IFRS S1. 25 Questions and answers

IFRS S1 Questions and Answers 

Common questions on IFRS S1 revolve around the general requirements for disclosing sustainability-related financial information. Understanding these requirements is crucial for entities that provide transparent and valuable sustainability-related disclosures to their stakeholders.

This guide covers key topics such as materiality, governance, risk management, and the specific metrics and targets that must be disclosed, providing a comprehensive overview of what interviewers might ask and what candidates need to know.

General Objective and Scope of IFRS S1

1. Question: What is the objective of IFRS S1 regarding sustainability-related financial disclosures?
   • Answer: The main objective of IFRS S1 is to require entities to disclose information about their sustainability-related risks and opportunities that is useful to primary users of general-purpose financial reports. This information helps users decide about providing resources to the entity, considering how sustainability-related risks and opportunities could affect the entity's cash flows, access to finance, and cost of capital over the short, medium, and long term.
2. Question: How does IFRS S1 define the scope of sustainability-related risks and opportunities?
   • Answer: IFRS S1 applies to the disclosure of all sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects, including its cash flows, access to finance, or cost of capital. Risks and opportunities that are unlikely to affect the entity’s prospects are outside the scope of this Standard.
3. Question: Can entities apply IFRS S1 if their general-purpose financial statements are not prepared under IFRS Accounting Standards?
   • Answer: Yes, entities may apply IFRS Sustainability Disclosure Standards, including IFRS S1, regardless of whether their related general-purpose financial statements are prepared according to IFRS Accounting Standards or other generally accepted accounting principles (GAAP).
4. Question: What qualitative characteristics make sustainability-related financial valuable information according to IFRS S1?
   • Answer: Useful sustainability-related financial information must be relevant and faithfully represent its purpose. Enhancing qualitative characteristics includes comparability, verifiability, timeliness, and understandability.
5. Question: What is the significance of fair presentation in the context of IFRS S1?
   • Answer: Fair presentation requires entities to disclose all relevant sustainability-related risks and opportunities that could reasonably be expected to affect their prospects, ensuring that the information is complete, neutral, and accurate. This also involves providing additional information if the applicable requirements in IFRS Standards are insufficient to enable users to understand the entity’s sustainability-related risks and opportunities.

Materiality and Reporting Entity in IFRS S1

1. Question: How does IFRS S1 define materiality in the context of sustainability-related financial disclosures?
   • Answer: Materiality is entity-specific and relates to information that, if omitted, misstated, or obscured, could reasonably be expected to influence decisions made by primary users of general-purpose financial reports.
2. Question: Why must sustainability-related financial disclosures be prepared for the same reporting entity as the related financial statements?
   • Answer: Preparing sustainability-related financial disclosures for the same reporting entity ensures consistency and alignment between sustainability disclosures and financial statements, making the information more valuable and coherent for users.
3. Question: What role does connected information play in sustainability-related financial disclosures?
   • Answer: Connected information enables users to understand the relationships between various sustainability-related risks and opportunities and their connections with other disclosures in the entity’s general-purpose financial reports, ensuring a holistic view of its sustainability impact.
4. Question: How should an entity ensure consistency in the data and assumptions in sustainability-related financial disclosures?
   • Answer: An entity should ensure that the data and assumptions used in sustainability-related financial disclosures are consistent with those used in preparing the related financial statements to the extent possible under applicable accounting standards.
5. Question: What is the significance of disclosing the unit of measure in sustainability-related financial disclosures?
   • Answer: Disclosing the unit of measure, such as the currency used, ensures that the information provided in sustainability-related financial disclosures is comparable and aligned with the related financial statements.

