<h2>Executive Summary</h2><ul><li><p>Auditors must ensure that a company’s financial statements match the Director’s Report in terms of climate and sustainability-related communication.</p></li><li><p>The emerging sustainability standards emphasise disclosure over accounting, focusing on the organisation’s assessment of its business risks and opportunities.</p></li><li><p>Climate-related risks influence business outcomes in myriad ways. Consequently, the accounting standards require these impacts to be acknowledged in terms of:</p></li></ul><ol><li><p>Asset recognition and depreciation</p></li><li><p>Impact on demand, prices and supply chains</p></li><li><p>Future cash flows</p></li><li><p>Risks around the impairment/decommissioning of assets</p></li><li><p>Mitigation plans</p></li></ol>.<p>In recent years, the issue of sustainability has gained vastly in prominence – and with it, so has the need to incorporate it in financial reporting. Traditionally, the two have been kept separate, but today, SEBI’s BRSR, the IFRS S1 and S2 standards and Ind-AS all have provisions for including sustainability-related issues in financial statements. At a recent session of the India CEO and CFO Forums in Mumbai, MP Vijay Kumar, Executive Director and Group CFO of Sify Technologies, decoded these standards and their implications for businesses.</p><h2>Director's Report and Auditor Alignment</h2><p>The Director’s Report – an essential element of a company’s annual report – communicates the organisation’s stance on climate change and its commitment to sustainability. It is also meant to outline strategies for reducing carbon emissions and achieving defined net-zero goals. This legally-significant document sets the organisation’s forward vision on these issues. For their part, auditors, guided by SA 720, are meant to ensure alignment between financial statements and the Director’s Report. Typically, the Auditor’s Report precedes the Director’s Report, and if discrepancies arise between the two, the auditor may withdraw its previously issued report.</p><h2>Emerging Sustainability Standards</h2><p>The International Sustainability Board, formed two years ago, has introduced two sustainability standards that have been endorsed by the International Organisation of Securities Commissions (IOSCO), of which SEBI is a member. These standards focus on general disclosures (IND AS 1/AS 1) and climate-related disclosures (New Sustainability Standard). Unlike the accounting standards, sustainability standards concentrate solely on how environmental and climate factors affect businesses and how businesses, in turn, impact the environment.</p><h2>Accounting Implications of Climate Change</h2><p>Accounting standards like IND AS and US GAAP do not explicitly address climate-related matters but certain accounting standards do require consideration of climate impacts:</p><p><em><strong>Sources of Estimation Uncertainty and Significant Judgments (IND AS 1 / AS 1, 5):</strong></em> Companies must disclose assumptions and significant judgments related to climate-related uncertainties that could materially affect asset and liability values within the next financial year. For example, climate-related uncertainties affecting estimates of future cash flows may impact asset impairment assessments (IND AS 36 / AS 28).</p><p><em><strong>Going Concern (IND AS 1 / AS 1, 5): </strong></em>Disclosure is required if climate-related uncertainties cast doubt on a company’s ability to continue as a going concern. For instance, climate-related impacts.</p><p><em><strong>Inventories (IND AS 2 / AS 2): </strong></em>Companies should assess the impact of climate change on the realisable value of their inventory. Climate-related factors, such as obsolescence, declining prices or increased completion costs, may necessitate inventory write-downs.</p><p><em><strong>Taxes on Income (IND AS 12 / AS 22):</strong></em> Recognition of deferred tax assets is subject to the reasonable assurance of future taxable profit, which may be affected by climate-related factors, impacting the recognition of such assets. For example, climate-related matters may affect estimates of future taxable profits.</p><p><em><strong>Property, Plant & Equipment and Intangible Assets (Ind AS 16 & 38 / AS 10 & 26):</strong></em> Changes in expected residual values and useful lives of assets due to climate-related factors should be reflected in depreciation or amortisation calculations. For instance, the shift from internal combustion engine (ICE) vehicles to electric vehicles (EVs) may affect the useful lives of manufacturing equipment.</p><p><em><strong>Impairment (Ind AS 36 / AS 28): </strong></em>Companies must assess whether climate-related factors, such as a decline in demand for products emitting greenhouse gases, indicate impairment of assets like manufacturing plants. External information, including regulatory changes, may also indicate impairment.</p><p><em><strong>Provisions, Contingent Liabilities, and Contingent Assets (Ind AS 37 / AS 29):</strong></em> Climate-related matters, especially those related to decommissioning and environmental legislation, require regular estimation of liabilities, impacting financial provisions and restructuring costs. Adequate provisioning must be made for impairment of assets affected by climate-related changes.</p>
