7 Update on Analysis of 2022 Annual Reports
18 May 2023 Agenda Paper 7
Executive Summary
| Project Type | Influencing |
| Project Scope | Research |
Purpose of the paper
The UKEB approved a research project focused on connectivity between IFRS Sustainability Disclosure Standards and Accounting Standards at its [March 2023] meeting. This paper provides an update on Deliverable Two in the Climate-related Matters Project Initiation Plan (PIP). As noted in that PIP, this is the second scheduled update for the Board ahead of the final report, scheduled to be presented at the June 2023 meeting.
Summary of the Issue
Deliverable Two aims to:
- assess areas of potential disconnects between disclosures made by UK listed companies in (i) the sustainability report relating to the TCFD and SECR requirements, and (ii) their financial statements;
- seek initial stakeholder perspectives; and
- consider the potential impacts of the draft ISSB disclosure requirements.
The research is being prepared to support the UKEB response to both the ISSB Request for Information (Rfl) on its workplan and the IASB's project regarding Climate-related Risks in Financial Statements.
This paper covers the following topics, set out in separate appendices:
- Appendix A: Analysis of connectivity gaps—PPE and Intangible Assets
- Appendix B: Aspects of draft IFRS Sustainability Disclosure Standards
- Appendix C: Consideration of IFRS Accounting Standards
Board discussion at this meeting will be factored into the on-going work on this research. The [final report] incorporating the Board's feedback is scheduled to be presented at the June 2023 Board meeting.
Decisions for the Board
1Do Board members have any questions or comments on the analysis of connectivity gaps presented in Appendix A?
2Do the Board members have any comments on the proposed questions to gather stakeholder feedback for the final report? [see following section for proposed questions]
Recommendation
That the Board discuss and consider the nature of the disconnects identified.
Appendices
- Appendix A: Analysis of connectivity gaps—PPE and Intangible Assets
- Appendix B: Aspects of draft IFRS Sustainability Disclosure Standards
- Appendix C: Consideration of IFRS Accounting Standards
1At the March 2023 UKEB meeting Board approved a research project focused on connectivity between IFRS Sustainability Disclosure Standards and Accounting Standards. This research is intended to support the UKEB response to both the ISSB RFI and the IASB's project Climate-related Risks in Financial Statements.
2This paper provides an update on Deliverable Two in the Climate-related Matters Project Initiation Plan (PIP).
Scope and deliverables
3The research is solely focused on identifying potential connectivity issues between narrative climate-related sustainability disclosures and the financial statements based on IFRS Accounting Standards. This work will not include any assessment of interoperability with other jurisdictional sustainability requirements nor seek to assess or comment on the current level of compliance with TCFD or SECR reporting requirements in the UK.
4The specific outcomes for this deliverable are:
- An analysis of connectivity gaps identified and the extent to which the cause may be due to incongruence between the accounting standards and the requirements of TCFD (as a proxy for draft S2).
- The potential impact of the adoption of draft IFRS S1 and draft IFRS S2 on those gaps.
- A summary of stakeholder views obtained from UKEB Working and Advisory Groups on the findings.
5The UKEB research sample of nine FTSE 350, 2022 Annual Reports is not intended to provide a representative result. Rather, it will allow the identification and deeper analysis of potential connectivity issues and consideration of potential solutions using real examples from across a range of entities and industries impacted by climate change. The sample focusses on high emission industries which are highly likely to be impacted by climate-related matters.
6In accordance with the Board's direction that this work is not intended to comment on the current level of compliance, the outcome of the research will be presented at a summary level and with anonymised illustrative examples.
Current Status
7The project team have now concluded the analysis of six of the nine entities annual reports. These included entities in the general industrials, metals and mining, pharmaceutical, defence and aerospace, and travel and leisure industries.
8The project team have identified the following connectivity themes to-date:
- Plant Property and Equipment (PPE) and Intangible Assets (covered in Appendix A):
- Depreciation and amortisation.
- Impairment.
- Costs to address climate-related matters.
9Appendix A sets out the overall context and users' expectations for each of the three themes and then provides three examples for each theme.
Question for the Board
1Do Board members have any questions or comments on Appendix A: Analysis of connectivity gaps—PPE and Intangible Assets
Next Steps
10The UKEB Sustainability Working Group (SWG) is scheduled to meet on 25 May 2023 to consider any additional themes identified and the potential impacts of IFRS S1 and S2.
