.1An exemption would reduce the regulatory cost and burden for groups and could avoid duplication of information.
6.2Sustainability strategies, processes, targets and metrics are not always set or managed at entity level so sustainability-related data at subsidiary level may not provide meaningful data and insights.
6.3Some subsidiaries have limited functions and exist purely to support the group, for example a service subsidiary to pay employees. It may be questionable as to whether sustainability-related disclosures for entities like this are meaningful.
6.4Stakeholders have suggested that subsidiary-level reporting does not necessarily provide decision-useful information for primary users. This is particularly the case for wholly owned subsidiaries, where the primary user is the parent company who may not benefit from the reporting.
6.5It would align with the existing practice for subsidiaries that are exempt from making climate-related financial disclosures under the Companies Act 2006.
7However, there would be a number of advantages to subsidiary-level sustainability disclosures as outlined in the following paragraphs.
7.1Subsidiary-level disclosure would support connectivity by enabling users to view the financial and sustainability-related data together for a ‘whole-of-entity' view of risks, performance and opportunities.
7.2Sustainability matters affecting subsidiaries would be disclosed providing more granularity and providing insights into data which might otherwise be lost in aggregated parent consolidated reports.
7.3Investors have indicated that subsidiary-level disclosures would be useful, particularly if subsidiaries are related to different geographic or business segments within the group. It is also acknowledged that there may be other primary users such as lenders and creditors, and for partially owned subsidiaries, investors external to the group.
7.4Some subsidiaries may be substantial in size and/or operate autonomously compared to the rest of the group so that their subsidiary-level disclosures could be more meaningful.
7.5It may help to embed sustainability mindsets and strengthen the management of sustainability-related risks and opportunities at subsidiary level thereby helping to improve the quality of corporate reporting within the UK in the long-term.
8Consideration will also need to be given by DBT as to how any subsidiary level sustainability reporting requirements would interact with existing provisions in the Companies Act, such as section 401. Section 401 exempts intermediate parent entities from the requirement to prepare consolidated financial statements when the intermediate parent is itself a subsidiary of a non-UK parent that meets the requirement. A number of conditions must be met including that the non-UK parent should prepare accounts in accordance with accounting standards that are equivalent to UK-adopted international accounting standards. It might be considered undesirable for a situation to arise where a UK intermediate parent is exempt from preparing consolidated financial statements but required to report consolidated sustainability-related disclosures. This would lead to clear challenges in connecting the information and allowing users to have a complete picture of the financial and sustainability risks, opportunities and performance. As such the interaction with section 401 should be carefully considered when assessing the scope and implementation of IFRS S1 and IFRS S2 in the UK.
Differences in defining reporting boundaries
9Some stakeholders have highlighted what they perceive to be differences in the definition of entity reporting boundaries in IFRS S1 and IFRS S2. The following are examples:
9.1the interaction with financial accounting definitions. For entities that prepare consolidated financial statements using International Financial Reporting Standards (IFRS), a determination as to what entities to include in the consolidated accounts is made by reference to IFRS 10 Consolidated Financial Statements (IFRS 10).' Stakeholders have characterised the approach in IFRS 10 as a 'financial view' of control and argue that this differs from the more 'operational view' of control that underpins IFRS S1 and IFRS S2. If sustainability-related risks and opportunities are managed at group level using an operational view of control, then the way in which subsidiaries' sustainability matters are managed and measured may not align with the boundary used by the entity to prepare its financial statements. The scope of reporting related to the different frameworks may therefore have inconsistencies.
9.2the interaction with the Greenhouse Gas Protocol (GHG Protocol). Paragraph 22 (9)(ii) states that an entity shall measure its greenhouse gas emissions in accordance with the GHG Protocol. The GHG Protocol permits three possible methods of consolidation for reporting purposes based on either financial control, operational control or equity share. Consequently, the reporting of an entity's greenhouse gas emissions may not align with the entity's financial reporting boundary (because of the potentially different treatments of subsidiaries, joint ventures, associates, other equity investments, joint operations and franchises). It may therefore be difficult to connect the financial information to the sustainability information and draw conclusions, as both sets of data may refer to a similar but different set of economic activities. This also means that the requirement for an entity's sustainability-related financial disclosures to be for the same reporting entity as the related financial statements may not be met.