<h2>Executive Summary</h2><ul><li><p>Auditors must ensure that a company’s financial statements match the Director’s Report in terms of climate and sustainability-related communication.</p></li><li><p>The emerging sustainability standards emphasise disclosure over accounting, focusing on the organisation’s assessment of its business risks and opportunities.</p></li><li><p>Climate-related risks influence business outcomes in myriad ways. Consequently, the accounting standards require these impacts to be acknowledged in terms of:</p></li></ul><ol><li><p>Asset recognition and depreciation</p></li><li><p>Impact on demand, prices and supply chains</p></li><li><p>Future cash flows</p></li><li><p>Risks around the impairment/decommissioning of assets</p></li><li><p>Mitigation plans</p></li></ol>.<p>In recent years, the issue of sustainability has gained vastly in prominence – and with it, so has the need to incorporate it in financial reporting. Traditionally, the two have been kept separate, but today, SEBI’s BRSR, the IFRS S1 and S2 standards and Ind-AS all have provisions for including sustainability-related issues in financial statements. At a recent session of the India CEO and CFO Forums in Mumbai, MP Vijay Kumar, Executive Director and Group CFO of Sify Technologies, decoded these standards and their implications for businesses.</p><h2>Director's Report and Auditor Alignment</h2><p>The Director’s Report – an essential element of a company’s annual report – communicates the organisation’s stance on climate change and its commitment to sustainability. It is also meant to outline strategies for reducing carbon emissions and achieving defined net-zero goals. This legally-significant document sets the organisation’s forward vision on these issues. For their part, auditors, guided by SA 720, are meant to ensure alignment between financial statements and the Director’s Report. Typically, the Auditor’s Report precedes the Director’s Report, and if discrepancies arise between the two, the auditor may withdraw its previously issued report.</p><h2>Emerging Sustainability Standards</h2><p>The International Sustainability Board, formed two years ago, has introduced two sustainability standards that have been endorsed by the International Organisation of Securities Commissions (IOSCO), of which SEBI is a member. These standards focus on general disclosures (IND AS 1/AS 1) and climate-related disclosures (New Sustainability Standard). Unlike the accounting standards, sustainability standards concentrate solely on how environmental and climate factors affect businesses and how businesses, in turn, impact the environment.</p><h2>Accounting Implications of Climate Change</h2><p>Accounting standards like IND AS and US GAAP do not explicitly address climate-related matters but certain accounting standards do require consideration of climate impacts:</p><p><em><strong>Sources of Estimation Uncertainty and Significant Judgments (IND AS 1 / AS 1, 5):</strong></em> Companies must disclose assumptions and significant judgments related to climate-related uncertainties that could materially affect asset and liability values within the next financial year. For example, climate-related uncertainties affecting estimates of future cash flows may impact asset impairment assessments (IND AS 36 / AS 28).</p><p><em><strong>Going Concern (IND AS 1 / AS 1, 5): </strong></em>Disclosure is required if climate-related uncertainties cast doubt on a company’s ability to continue as a going concern. For instance, climate-related impacts.</p><p><em><strong>Inventories (IND AS 2 / AS 2): </strong></em>Companies should assess the impact of climate change on the realisable value of their inventory. Climate-related factors, such as obsolescence, declining prices or increased completion costs, may necessitate inventory write-downs.</p><p><em><strong>Taxes on Income (IND AS 12 / AS 22):</strong></em> Recognition of deferred tax assets is subject to the reasonable assurance of future taxable profit, which may be affected by climate-related factors, impacting the recognition of such assets. For example, climate-related matters may affect estimates of future taxable profits.</p><p><em><strong>Property, Plant & Equipment and Intangible Assets (Ind AS 16 & 38 / AS 10 & 26):</strong></em> Changes in expected residual values and useful lives of assets due to climate-related factors should be reflected in depreciation or amortisation calculations. For instance, the shift from internal combustion engine (ICE) vehicles to electric vehicles (EVs) may affect the useful lives of manufacturing equipment.</p><p><em><strong>Impairment (Ind AS 36 / AS 28): </strong></em>Companies must assess whether climate-related factors, such as a decline in demand for products emitting greenhouse gases, indicate impairment of assets like manufacturing plants. External information, including regulatory changes, may also indicate impairment.</p><p><em><strong>Provisions, Contingent Liabilities, and Contingent Assets (Ind AS 37 / AS 29):</strong></em> Climate-related matters, especially those related to decommissioning and environmental legislation, require regular estimation of liabilities, impacting financial provisions and restructuring costs. Adequate provisioning must be made for impairment of assets affected by climate-related changes.</p>