11The SWG will be asked to comment on the questions below which will be reflected in the final draft of the report:
- Do the themes identified represent areas that users of Annual Reports would reasonably expect to have a financial impact in the financial statements?
- Do the examples represent disconnects where disclosure would have been relevant and useful to users of the financial statements?
- To what extent may the application of draft IFRS S1and S2 address these types of disconnects?
- Are there possible solutions for any remaining areas of disconnect i.e., not addressed by the ISSB Standards?
Question for the Board
2Do the Board members have any comments on the proposed questions to gather stakeholder feedback from the SWG for the final report?
12The National Standard Setters Sustainability Forum and the other UKEB Advisory Groups will also be invited to comment on the draft report.
13Any additional themes identified from the three remaining Annual Reports and Stakeholder feedback will be updated in the final report. The final report is scheduled to be presented at the June 2023 UKEB meeting.
Appendix A: Analysis of connectivity gaps—PPE and Intangible Assets
A1This report presents the current analysis of the following connectivity themes (based on review of six of the nine annual reports selected):
- Plant Property and Equipment (PPE) and Intangible Assets (covered in Appendix A):
- Depreciation and amortisation.
- Impairment.
- Costs to address climate-related matters.
A2For each of the themes we set out the context and the user expectations, illustrated by examples from the annual reports reviewed so far. The examples are anonymised as previously agreed with the Board.
Theme 1: Depreciation and amortisation
Context
A3This theme includes consideration of how climate-related risks may impact depreciation or depletion of property, plant and equipment (PPE) assets, and amortisation of finite-lived intangibles.
A4Reduced estimates of remaining asset lives may result from the need to retire carbon-intensive PPE earlier than was previously expected. Additionally, estimated residual values may decline if carbon intensive assets become less desirable. Carbon intensity may be ascribed to various categories of PPE, for example fossil fuel reserves themselves (coal, oil, gas reserves), assets powered by fossil fuel (machinery and vehicles that run on fossil fuels), assets used to produce inventory that is powered by fossil fuels (machinery that produces internal combustion engines), etc. As a result, decreases in such asset lives and residual values may lead to higher depreciation expense.
User expectations
A5Users might expect visibility of how climate-related matters such as climate risks and emissions reduction targets have been considered in the estimates of remaining useful life/production and residual values. To the extent that changes in depreciation result, these should be disclosed, if material, in accordance with IAS 8 Accounting Policies, Accounting Estimates and Errors (paragraph 39).
A6If no adjustments are made, users may expect disclosure explaining why this is reasonable in consideration of the sustainability issues identified. In some cases, it may be expected that the carrying amount of relevant carbon-intensive assets, and information on their assumed remaining lives/residual values be disclosed to provide an understanding of the situation.
A7Users will benefit from information on how climate-related matters such as climate risks and emissions reduction targets have been considered in the estimates of remaining useful life/production and residual values. This will enable users to assess the reasonableness of the assumptions on which the estimates have been based, including where estimates have not been changed.
Potential disconnects with the financial statements
Depreciation and amortisation
Example 1: Depreciation and amortisation – Fleet renewal (1)
| Context | Annual Report disclosures relating to information on fleet renewals to reduce emissions are noted below for the Travel and leisure industry. |
| Sustainability disclosures | Travel and leisure industry |
| Company A "A modern fleet of aircraft is instrumental in driving down emissions and so we will be making a list price investment of $21 billion over the coming years to continue to renew our fleet. All 168 new aircraft deliveries, scheduled between FY23 and FY29, will be Airbus NEO aircraft, which are at least 15% more fuel efficient and 50% quieter than the aircraft they replace." Company B "Over the course of 2022, we signed agreements with Airbus and Boeing to acquire 87 new aircraft which will reduce our emissions by up to 20 per cent and we thank our shareholders for their approval.... plans to make a EUR 13.5bn investment between 2023-30 for 192 new, efficient aircraft." |
|
| Users' expectation of connectivity | There may be an expectation of information on whether these significant new additions to the fleet have implications for the existing fleet. For example, whether the retirement of existing (more carbon intensive) fleet may be retired earlier than expected, or whether the need to reduce residual values was considered. |
