Questions & Answers
What is the difference between current financial effects in ESRS 2 paragraph 48 (d) and anticipated short-term effects in ESRS 2 paragraph 48 (e)?
- Financial effects
- current financial effects
- anticipated financial effects
Background
The submitter provided the following background for the question: ‘According to ESRS 1 Section 6.4 paragraph 77, the short-term time horizon is defined as the reporting period (which we interpret as the current reporting period), and the medium-term horizon starts after that reporting period up to five years. Is the next annual reporting period included in the short-term horizon as defined by ESRS 1.77.b, and is that then the definition of anticipated short-term effects, or is it included in the medium-term horizon? What would be the short-term anticipated effects in that case? (In the French translation, short-term time horizon is defined as the ‘période de référence’, which in paragraph 75 is the equivalent of the ‘base year’ – this adds to the confusion.)’
ESRS 2 paragraph 48 states: ‘The undertaking shall disclose …
(d) the current financial effects of the undertaking’s material risks and opportunities on its financial position, financial performance and cash flows and the material risks and opportunities for which there is a significant risk of a material adjustment within the next annual reporting period to the carrying amounts of assets and liabilities reported in the related financial statements; and
(e) the anticipated financial effects of the undertaking’s material risks and opportunities on its financial position, financial performance and cash flows over the short-, medium- and long-term, including the reasonably expected time horizons for those effects. This shall include how the undertaking expects its financial position, financial performance and cash flows to change over the short-, medium- and long-term, given its strategy to manage risks and opportunities, taking into consideration:
(i) its investment and disposal plans (for example, capital expenditure, major acquisitions and divestments, joint ventures, business transformation, innovation, new business areas and asset retirements), including plans the undertaking is not contractually committed to; and
(ii) its planned sources of funding to implement its strategy. …’.
Annex II Acronyms and Glossary of Terms defines:
(a) ‘financial effects’ as ‘Effects from risks and opportunities that affect the undertaking’s financial position, financial performance and cash flows over the short-, medium- or long-term’;
(b) ‘current financial effects’ as ‘Financial effects for the current reporting period that are recognised in the primary financial statements’; and
(c) ‘anticipated financial effects’ as ‘Financial effects that do not meet the recognition criteria for inclusion in the financial statement line items in the reporting period and that are not captured by the current financial effects’.
ESRS 1 Appendix C states in its phase-in provisions regarding ESRS 2 paragraph 48 (e), ‘The undertaking may omit the information prescribed by ESRS 2 SBM-3 paragraph 48 (e) (anticipated financial effects) for the first year of preparation of its sustainability statement. The undertaking may comply with ESRS 2 SBM-3 paragraph 48 (e) by reporting only qualitative disclosures for the first three years of preparation of its sustainability statement, if it is impracticable to prepare quantitative disclosures.’
Answer
Current financial effects and anticipated financial effects are two different concepts.
Current financial effects are defined as ‘financial effects for the current reporting period that are recognised in the primary financial statements’. Anticipated financial effects are defined as ‘financial effects that do not meet the recognition criteria for inclusion in the financial statement line items in the reporting period and that are not captured by the current financial effects’. Anticipated financial effects includes the financial effects that are not ‘current financial effects’.
The distinguishing characteristic is whether the financial effect has already been recognised in the financial statements based on the recognition criteria for inclusion in the primary financial statements or not. Accordingly, the current financial effect has already been recognised at or before the reporting date, whereas the anticipated effect might occur thereafter, be it in the short- (within the reporting period, after the balance-sheet date), medium- or long-term.
For example, an impairment charge recognised in the current reporting period in accordance with IAS 36 Impairment of assets is a current financial effect whereas a disclosure in accordance with IAS 36 paragraph 134 (f), requiring the disclosure of a potential impairment based on a ‘reasonable possible change in key assumptions’, is an anticipated financial effect.
The second part of ESRS 2 paragraph 48 (d) (second datapoint) requires the disclosure of ‘… the material risks and opportunities for which there is a significant risk of a material adjustment within the next annual reporting period to the carrying amounts of assets and liabilities reported in the related financial statements’. This datapoint does not qualify as current financial effects but as anticipated financial effects for which there is a significant risk of a material adjustment within the next annual reporting period.
In this sense, there is an overlap as the datapoint ‘adjustment within the next annual reporting period’ is also part of the anticipated financial effects to be reported under ESRS 2 paragraph 48 (e).
The undertaking may incorporate disclosures using cross-references to the respective parts in the financial statements to avoid repetitions. As a reminder in the context of financial effects, undertakings shall include in their sustainability statement, based on thresholds of materiality, references to the financial statements for monetary amounts or other quantitative data (see ESRS 1 paragraphs 124 and 125) – respectively, for significant data, assumptions, and qualitative information (see ESRS 1 paragraphs 126 to 128 and Chapter 9.2 Connected information and connectivity with financial statements). Incorporation by reference may be considered (see ESRS 1 Chapter 9.1 Incorporation by reference).