Understand the latest developments in Australia’s journey to mandatory climate-related financial disclosures

Federal Parliament has finalised passage of Treasury Laws Amendment (2023 Measures No. 1) Bill 2023 and the Bill is now law after receiving Royal Assent on 27 November 2023.

The Bill amends the Australian Securities and Investments Commission Act 2001 to:

• Give the AASB the power to develop and formulate sustainability standards
• Expand the AUASB’s functions to include formulating auditing and assurance standards for sustainability purposes
• Expand the Financial Reporting Council's oversight and governance powers to account for the development of sustainability standards.

The new AASB powers relate to the formulation of voluntary sustainability standards.  The ability of the AASB to “make” mandatorily applying sustainability standards will result from the expected Treasury position statement (and exposure draft legislation) in response to the second consultation on climate-related financial disclosures.

Read our updated Pillar Two publication to understand the disclosure requirements for December 2023 and later periods

The Pillar Two top up tax regime arises from the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

Pillar Two is designed to operate to ensure a minimum rate of taxation of 15% and applies to entities that have global revenues of €750 million (approximately A$1.2 billion) or more.  Broadly, where entities have operations in low tax jurisdictions, the ultimate parent entity would be subject to additional ‘top up’ tax on low or zero taxed profits.

During 2023, the IASB and AASB made amendments which prohibit the recognition or disclosure of deferred taxes arising from Pillar Two taxes.  In Australia, there are slightly different requirements in Tier 1 and Tier 2 financial statements.  Legislation to implement Pillar Two in Australia is expected in 2024 but has been announced as applying to income years beginning on or after 1 January 2024.

We’ve updated our Clarity publication Responding to Pillar Two to incorporate the latest financial reporting developments and provide updated example disclosures.  Our December 2023 Tier 1 models and reporting considerations publication also provides further analysis and examples.

Entities that may be expected to be subject to Pillar Two should ensure they consider the financial reporting disclosures for 31 December 2023, particularly disclosure of any known or estimable information about the expected impact of the new regime.

December 2023 Tier 2 presentation and disclosure checklist available

We have updated our Tier 2 presentation and disclosure checklist for entities preparing financial statements in accordance with Australian Accounting Standards – Simplified Disclosures for periods ending on or after 31 December 2023.  This checklist can be used in conjunction with our June 2023 Tier 2 model financial report to ensure compliance with Tier 2 requirements.

IASB consults on financial instruments classification

The IASB has published IASB/ED/2023/5 Financial Instruments with Characteristics of Equity, which proposes numerous changes to the classification, presentation and disclosure of financial instruments.

The exposure draft proposes to:

• Clarify the underlying classification principles in IAS 32 Financial Instruments: Presentation in areas such as the ‘fixed for fixed’ criterion when classifying derivative instruments, financial instruments with contingent settlement provisions and the effects of shareholder discretion on classification of financial instruments
• Introduce new disclosure requirements to provide further information about how the entity is financed, its capital resources and its ownership structure, including potential dilution to the ownership structure from financial instruments issued at the reporting date
• Require new presentation requirements for issued capital and reserves, profit or loss, comprehensive income and distributions to separately disclose the amounts attributable to ordinary shareholders and other owners of the parent.

IASB/ED/2023/5 is open for comment until 29 March 2024.

The AASB has released an equivalent exposure draft, ED 327 Financial Instruments with Characteristics of Equity, which is open for comment until 9 February 2024.

More information:

• IASB media release
• IASB/ED/2023/5 Financial Instruments with Characteristics of Equity
• Snapshot offering an overview of the proposals
• iGAAP in Focus IASB publishes Exposure Draft ‘Financial Instruments with Characteristics of Equity’.

Government announces the combination of the AASB, AUASB and FRC

On 21 November 2023, the Treasurer and Assistant Treasurer announced the Federal Government’s intention to combine the Australian Accounting Standards Board, Auditing and Assurance Standards Board and Financial Reporting Council into a single body.

The concept of a single, flexible entity responsible for financial reporting system oversight, standard-setting and advice to government was included as one potential structure in Treasury’s first consultation on climate-related financial disclosures.

The new body is expected to be operational on or after 1 July 2026 (subject to the passage of legislation) and will be responsible for accounting and auditing standards and climate-related financial disclosures. The AASB will continue to develop climate-related financial disclosure standards until the new arrangements are in place.

The proposed model is similar to the arrangements in New Zealand, where the External Reporting Board performs similar functions (but delegates standard-setting responsibilities to sub-boards). 

The Government expects to consult on exposure draft legislation and transitional arrangements in due course.