| Financial statement disclosure | Company A "Long term fleet plans and useful economic lives. ... During the course of 2020 as a result of the impact of COVID-19, the Group permanently stood down 82 aircraft (of which ten were subsequently stood back up), their associated engines and rotable inventories. ..." Company B "With the permanent standing down of these aircraft, coupled with the future committed delivery of 192 fuel efficient aircraft as detailed in note 15 (commitments), the Group considers the existing fleet assets align with the long-term fleet plans to achieve its climate strategy. All aircraft in the fleet, and those due to be delivered in the future, have the capability to utilise SAF[^1] in their operations without impediment. Accordingly, no impairment has arisen in the current or prior year, nor have the useful lives and residual values of aircraft been amended, as a result of the Group's decarbonisation plans." |
Example 2: Depreciation and amortisation – Fleet renewal (2)
| Context | Annual Report disclosures relating to information on fleet renewals to reduce emissions are noted below for the Metals and mining industry. |
| Sustainability disclosures | Metals and mining industry |
| "We are introducing 10 fuel bulk carriers, ... to our roster of vessels, with the first vessel delivered in December 2022 – the remaining vessels are expected to be delivered by mid-2024. They offer significant environmental benefits, having the potential to cut CO2 emissions by up to 35% compared with vessels fuelled by conventional marine oil alone, while adoption of new technologies will eliminate the release of unburnt methane, as well as removing sulphur oxides, and reducing the volume of nitrogen oxides and particulate matter." | |
| Users' expectation of connectivity | There may be an expectation of information on whether these significant new additions to the fleet have implications for the existing fleet. For example, whether the retirement of existing (more carbon intensive) fleet may be retired earlier than expected, or whether the need to reduce residual values was considered. |
| Financial statement disclosure | No relevant disclosures noted. |
Example 3: Depreciation and amortisation – Replacement of PPE
Strategic Report
Our performance this year...
| Project Type | Influencing |
| Project Scope | Research |
Purpose of the paper
The UKEB approved a research project focused on connectivity between IFRS Sustainability Disclosure Standards and Accounting Standards at its [March 2023] meeting. This paper provides an update on Deliverable Two in the Climate-related Matters Project Initiation Plan (PIP). As noted in that PIP, this is the second scheduled update for the Board ahead of the final report, scheduled to be presented at the June 2023 meeting.
Summary of the Issue
Deliverable Two aims to:
- assess areas of potential disconnects between disclosures made by UK listed companies in (i) the sustainability report relating to the TCFD and SECR requirements, and (ii) their financial statements;
- seek initial stakeholder perspectives; and
- consider the potential impacts of the draft ISSB disclosure requirements.
The research is being prepared to support the UKEB response to both the ISSB Request for Information (Rfl) on its workplan and the IASB's project regarding Climate-related Risks in Financial Statements.
This paper covers the following topics, set out in separate appendices:
- Appendix A: Analysis of connectivity gaps—PPE and Intangible Assets
- Appendix B: Aspects of draft IFRS Sustainability Disclosure Standards
- Appendix C: Consideration of IFRS Accounting Standards
Board discussion at this meeting will be factored into the on-going work on this research. The [final report] incorporating the Board's feedback is scheduled to be presented at the June 2023 Board meeting.
Decisions for the Board
1Do Board members have any questions or comments on the analysis of connectivity gaps presented in Appendix A?
2Do the Board members have any comments on the proposed questions to gather stakeholder feedback for the final report? [see following section for proposed questions]
Recommendation
That the Board discuss and consider the nature of the disconnects identified.
Appendices
- Appendix A: Analysis of connectivity gaps—PPE and Intangible Assets
- Appendix B: Aspects of draft IFRS Sustainability Disclosure Standards
- Appendix C: Consideration of IFRS Accounting Standards
1At the March 2023 UKEB meeting Board approved a research project focused on connectivity between IFRS Sustainability Disclosure Standards and Accounting Standards. This research is intended to support the UKEB response to both the ISSB RFI and the IASB's project Climate-related Risks in Financial Statements.
2This paper provides an update on Deliverable Two in the Climate-related Matters Project Initiation Plan (PIP).
Scope and deliverables
3The research is solely focused on identifying potential connectivity issues between narrative climate-related sustainability disclosures and the financial statements based on IFRS Accounting Standards. This work will not include any assessment of interoperability with other jurisdictional sustainability requirements nor seek to assess or comment on the current level of compliance with TCFD or SECR reporting requirements in the UK.
