13.2 New Financial Reporting Challenges
Let’s get into some more changes in accounting policies and procedures. Income statements, balance sheets, and cash flow statements are important, but more companies are facing additional Referring to rules or laws that have been enacted by a legislative body such as Congress., Referring to rules or guidelines established by governmental agencies with the authority to create regulations within the framework of statutory laws., and industry-reporting burdens. Corporate financials, pillars of excellence, and, ultimately, SOX compliance are increasingly met with public skepticism. While transparency has become quite a business buzzword, sustainability is also in the mix. People want to see the proof behind public relations materials and corporate mission statements. And, that’s where A form of non-financial reporting that discloses qualitative and quantitative information concerning environmental, social, economic and governance issues. comes into play.
In 2023, the European Union moved toward mandatory sustainability reporting with the introduction of the Corporate Sustainability Reporting Directive (CSRD). U.S. reporting requirements are very much in flux, but some public and private companies are already participating in the form of voluntary sustainability disclosures. We’ll outline several sustainability and climate disclosure frameworks and what they measure.1
Sustainability Accounting
Financial accounting mainly provides the current financial health of a business. Sustainability accounting aims to reflect bigger picture initiatives to help assess current and future business value. However, setting a baseline for sustainability reporting can be daunting.
To develop high-quality global disclosure standards, the International Financial Reporting Standards (IFRS) Foundation established the International Sustainability Standards Board (ISSB) in 2021. Since its formation, the ISSB has consolidated the work of other investor-focused organizations, including the Sustainability Accounting Standards Board (SASB).
SASB standards are industry-specific and designed to identify the following:
Sustainability-related risks and opportunities most likely to impact company cash flows
Company access to finance and cost of capital over the short, medium, or long term
Disclosure topics and metrics particularly relevant to investors2
After assuming responsibility for the SASB standards in 2022, the ISSB issued its first global sustainability disclosure reporting standards: IFRS S1 and IFRS S2. These standards apply the work of the SASB and Task Force on Climate-Related Financial Disclosures (TCFD), along with input from the G20, the Financial Stability Board, and the International Organization of Securities Commissions (IOSCO).3
The ISSB standards are also industry-specific and directly reference the SASB standards:
“IFRS S1 requires companies to consider the SASB Standards to identify sustainability-related risks and opportunities and disclose related information.”
“IFRS S2 provides accompanying guidance derived from the climate-related topics and metrics in the SASB Standards. This guidance has been enhanced to improve international applicability.”4
Now, let’s move on to climate-specific disclosures. Between the U.S. and the EU, we have SEC, the State of California, CSRD, and ISSB climate disclosure frameworks. Volumes could be written about these subjects alone, but the accounting takeaway is that they can overlap, change, and take effect in stages. A category of gases that contribute to global warming. emissions reporting is among the list of metrics. A company’s emissions footprint measures its human activities that can affect the atmosphere, and therefore contribute to climate change.5
How is this relevant to accounting? Let’s look at an example of carbon-based emissions metrics.
The Connection Between Accounting and GHG Emissions Reporting
Emissions reporting is not just for transportation companies and manufacturers who burn fossil fuels or manufacture products that cause air pollution. Buildings, for example, use fossil fuel energy to heat, cool, and power operations. Additionally, the building construction process itself contributes to its The total amount of carbon dioxide emitted into the atmosphere in a given period..
Since real estate accounts for an estimated 40 percent of global carbon dioxide emissions, a company’s leased and owned buildings are very much a hot topic in climate disclosures.6 That is where The process of recording and reporting lease agreements in financial statements.—with the help of new lease accounting standards—can play a part in GHG emissions reporting.
Understandably, some firms may not want to invest in dedicated resources to keep track of all these standards and metrics and will choose to outsource. However, there are tools that work with AIS to ease reporting tasks. Next, we’ll preview a few levels of software solutions.