9.3Stakeholders flagged that a similar challenge arises in relation to the existing UK Streamlined Energy and Carbon Reporting (SECR) requirements. The SECR legislation does not prescribe a calculation methodology but government guidance recommends, among other approaches, the use of the GHG Protocol. The application of the GHG Protocol will be addressed in a later TAC paper. There is also an option under SECR to exclude energy and carbon information relating to a subsidiary from the group report which the subsidiary would not itself be obliged to include if reporting on its own account.
10Due to the apparently different scopes defined within IFRS S1 and IFRS S2, entities may find it difficult to exactly align the entity reporting boundary for their financial disclosures with the entity reporting boundary for their sustainability-related disclosures. Paragraph BC85 of the IFRS S1 Basis for Conclusions explains that the requirement for the reporting entity to be the same for both financial statements and sustainability-related financial disclosures 'is designed to enable information disclosed in the financial statements to be connected with sustainability-related financial information.' However, in practice, this is not always possible as the reporting boundary specified for different sustainability disclosures may not always align with the reporting boundary for financial reporting. Stakeholders have flagged that these apparent 'inconsistencies' (e.g.: that the scope of activities included in an entity's greenhouse gas emissions disclosures may not align with the scope of activities included in the entity's financial reporting) mean that the same entity reporting boundary will not necessarily be applied to all disclosures. Even within the sustainability disclosures the reporting entity boundary may differ, for example a joint venture or franchise may be included in the entity's own direct greenhouse gas emissions disclosures but excluded from scenario analysis. These differing boundaries may compromise the comparability, connectivity and consistency of the disclosures.
Changes in group structures
11One stakeholder identified a need for further clarity as to how to treat changes to the structure of the group, for example through acquisitions and disposals, under IFRS S1 and IFRS S2. Additional clarity on the treatment of metrics in the base period, comparatives and general sustainability reporting would be welcomed. The GHG Protocol provides guidance on how to address 'acquisitions, divestments, and mergers' to facilitate meaningful comparisons over time and maintain consistency. This would include how to recalculate the base year and historic emissions for greenhouse gas emissions; how to adjust annualised metrics that may have seasonal differences; and how to present comparatives. Ideally any new guidance should come from the International Sustainability Standards Board (ISSB).
12In June 2024, the Technical Implementation Group on IFRS S1 and IFRS S2 (TIG) is scheduled to discuss AP2: Application of the requirements on comparative information when acquiring or disposing of a subsidiary. This TIG paper addresses some of the issues identified in this paper. As this TAC paper is being published before the outcome of the ISSB TIG meeting is known, an update will be provided at the TAC meeting which may determine whether or how this particular issue is taken forward.
Other jurisdictional approaches
13As noted in TAC Paper 2024-TAC-001, the TAC may observe the implementation of specific matters in IFRS S1 and IFRS S2 in jurisdictions outside the UK that might impact international comparability. For the purposes of this technical area, practices in the EU and Singapore have been identified for TAC consideration as these two jurisdictions were highlighted by stakeholders.
European Union
14The EU Corporate Sustainability Reporting Directive (CSRD) is implemented by way of amendments to existing EU directives and therefore extends to an existing exemption1 in the EU Accounting Directive. As a result, all subsidiaries are exempt from the obligation to report sustainability-related information where this information is included as part of their parent's consolidated sustainability-related reporting. If the ultimate parent is located outside of the EU, the exemption also applies provided the ultimate parent reporting at group level complies with the CSRD or 'equivalent' sustainability reporting standards. The exemption does not apply to public interest entities that reach the large company thresholds. A formal decision by the EU is required before any other jurisdictional sustainability disclosure framework would be considered 'equivalent.' A UK intermediate parent company could then be exempt from reporting under CSRD provided its parent prepares consolidated sustainability-related disclosures under CSRD or an 'equivalent' framework.
15It should be noted that the EU Accounting Directive also includes a provision2 which exempts intermediate parent entities from preparing consolidated financial statements and a consolidated management report where that parent is itself a subsidiary of another parent that meets the requirement. Ultimate parent entities that prepare accounts ‘equivalent' to EU-endorsed IFRS are also captured by this exemption. So a UK intermediate parent company may then be exempt from preparing consolidated financial statements for EU compliance purposes, provided its parent prepares consolidated financial statements that comply with EU-endorsed IFRS or, if they are deemed ‘equivalent', that comply with UK-adopted international accounting standards.