4The specific outcomes for this deliverable are:
- An analysis of connectivity gaps identified and the extent to which the cause may be due to incongruence between the accounting standards and the requirements of TCFD (as a proxy for draft S2).
- The potential impact of the adoption of draft IFRS S1 and draft IFRS S2 on those gaps.
- A summary of stakeholder views obtained from UKEB Working and Advisory Groups on the findings.
5The UKEB research sample of nine FTSE 350, 2022 Annual Reports is not intended to provide a representative result. Rather, it will allow the identification and deeper analysis of potential connectivity issues and consideration of potential solutions using real examples from across a range of entities and industries impacted by climate change. The sample focusses on high emission industries which are highly likely to be impacted by climate-related matters.
6In accordance with the Board's direction that this work is not intended to comment on the current level of compliance, the outcome of the research will be presented at a summary level and with anonymised illustrative examples.
Current Status
7The project team have now concluded the analysis of six of the nine entities annual reports. These included entities in the general industrials, metals and mining, pharmaceutical, defence and aerospace, and travel and leisure industries.
8The project team have identified the following connectivity themes to-date:
- Plant Property and Equipment (PPE) and Intangible Assets (covered in Appendix A):
- Depreciation and amortisation.
- Impairment.
- Costs to address climate-related matters.
9Appendix A sets out the overall context and users' expectations for each of the three themes and then provides three examples for each theme.
Question for the Board
1Do Board members have any questions or comments on Appendix A: Analysis of connectivity gaps—PPE and Intangible Assets
Next Steps
10The UKEB Sustainability Working Group (SWG) is scheduled to meet on 25 May 2023 to consider any additional themes identified and the potential impacts of IFRS S1 and S2.
11The SWG will be asked to comment on the questions below which will be reflected in the final draft of the report:
- Do the themes identified represent areas that users of Annual Reports would reasonably expect to have a financial impact in the financial statements?
- Do the examples represent disconnects where disclosure would have been relevant and useful to users of the financial statements?
- To what extent may the application of draft IFRS S1and S2 address these types of disconnects?
- Are there possible solutions for any remaining areas of disconnect i.e., not addressed by the ISSB Standards?
Question for the Board
2Do the Board members have any comments on the proposed questions to gather stakeholder feedback from the SWG for the final report?
12The National Standard Setters Sustainability Forum and the other UKEB Advisory Groups will also be invited to comment on the draft report.
13Any additional themes identified from the three remaining Annual Reports and Stakeholder feedback will be updated in the final report. The final report is scheduled to be presented at the June 2023 UKEB meeting.
Appendix A: Analysis of connectivity gaps—PPE and Intangible Assets
A1This report presents the current analysis of the following connectivity themes (based on review of six of the nine annual reports selected):
- Plant Property and Equipment (PPE) and Intangible Assets (covered in Appendix A):
- Depreciation and amortisation.
- Impairment.
- Costs to address climate-related matters.
A2For each of the themes we set out the context and the user expectations, illustrated by examples from the annual reports reviewed so far. The examples are anonymised as previously agreed with the Board.
Theme 1: Depreciation and amortisation
Context
A3This theme includes consideration of how climate-related risks may impact depreciation or depletion of property, plant and equipment (PPE) assets, and amortisation of finite-lived intangibles.
A4Reduced estimates of remaining asset lives may result from the need to retire carbon-intensive PPE earlier than was previously expected. Additionally, estimated residual values may decline if carbon intensive assets become less desirable. Carbon intensity may be ascribed to various categories of PPE, for example fossil fuel reserves themselves (coal, oil, gas reserves), assets powered by fossil fuel (machinery and vehicles that run on fossil fuels), assets used to produce inventory that is powered by fossil fuels (machinery that produces internal combustion engines), etc. As a result, decreases in such asset lives and residual values may lead to higher depreciation expense.
User expectations
A5Users might expect visibility of how climate-related matters such as climate risks and emissions reduction targets have been considered in the estimates of remaining useful life/production and residual values. To the extent that changes in depreciation result, these should be disclosed, if material, in accordance with IAS 8 Accounting Policies, Accounting Estimates and Errors (paragraph 39).
A6If no adjustments are made, users may expect disclosure explaining why this is reasonable in consideration of the sustainability issues identified. In some cases, it may be expected that the carrying amount of relevant carbon-intensive assets, and information on their assumed remaining lives/residual values be disclosed to provide an understanding of the situation.
