One central principle enshrined in the IFRS sustainability standards, notably IFRS S1 - General requirements for disclosure of sustainability-related financial information, is the connectedness of the information provided in sustainability-related financial disclosures and other general-purpose financial reports such as financial statements.
Therefore, there is an expectation that the sustainability-related strategic decisions discussed in the sustainability report will translate into financial impact in the financial statements. This connected information helps to prevent the risk of greenwashing by organisations where sustainability matters affecting them are not considered or included in preparing the financial statements.
This risk is very high for many organisations regarding their climate-related ambitions and targets towards addressing climate risks and opportunities affecting the organisation.
Organisations need more than just setting net-zero targets when considering sustainability-related matters; they must ensure that these targets are considered in the context of financial reporting. Providing this connection ensures that the financial effect of these commitments is considered for the benefit of users of the financial statements.
The IASB (International Accounting Standards Board) recently issued an agenda decision that provides clarification on whether an organisation's commitment to reduce or offset its greenhouse gas emissions creates a constructive obligation for it and how to account for such a provision in accordance with the relevant IFRS accounting standard, IAS 37 - Provisions, Contingent Liabilities and Contingent Assets.
The board's decision requires organisations to assess whether their commitment meets the definition of a constructive obligation. If this definition of constructive obligation or criterion is met, the organisation should evaluate whether the constructive obligation meets the requirement to be recognised as a provision in the financial statements.
Therefore, organisations must pay attention to their commitments regarding sustainability-related matters and how they affect the financial statements.
For example, many organisations have set net-zero targets which detail their scope 1, 2 and 3 emissions reduction and transition strategies, including timelines. These organisations must assess the impact of their climate commitments when preparing their financial statements.
Organisations should also include disclosures in their financial statements relating to sustainability-related implications to enable users of their financial statements to understand the effects of these commitments on the organisation’s financial performance, financial position and cash flows.
Akinyemi Awodumila is a Partner at Deloitte East Africa. He is an author who writes and speaks widely on corporate reporting topics.
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