Appendix D (AASBS1_09-24)

The Conceptual Framework for Financial Reporting and the Framework for the Preparation and Presentation of Financial Statements (the Conceptual Frameworks) were issued by the AASB. They describe the objective of, and the concepts that apply to, general purpose financial reports. One purpose of the Conceptual Frameworks is to assist the AASB to develop Australian Accounting Standards for preparing financial statements based on consistent concepts.

Sustainability-related financial disclosures are part of general purpose financial reports. The qualitative characteristics in the Conceptual Frameworks, therefore, apply to sustainability-related financial information. However, the nature of some of the information required to meet the objective of this Standard (see paragraphs 1–4) differs in some respects from the information provided in financial statements.

Sustainability-related financial information is useful if it is relevant and faithfully represents what it purports to represent. Relevance and faithful representation are fundamental qualitative characteristics of useful sustainability-related financial information. The usefulness of sustainability-related financial information is enhanced if the information is comparable, verifiable, timely and understandable. Comparability, verifiability, timeliness and understandability are enhancing characteristics of useful sustainability-related financial information.

Relevant sustainability-related financial information is capable of making a difference in the decisions made by primary users. Information may be capable of making a difference in a decision even if some users choose not to take advantage of it or are already aware of it from other sources. Sustainability-related financial information is capable of making a difference in decisions made by users if it has predictive value, confirmatory value or both.

Sustainability-related financial information has predictive value if it can be used as an input to processes employed by primary users to predict future outcomes. Sustainability-related financial information need not be a prediction or forecast to have predictive value. Sustainability-related financial information with predictive value is employed by primary users in making their own predictions. For example, information about water quality, which can include information about the water being polluted, could inform the expectations of users about the ability of an entity to meet local water-quality requirements.

Sustainability-related financial information has confirmatory value if it provides feedback about (confirms or changes) previous evaluations.

The predictive value and confirmatory value of sustainability-related financial information are interrelated. Information that has predictive value often also has confirmatory value. For example, information for the current year about greenhouse gas emissions, which can be used as the basis for predicting greenhouse gas emissions in future years, can also be compared with predictions about greenhouse gas emissions for the current year that were made in past years. The results of those comparisons can help a user to correct and improve the processes that were used to make those previous predictions.

Information is material if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that the primary users of general purpose financial reports make on the basis of those reports, which provide information about a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance. The materiality of information is assessed in the context of an entity’s sustainability-related financial disclosures and is based on the nature or magnitude of the item to which the information relates, or both.

Sustainability-related financial information represents phenomena in words and numbers. To be useful, the information must not only represent relevant phenomena, it must also faithfully represent the substance of the phenomena that it purports to represent.

To be a faithful representation, a depiction would be complete, neutral and accurate. The objective of general purpose financial reports is to maximise those qualities to the extent possible.

A complete depiction of a sustainability-related risk or opportunity includes all material information necessary for primary users to understand that risk or opportunity.

Sustainability-related financial information shall be neutral. A neutral depiction is one without bias in the selection or disclosure of information. Information is neutral if it is not slanted, weighted, emphasised, de-emphasised or otherwise manipulated to make it more likely that primary users will receive that information favourably or unfavourably. Neutral information is not information without purpose or without influence on behaviour. On the contrary, relevant information is, by definition, capable of making a difference in users’ decisions.

Some sustainability-related financial information—for example, targets or plans—is aspirational. A neutral discussion of such matters covers both aspirations and the factors that could prevent an entity from achieving these aspirations.

Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when making judgements under conditions of uncertainty. The exercise of prudence means that opportunities are not overstated and risks are not understated. Equally, the exercise of prudence does not allow for the understatement of opportunities or the overstatement of risks.

Sustainability-related financial information shall be accurate. Information can be accurate without being perfectly precise in all respects. The precision needed and attainable, and the factors that make information accurate, depend on the nature of the information and the nature of the matters to which it relates. For example, accuracy requires that: 

(a) factual information is free from material error; 

(b) descriptions are precise; 

(c) estimates, approximations and forecasts are clearly identified as such; 

(d) no material errors are made in selecting and applying an appropriate process for developing an estimate, approximation or forecast; 

(e) assertions and inputs used in developing estimates are reasonable and based on information of sufficient quality and quantity; and 

(f) information on judgements about the future faithfully reflects both those judgements and the information on which they are based.