A7Users will benefit from information on how climate-related matters such as climate risks and emissions reduction targets have been considered in the estimates of remaining useful life/production and residual values. This will enable users to assess the reasonableness of the assumptions on which the estimates have been based, including where estimates have not been changed.
Potential disconnects with the financial statements
Depreciation and amortisation
Example 1: Depreciation and amortisation – Fleet renewal (1)
| Context | Annual Report disclosures relating to information on fleet renewals to reduce emissions are noted below for the Travel and leisure industry. |
| Sustainability disclosures | Travel and leisure industry |
| Company A "A modern fleet of aircraft is instrumental in driving down emissions and so we will be making a list price investment of $21 billion over the coming years to continue to renew our fleet. All 168 new aircraft deliveries, scheduled between FY23 and FY29, will be Airbus NEO aircraft, which are at least 15% more fuel efficient and 50% quieter than the aircraft they replace." Company B "Over the course of 2022, we signed agreements with Airbus and Boeing to acquire 87 new aircraft which will reduce our emissions by up to 20 per cent and we thank our shareholders for their approval.... plans to make a EUR 13.5bn investment between 2023-30 for 192 new, efficient aircraft." |
|
| Users' expectation of connectivity | There may be an expectation of information on whether these significant new additions to the fleet have implications for the existing fleet. For example, whether the retirement of existing (more carbon intensive) fleet may be retired earlier than expected, or whether the need to reduce residual values was considered. |
| Financial statement disclosure | Company A "Long term fleet plans and useful economic lives. ... During the course of 2020 as a result of the impact of COVID-19, the Group permanently stood down 82 aircraft (of which ten were subsequently stood back up), their associated engines and rotable inventories. ..." Company B "With the permanent standing down of these aircraft, coupled with the future committed delivery of 192 fuel efficient aircraft as detailed in note 15 (commitments), the Group considers the existing fleet assets align with the long-term fleet plans to achieve its climate strategy. All aircraft in the fleet, and those due to be delivered in the future, have the capability to utilise SAF[^1] in their operations without impediment. Accordingly, no impairment has arisen in the current or prior year, nor have the useful lives and residual values of aircraft been amended, as a result of the Group's decarbonisation plans." |
Example 2: Depreciation and amortisation – Fleet renewal (2)
| Context | Annual Report disclosures relating to information on fleet renewals to reduce emissions are noted below for the Metals and mining industry. |
| Sustainability disclosures | Metals and mining industry |
| "We are introducing 10 fuel bulk carriers, ... to our roster of vessels, with the first vessel delivered in December 2022 – the remaining vessels are expected to be delivered by mid-2024. They offer significant environmental benefits, having the potential to cut CO2 emissions by up to 35% compared with vessels fuelled by conventional marine oil alone, while adoption of new technologies will eliminate the release of unburnt methane, as well as removing sulphur oxides, and reducing the volume of nitrogen oxides and particulate matter." | |
| Users' expectation of connectivity | There may be an expectation of information on whether these significant new additions to the fleet have implications for the existing fleet. For example, whether the retirement of existing (more carbon intensive) fleet may be retired earlier than expected, or whether the need to reduce residual values was considered. |
| Financial statement disclosure | No relevant disclosures noted. |
Example 3: Depreciation and amortisation – Replacement of PPE
I### 1. Performance Overview {: #section-1-performance-overview }
Summary of the Issues
Deliverable Two aims to:
- assess areas of potential disconnects between disclosures made by UK listed companies in (i) the sustainability report relating to the TCFD and SECR requirements, and (ii) their financial statements;
- seek initial stakeholder perspectives; and
- consider the potential impacts of the draft ISSB disclosure requirements.
The research is being prepared to support the UKEB response to both the ISSB Request for Information (Rfl) on its workplan and the IASB's project regarding Climate-related Risks in Financial Statements.
This paper covers the following topics, set out in separate appendices:
- Appendix A: Analysis of connectivity gaps—PPE and Intangible Assets
- Appendix B: Aspects of draft IFRS Sustainability Disclosure Standards
- Appendix C: Consideration of IFRS Accounting Standards
Board discussion at this meeting will be factored into the on-going work on this research. The [final report] incorporating the Board's feedback is scheduled to be presented at the June 2023 Board meeting.
Decisions for the Board
1Do Board members have any questions or comments on the analysis of connectivity gaps presented in Appendix A?