16These exemptions work independently. Therefore, an intermediate parent that is itself a subsidiary may be exempt from preparing consolidated financial statements and a consolidated management report under the exemption described in paragraph 15 if its parent is meeting that requirement. However, if the ultimate parent's sustainability-related reporting is not in compliance with the CSRD or 'equivalent' reporting frameworks the intermediate parent would not be entitled to the exemption described in paragraph 14 for reporting consolidated sustainability-related information. The situation could then arise that, from an EU perspective, an intermediate parent entity would be required to make public sustainability-related disclosures without being required to publish the related financial statements and management report. If equivalence decisions on UK-adopted international accounting standards and UK Sustainability Reporting Standards are taken at different times, then a UK intermediate parent company could also find itself exempt from preparing consolidated financial statements for EU compliance purposes but required to make EU sustainability-related disclosures.
Singapore
17Singapore has announced that large non-listed companies will be exempt from reporting climate-related disclosures if their parent company prepares consolidated reporting using ISSB-aligned local reporting standards or equivalent standards (e.g. European Sustainability Reporting Standards). Non-listed companies whose parents prepare consolidated climate-related disclosures using other international standards and frameworks (e.g. Global Reporting Initiative Standards (GRI), Task Force on Climate-related Financial Disclosures Recommendations (TCFD)), will be exempt from meeting the new requirements for a transitional period of three years.
Endorsement recommendations
Alternative options considered but not recommended.
18In considering the TAC's endorsement recommendations on the requirements relating to the reporting entity (boundary), 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.
19The Secretariat considered and disregarded these alternative options, including:
19.1recommending an exemption from the need to prepare subsidiary level sustainability disclosures when consolidated group disclosures are prepared be considered as part of implementation. This option was not pursued as there are advantages to requiring sustainability-related reporting for at least some intermediate subsidiaries. This would also allow for the strategic management of sustainability-related risks and opportunities to become more integrated at subsidiary level which should improve reporting going forward. Any considerations about exemptions for subsidiary-level reporting is an implementation matter that will be decided by DBT and the FCA at a later date.
19.2recommending UK guidance on reporting entity (boundary) and changes in group structures be developed. The issues raised by stakeholders are not UK-specific and therefore, to maintain international comparability and a global baseline it is appropriate that guidance is sought from the ISSB for further clarity.
Suggested endorsement recommendation
20Considering the stakeholder feedback and analysis, the TAC is asked to tentatively recommend that the requirements on reporting entity in IFRS S1 are maintained, but that the TAC note in its advice to the Department of Business and Trade (DBT) the following:
20.1for implementation, when considering the scope of application of IFRS S1 for reporting entities, consideration should be given to the interaction of any requirements with existing legislation and the UK stakeholder feedback seeking an exemption for certain subsidiaries where the parent company is reporting on an equivalent basis for the consolidated group; and
20.2that UK stakeholders have identified a need for additional guidance from the ISSB on:
- how the boundaries set out within IFRS S1 and S2 should be applied to ensure consistent and comparable disclosures; and
- following (i) and depending on the outcome of the June ISSB TIG meeting which will consider this issue; how to treat changes to the structure of the group when making sustainability-related financial disclosures.
21The application of the requirements may impact the international comparability of disclosures, especially if different reporting entity boundaries are used which may compromise comparability. Some jurisdictions require subsidiary-level reporting and others do not, which could also impact international comparability with other jurisdictions. Additionally, if reporting entity boundaries are misaligned then the resulting disclosures may not be as understandable and connected to the related financial information. Some stakeholders have suggested that the quality of UK reporting may be improved overall if subsidiaries are also required to provide disclosures, although stakeholders have argued that some standalone subsidiary reporting may not be useful or meaningful and may take undue cost or effort to prepare because the reporting does not reflect how these risks and opportunities are managed within the group.
Questions for the TAC
- Does the TAC agree with the analysis in this paper in relation to the reporting entity boundaries requirements in IFRS S1 and IFRS S2?
- Does the TAC tentatively recommend to maintain the requirements in IFRS S1 paragraphs 20 and B38?
- Does the TAC tentatively recommend that the issues in paragraph 20.1 and 20.2 are noted in the advice provided to DBT?