Governance and Strategy

1. Question: What is the objective of sustainability-related financial disclosures on governance according to IFRS S1?
   • Answer: The objective is to enable users to understand the governance processes, controls, and procedures an entity uses to monitor and manage sustainability-related risks and opportunities.
2. Question: What specific governance-related information must an entity disclose under IFRS S1?
   • Answer: An entity must disclose information about the governance body responsible for overseeing sustainability-related risks and opportunities, including how responsibilities are reflected in terms of reference, how skills are developed, and how governance bodies monitor and manage sustainability risks and opportunities.
3. Question: How should an entity disclose its strategy for managing sustainability-related risks and opportunities?
   • Answer: An entity should disclose information that enables users to understand the sustainability-related risks and opportunities that could reasonably affect its prospects, the impact on its business model and value chain, and how these factors influence its strategy and financial performance.
4. Question: Why must an entity disclose the time horizons associated with sustainability-related risks and opportunities?
   • Answer: Disclosing time horizons (short, medium, and long term) helps users understand when the effects of sustainability-related risks and opportunities are expected to occur and how these align with the entity's strategic planning.
5. Question: What should an entity disclose regarding the resilience of its strategy to sustainability-related risks?
   • Answer: An entity should provide qualitative and, if applicable, quantitative assessments of the resilience of its strategy and business model in relation to sustainability-related risks, including how these assessments were conducted and the time horizon considered.

Risk Management in IFRS S1

1. Question: What is the objective of risk management disclosures in IFRS S1?
   • Answer: The objective is to enable users to understand the processes an entity uses to identify, assess, prioritize, and monitor sustainability-related risks and opportunities, as well as how these processes are integrated into the entity’s overall risk management.
2. Question: What specific information about the processes used to manage sustainability-related risks should be disclosed?
   • Answer: An entity should disclose the inputs and parameters used in identifying risks, whether scenario analysis is employed, how risks are assessed and prioritized, and how the processes have evolved compared to previous reporting periods.
3. Question: How should an entity disclose the integration of sustainability-related risk management into its overall risk management process?
   • Answer: The entity should describe the extent to which and how sustainability-related risks and opportunities are integrated into and inform the entity’s overall risk management process, ensuring that these are not treated in isolation.
4. Question: Why is it important to disclose how sustainability-related opportunities are managed?
   • Answer: Disclosing how opportunities are managed gives users insight into how the entity plans to capitalize on these opportunities to enhance its prospects. This is crucial for a comprehensive understanding of the entity’s strategy.
5. Question: What role does scenario analysis play in sustainability-related risk management disclosures?
   • Answer: Scenario analysis helps understand the potential impacts of sustainability-related risks under different future scenarios, aiding in more informed decision-making and providing users with insights into the entity’s preparedness for various outcomes.

Metrics and Targets in IFRS S1

1. Question: What is the objective of disclosing metrics and targets under IFRS S1?
   • Answer: The objective is to enable users to understand an entity's performance in relation to sustainability-related risks and opportunities, including progress towards any set targets.
2. Question: How should an entity disclose metrics to measure sustainability-related risks and opportunities?
   • Answer: An entity should disclose metrics required by applicable IFRS Sustainability Disclosure Standards and any other metrics it uses to monitor sustainability-related risks and opportunities, ensuring transparency and comparability.
3. Question: What information should be provided about an entity's targets for managing sustainability-related risks and opportunities?
   • Answer: An entity should disclose the metrics used to set the target, the specific quantitative or qualitative targets, the period over which the target applies, the base period, milestones, and progress towards these targets.
4. Question: How should an entity handle the disclosure of metrics developed internally?
   • Answer: The entity should provide a clear definition of the metric, explain how it was developed, whether it is validated by a third party, and describe the method used to calculate it, including any limitations and assumptions.
5. Question: Why is consistency in defining and calculating metrics important in sustainability-related disclosures?
   • Answer: Consistency ensures that users can compare the entity’s performance over time and across entities, making the information more reliable and helpful for decision-making.

Closing Remarks:

Mastering the common questions on IFRS S1 equips finance professionals with the knowledge to navigate sustainability-related financial disclosures effectively. By focusing on the critical areas of governance, strategy, risk management, and reporting, professionals can ensure that their disclosures meet the stringent requirements of IFRS S1, ultimately supporting better stakeholder decision-making.

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