2Do the Board members have any comments on the proposed questions to gather stakeholder feedback for the final report? [see following section for proposed questions]
Recommendation
That the Board discuss and consider the nature of the disconnects identified.
Appendices
- Appendix A: Analysis of connectivity gaps—PPE and Intangible Assets
- Appendix B: Aspects of draft IFRS Sustainability Disclosure Standards
- Appendix C: Consideration of IFRS Accounting Standards
1At the March 2023 UKEB meeting Board approved a research project focused on connectivity between IFRS Sustainability Disclosure Standards and Accounting Standards. This research is intended to support the UKEB response to both the ISSB RFI and the IASB's project Climate-related Risks in Financial Statements.
2This paper provides an update on Deliverable Two in the Climate-related Matters Project Initiation Plan (PIP).
Scope and deliverables
3The research is solely focused on identifying potential connectivity issues between narrative climate-related sustainability disclosures and the financial statements based on IFRS Accounting Standards. This work will not include any assessment of interoperability with other jurisdictional sustainability requirements nor seek to assess or comment on the current level of compliance with TCFD or SECR reporting requirements in the UK.
4The specific outcomes for this deliverable are:
- An analysis of connectivity gaps identified and the extent to which the cause may be due to incongruence between the accounting standards and the requirements of TCFD (as a proxy for draft S2).
- The potential impact of the adoption of draft IFRS S1 and draft IFRS S2 on those gaps.
- A summary of stakeholder views obtained from UKEB Working and Advisory Groups on the findings.
5The UKEB research sample of nine FTSE 350, 2022 Annual Reports is not intended to provide a representative result. Rather, it will allow the identification and deeper analysis of potential connectivity issues and consideration of potential solutions using real examples from across a range of entities and industries impacted by climate change. The sample focusses on high emission industries which are highly likely to be impacted by climate-related matters.
6In accordance with the Board's direction that this work is not intended to comment on the current level of compliance, the outcome of the research will be presented at a summary level and with anonymised illustrative examples.
Current Status
7The project team have now concluded the analysis of six of the nine entities annual reports. These included entities in the general industrials, metals and mining, pharmaceutical, defence and aerospace, and travel and leisure industries.
8The project team have identified the following connectivity themes to-date:
- Plant Property and Equipment (PPE) and Intangible Assets (covered in Appendix A):
- Depreciation and amortisation.
- Impairment.
- Costs to address climate-related matters.
9Appendix A sets out the overall context and users' expectations for each of the three themes and then provides three examples for each theme.
Question for the Board
1Do Board members have any questions or comments on Appendix A: Analysis of connectivity gaps—PPE and Intangible Assets
Next Steps
10The UKEB Sustainability Working Group (SWG) is scheduled to meet on 25 May 2023 to consider any additional themes identified and the potential impacts of IFRS S1 and S2.
11The SWG will be asked to comment on the questions below which will be reflected in the final draft of the report:
- Do the themes identified represent areas that users of Annual Reports would reasonably expect to have a financial impact in the financial statements?
- Do the examples represent disconnects where disclosure would have been relevant and useful to users of the financial statements?
- To what extent may the application of draft IFRS S1and S2 address these types of disconnects?
- Are there possible solutions for any remaining areas of disconnect i.e., not addressed by the ISSB Standards?
Question for the Board
2Do the Board members have any comments on the proposed questions to gather stakeholder feedback from the SWG for the final report?
12The National Standard Setters Sustainability Forum and the other UKEB Advisory Groups will also be invited to comment on the draft report.
13Any additional themes identified from the three remaining Annual Reports and Stakeholder feedback will be updated in the final report. The final report is scheduled to be presented at the June 2023 UKEB meeting.
Appendix A: Analysis of connectivity gaps—PPE and Intangible Assets
A1This report presents the current analysis of the following connectivity themes (based on review of six of the nine annual reports selected):
- Plant Property and Equipment (PPE) and Intangible Assets (covered in Appendix A):
- Depreciation and amortisation.
- Impairment.
- Costs to address climate-related matters.
A2For each of the themes we set out the context and the user expectations, illustrated by examples from the annual reports reviewed so far. The examples are anonymised as previously agreed with the Board.
Theme 1: Depreciation and amortisation
Context
A3This theme includes consideration of how climate-related risks may impact depreciation or depletion of property, plant and equipment (PPE) assets, and amortisation of finite-lived intangibles.