The usefulness of sustainability-related financial information is enhanced if it is comparable, verifiable, timely and understandable.

The decisions made by the primary users of general purpose financial reports involve choosing between alternatives; for example, selling or holding an investment, or investing in one reporting entity or another. Comparability is the characteristic that enables users to identify and understand similarities in, and differences among, items. Unlike the other qualitative characteristics, comparability does not relate to a single item. A comparison requires at least two items. Information is more useful to users if it is also comparable, that is, if it can be compared with: 

(a) information provided by the entity in previous periods; and 

(b) information provided by other entities, in particular those with similar activities or operating within the same industry.

Sustainability-related financial disclosures shall be provided in a way that enhances comparability.

Consistency is related to, but is not the same as, comparability. Consistency refers to the use of the same approaches or methods for providing disclosures about the same sustainability-related risks and opportunities, from period to period, both by a reporting entity and other entities. Comparability is the goal; consistency helps to achieve that goal.

Comparability is not uniformity. For information to be comparable, like things shall look alike and different things shall look different. Comparability of sustainability-related financial information is not enhanced by making unlike things look alike any more than it is enhanced by making like things look different.

Verifiability helps to give users confidence that information is complete, neutral and accurate. Information is verifiable if it is possible to corroborate either the information itself or the inputs used to derive it. Verifiable information is more useful to primary users than information that is not verifiable.

Verifiability means that various knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. Quantified information need not be a single point estimate to be verifiable. A range of possible amounts and the related probabilities could also be verified.

Sustainability-related financial information shall be provided in a way that enhances its verifiability. Verifiability can be enhanced by, for example: 

(a) including information that can be corroborated by comparing it with other information available to primary users about an entity’s business, about other businesses or about the external environment in which the entity operates; 

(b) providing information about inputs and methods of calculation used to produce estimates or approximations; and 

(c) providing information reviewed and agreed by the entity’s board, board committees or equivalent bodies.

Some sustainability-related financial information will be presented as explanations or forward-looking information. That information can be supportable, for example by faithfully representing fact-based strategies, plans and risk analyses. To help primary users decide whether to use such information, an entity shall describe the underlying assumptions and methods of producing the information, as well as other factors that provide evidence that the information reflects the actual plans or decisions made by the entity.

Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older information is, the less useful it is. However, some information may continue to be timely long after the end of a reporting period because, for example, some users may need to identify and assess trends.

Sustainability-related financial information shall be clear and concise. For sustainability-related financial disclosures to be concise, they need: 

(a) to avoid generic information, sometimes called ‘boilerplate’, that is not specific to the entity; 

(b) to avoid duplication of information in the general purpose financial reports, including unnecessary duplication of information also provided in the related financial statements; and 

(c) to use clear language and clearly structured sentences and paragraphs.

The clearest form a disclosure can take will depend on the nature of the information and might include tables, graphs or diagrams in addition to narrative text. If graphs or diagrams are used, additional text or tables might be necessary to avoid obscuring material detail.

Clarity might be enhanced by distinguishing information about developments in the reporting period from ‘standing’ information that remains unchanged, or changes little, from one period to the next—for example, by separately describing features of an entity’s sustainability-related governance and risk management processes that have changed since the previous reporting period.

Disclosures are concise if they include only material information. Any immaterial information included shall be provided in a way that avoids obscuring material information.

Some sustainability-related risks and opportunities are inherently complex and might be difficult to present in a manner that is easy to understand. An entity shall present such information as clearly as possible. However, complex information about these risks and opportunities shall not be excluded from general purpose financial reports to make those reports easier to understand. Excluding such information would render those reports incomplete and, therefore, possibly misleading.

The completeness, clarity and comparability of sustainability-related financial information all rely on information being presented as a coherent whole. For sustainability-related financial information to be coherent, it shall be presented in a way that explains the context and the connections between the related items of information.

If sustainability-related risks and opportunities located in one part of an entity’s general purpose financial reports have implications for information disclosed in other parts, the entity shall include the information necessary for users to assess those implications.

Coherence also requires an entity to provide information in a way that allows users to relate information about its sustainability-related risks and opportunities to information in the entity’s financial statements.