Criteria for mandatory sustainability reporting are tested each reporting period
Criteria for mandatory sustainability reporting are tested each reporting period
With mandatory sustainability reporting being phased in over the next three years, the focus to date has been on whether entities preparing financial reports under Chapter 2M of the Corporations Act 2001 will have to prepare a sustainability report, and if so, when.
But what happens if things change in future? Entities may be wondering whether assessing mandatory sustainability reporting obligations is a one-time thing or a test that must be repeated each year.
Is mandatory reporting a ‘set and forget’ test?
If an entity meets one of the three criteria for mandatory sustainability reporting in a particular financial year, does it mean it will have to continue preparing sustainability reports in future?
No. The mandatory sustainability reporting test is not a ‘set and forget’ test. It must be repeated each financial year in a similar fashion to the test for large proprietary company financial reporting obligations under sections 292(1)(c) and 45A(3). This is because all three criteria in section 292A for mandatory sustainability reporting are based on a ‘financial year’ or year-end test as follows:
The size threshold test is assessed each year based on revenues for the financial year, and gross assets and employee numbers at the end of the year. Similarly, the asset owners test is based on the value of assets at the end of the year. The NGER test is based on emissions during a financial year.
Example 1 – Sustainability reporting obligations triggered in future
Entity ABC is a small, listed start-up entity with a 30 June 2028 year-end.
It is required to prepare and lodge financial statements with the Australian Securities and Investments Commission (ASIC) because it is a disclosing entity. However, at 30 June 2028, it does not meet any of the criteria for mandatory sustainability reporting.
In May 2029, Entity ABC undertakes a major business acquisition. Applying acquisition accounting in IFRS 3 Business Combinations for this business combination, the Entity ABC group meets the size thresholds for mandatory sustainability reporting for the year ended 30 June 2029, based on consolidated gross assets and employee numbers.
Conclusion
As Entity ABC is listed at 30 June 2029, it must prepare and lodge financial statements with ASIC because it is a disclosing entity.
Even though it had no obligation to prepare a sustainability report for the year ended 30 June 2028, it must now prepare one for 30 June 2029. This is because, after applying acquisition accounting for the acquired entity, the group meets the size thresholds in section 292A(3).
Directors to take note – Think carefully before completing an acquisition close to year-end
Directors should be aware that the entity’s sustainability reporting obligations may be triggered as a result of business acquisitions, and that completing acquisitions near year-end may put a strain on already-stretched finance resources. ASIC has laid out its expectations regarding directors’ duties with respect to sustainability reporting and maintaining sustainability records. There are no exemptions from preparing a sustainability report simply because the completion date is close to year-end. Entities would need to apply to ASIC for specific relief, which may not necessarily be granted.
Bearing in mind that Entity ABC’s acquisition only occurred in May 2029, and that Entity ABC is a listed entity, it must prepare and lodge its first mandatory sustainability report by no later than 30 September 2029 (four to five months after completing the acquisition). If Entity ABC has no systems and processes in place regarding sustainability governance, strategy, risk management and measuring its greenhouse gas emissions, it may not be prepared for this task.
Assuming the acquired entity is an Australian entity, and therefore, has prepared a sustainability report for the year ended 30 June 2028, there should be systems and processes in place to cover its own sustainability reporting obligations. However, Entity ABC must prepare a sustainability report for the whole group, and will need to overlay the acquiree’s systems and processes with those of its own (which may need to be developed from scratch).
A worst-case scenario is that the acquired entity is not an Australian entity, and that there are no systems and processes in place for the whole group. Calculating your greenhouse gas emissions at such short notice could be a mammoth task.
Example 2 – Entity is required to prepare a financial report, but no longer meets any of the sustainability reporting criteria
Entity DEF is a listed entity with a 30 June 2027 year-end.
It meets the threshold for Group 2 sustainability reporting because it is an NGER reporter and prepares its first mandatory sustainability report for 30 June 2027.
In October 2027, Entity DEF closes its main manufacturing facility because it now outsources all of the production to China. It deregisters and is no longer an NGER reporter at 30 June 2028. While revenues will exceed $50 million for the 30 June 2028 year, assets and employees will not meet the size threshold for mandatory sustainability reporting, i.e. $25 million and 100 employees.
Entity DEF remains listed at 30 June 2028.
Conclusion
As Entity DEF is listed at 30 June 2028, it must prepare and lodge financial statements with ASIC because it is a disclosing entity. However, as it is no longer an NGER reporter and does not meet the size thresholds in section 292A(3), it is not required to prepare a sustainability report for the year ended 30 June 2028.
It is important to note that in order to no longer have to report under the NGER Act (and therefore, no longer meet the threshold for sustainability reporting as an NGER reporter), entities that drop below NGER reporting thresholds must deregister from NGER.
Example 3 – Entity is no longer required to prepare a financial report and a sustainability report
Entity XYZ is a large proprietary company with a 30 June 2026 year-end. It is controlled by Foreign Company Limited, which has no other operations in Australia.
Entity XYZ meets the Group 1 sustainability reporting threshold and prepares its first mandatory sustainability report for the year ended 30 June 2026.
In October 2026, Entity XYZ undergoes a restructuring, with the majority of its operations moved offshore.
At 30 June 2027, Entity XYZ is considered a small foreign-controlled proprietary company. It is, therefore, no longer required to prepare and lodge financial statements with ASIC because it applies the relief in ASIC Corporations (Foreign-Controlled Company Reports) Instrument 2017/204 (i.e. Entity XYZ is not part of a large Australian group).
Conclusion
Entity XYZ does not prepare a sustainability report for the year ended 30 June 2027 because it is not required to lodge financial statements with ASIC under Chapter 2M.
Need help?
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