A4Reduced estimates of remaining asset lives may result from the need to retire carbon-intensive PPE earlier than was previously expected. Additionally, estimated residual values may decline if carbon intensive assets become less desirable. Carbon intensity may be ascribed to various categories of PPE, for example fossil fuel reserves themselves (coal, oil, gas reserves), assets powered by fossil fuel (machinery and vehicles that run on fossil fuels), assets used to produce inventory that is powered by fossil fuels (machinery that produces internal combustion engines), etc. As a result, decreases in such asset lives and residual values may lead to higher depreciation expense.
User expectations
A5Users might expect visibility of how climate-related matters such as climate risks and emissions reduction targets have been considered in the estimates of remaining useful life/production and residual values. To the extent that changes in depreciation result, these should be disclosed, if material, in accordance with IAS 8 Accounting Policies, Accounting Estimates and Errors (paragraph 39).
A6If no adjustments are made, users may expect disclosure explaining why this is reasonable in consideration of the sustainability issues identified. In some cases, it may be expected that the carrying amount of relevant carbon-intensive assets, and information on their assumed remaining lives/residual values be disclosed to provide an understanding of the situation.
A7Users will benefit from information on how climate-related matters such as climate risks and emissions reduction targets have been considered in the estimates of remaining useful life/production and residual values. This will enable users to assess the reasonableness of the assumptions on which the estimates have been based, including where estimates have not been changed.
Potential disconnects with the financial statements
Depreciation and amortisation
Example 1: Depreciation and amortisation – Fleet renewal (1)
| Context | Annual Report disclosures relating to information on fleet renewals to reduce emissions are noted below for the Travel and leisure industry. |
| Sustainability disclosures | Travel and leisure industry |
| Company A "A modern fleet of aircraft is instrumental in driving down emissions and so we will be making a list price investment of $21 billion over the coming years to continue to renew our fleet. All 168 new aircraft deliveries, scheduled between FY23 and FY29, will be Airbus NEO aircraft, which are at least 15% more fuel efficient and 50% quieter than the aircraft they replace." Company B "Over the course of 2022, we signed agreements with Airbus and Boeing to acquire 87 new aircraft which will reduce our emissions by up to 20 per cent and we thank our shareholders for their approval.... plans to make a EUR 13.5bn investment between 2023-30 for 192 new, efficient aircraft." |
|
| Users' expectation of connectivity | There may be an expectation of information on whether these significant new additions to the fleet have implications for the existing fleet. For example, whether the retirement of existing (more carbon intensive) fleet may be retired earlier than expected, or whether the need to reduce residual values was considered. |
| Financial statement disclosure | Company A "Long term fleet plans and useful economic lives. ... During the course of 2020 as a result of the impact of COVID-19, the Group permanently stood down 82 aircraft (of which ten were subsequently stood back up), their associated engines and rotable inventories. ..." Company B "With the permanent standing down of these aircraft, coupled with the future committed delivery of 192 fuel efficient aircraft as detailed in note 15 (commitments), the Group considers the existing fleet assets align with the long-term fleet plans to achieve its climate strategy. All aircraft in the fleet, and those due to be delivered in the future, have the capability to utilise SAF[^1] in their operations without impediment. Accordingly, no impairment has arisen in the current or prior year, nor have the useful lives and residual values of aircraft been amended, as a result of the Group's decarbonisation plans." |
Example 2: Depreciation and amortisation – Fleet renewal (2)
| Context | Annual Report disclosures relating to information on fleet renewals to reduce emissions are noted below for the Metals and mining industry. |
| Sustainability disclosures | Metals and mining industry |
| "We are introducing 10 fuel bulk carriers, ... to our roster of vessels, with the first vessel delivered in December 2022 – the remaining vessels are expected to be delivered by mid-2024. They offer significant environmental benefits, having the potential to cut CO2 emissions by up to 35% compared with vessels fuelled by conventional marine oil alone, while adoption of new technologies will eliminate the release of unburnt methane, as well as removing sulphur oxides, and reducing the volume of nitrogen oxides and particulate matter." | |
| Users' expectation of connectivity | There may be an expectation of information on whether these significant new additions to the fleet have implications for the existing fleet. For example, whether the retirement of existing (more carbon intensive) fleet may be retired earlier than expected, or whether the need to reduce residual values was considered. |
| Financial statement disclosure | No relevant disclosures noted. |