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IFRS S1 & IFRS S2 Explained

February 17, 2024

It is important to stay updated on the latest standards. For accountants and financial professionals, the International Financial Reporting Standards (IFRS) play a role in ensuring that relevant information is disclosed in a standard that is recognised across several countries.

In this article, we will explore IFRS S1 and IFRS S2, which are two standards introduced by the International Sustainability Standards Board (ISSB) to address disclosures related to sustainability.

Introduction to IFRS S1 and IFRS S2

IFRS S1 and IFRS S2, also known as "General Requirements for Disclosure of Sustainability related Financial Information" and "Climate related Disclosures" respectively, is part of the ISSB's goal to enhance the transparency in sustainability-related data in financial reports.

These standards have been designed to empower investors and creditors in making well-informed decisions regarding resource allocation to organisations.

Effective Dates

Both IFRS S1 and IFRS S2 will be applicable for annual reporting starting from January 1, 2024, and financial reports based on these standards will come into effect in 2025. While the ISSB encourages companies to adopt these standards voluntarily, it will be up to countries themselves to determine whether both standards will be mandatory in the future.

In Australia, the Australian Accounting Standards Board is using IFRS S1 and IFRS S2 to develop the Australian Sustainability Reporting Standards. These standards are still in development and are open for comment till 1 March 2024.

Key Objectives of IFRS S1

The primary objective of IFRS S1 is to encourage businesses to disclose information about sustainability-related risks and opportunities. This disclosure will prove valuable to those who use general-purpose financial reports, aiding them in resource allocation decisions like if they should invest in a business. Sustainability-related risks and opportunities will include factors that could be expected to affect an organisation’s cash flows, access to finance, or cost of capital.

Key Components of IFRS S1

Let’s take a look at the main elements of IFRS S1 set to be enacted on 1 January 2024:

Governance - This section involves the disclosure of a businesses governance processes, controls, and procedures for sustainability-related risks and opportunities.
Strategy - Businesses must outline their strategies for managing sustainability-related risks and opportunities.
Risk Management - IFRS S1 requires the disclosure of processes that identify, assess, prioritise, and monitor these risks and opportunities. Importantly, it highlights the integration of risk management into an entity's overall risk management system.
Metrics and Targets - Businesses must report on their sustainability-related risks and opportunities performance, including progress towards any targets set by the business or required by law or regulation.

The Objectives of IFRS S2

IFRS S2, also referred to as the "Climate related Disclosures," aims to ensure that organisations disclose relevant information regarding risks and opportunities linked to climate change. This disclosure is for individuals who rely on general financial reports to make informed decisions such as whether or not to invest in a business.

Key Components of IFRS S2

Let’s take a look at the main components of IFRS S2 and how it differs to IFRS S1:

Governance - IFRS S2 ensures the disclosure of governance processes, controls, and procedures used by entities to monitor, manage, and oversee climate-related risks and opportunities.
Strategy - Businesses must clearly explain their approaches to managing climate-related risks and opportunities. This section also requires disclosure of the impact of these factors on an entity's business model.
Risk Management - This focuses on the processes used to identify, assess, prioritise, and monitor climate-related risks and opportunities. It focuses on data sources, the scope of operations, scenario analysis, and integration into risk management systems.
Metrics and Targets - IFRS S2's metrics and targets section covers greenhouse gas emissions, capital invested in climate-related risks and opportunities, and the use of carbon credits for reducing emissions.

Next Steps and Recommendations

With the introduction of IFRS S1 and IFRS S2, there should be a lot more transparency with regards to sustainability.

Here are some important suggestions for organisations:

Understand the Standards - Organisations need to have an understanding of these standards and their implications for reporting and decision-making.
Evaluate Sustainability Strategies - Organisations should assess and disclose their sustainability strategies, risk management processes, and performance metrics and targets in line with the standards.
Collaborate and Seek Guidance - Collaboration with industry peers and seeking guidance from industry-specific standards can help entities navigate the complex landscape of sustainability reporting.

How QuickBooks Can Help With Your Future IFRS S1 & S2 Reports

IFRS S1 and IFRS S2 represent a significant step towards providing useful information about sustainability-related risks and opportunities.

As they become an integral part of financial reporting, accountants and financial professionals need to be well-versed in these standards to ensure compliance and transparency in an increasingly sustainable world.

To prepare for your IFRS S1 & S2 reporting, you should consider using QuickBooks. QuickBooks allows you to collect and manage your financial data, which can help you prepare for your sustainability-related disclosures. Sign up to QuickBooks Online Accountant today and streamline your financial reporting processes.

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