Consistency

IFRS 18 Presentation and Disclosure in Financial Statements – Best read

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IFRS 18 Presentation and Disclosure in Financial Statements

The IASB’s newly issued standard IFRS 18 mainly deals with the presentation of the income statement, balance sheet and certain footnotes. At the same time, certain aspects of the cash flow statement are modified. IFRS 18 does not change the recognition and measurement of the components of financial statements; therefore, the amounts reported as shareholders’ equity and net income are both unchanged. However, it will have a significant impact on the presentation and disaggregation of what is reported (primarily in the income statement and footnotes), including what subtotals companies must provide and how these are defined.

There are five main areas where we think the new standard will help investors as users of IFRS Financial Statements:IFRS 18 Presentation and Disclosure in Financial Statements

Operating–Investing–Financing classification

IFRS 18 aims to establishes a structured statement of profit or loss by implementing the following measures:

  • It introduces three defined categories for income and expenses: operating, investing, and financing.
    • Operating – income/expenses resulting from the company’s main business operations.
    • Investing – income/expenses from:
      • investments in associates, joint ventures and unconsolidated subsidiaries;
      • cash and cash equivalents;
      • assets that generate a return individually and largely independently (e.g. rental income from investment properties).
    • Financing – consisting of:
      • income/expenses from liabilities related to raising finance only (e.g. interest expense on borrowings); and
      • interest income/expenses and effects of changes in interest rates from other liabilities (e.g. interest expense on lease liabilities).
  • It mandates to present new defined totals and subtotals, including operating profit, thereby enhancing the clarity and consistency of financial reporting.

Entities primarily engaged in investing in assets or providing finance to customers are subject to specific categorisation requirements. This entails that additional income and expense items, which would typically be classified as investing or financing activities, are instead categorised under operating activities. Consequently, operating profit reflects the outcomes of an entity’s core business operations. Identifying the main business activity involves exercising judgment based on factual circumstances.

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Category 3 Fuel and Energy Related Activities – The best calculation guidance

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Category 3 Fuel and Energy Related Activities Not Included in Scope 1 or Scope 2

Category description – Category 3 Fuel and Energy Related Activities includes emissions related to the production of fuels and energy purchased and consumed by the reporting company in the reporting year that are not included in scope 1 or scope 2.

This guidance page for Category 3 Fuel and Energy Related Activities serves as a companion to the Scope 3 Standard to offer companies practical guidance on calculating their scope 3 emissions. It provides information not contained in the Scope 3 Standard, such as methods for calculating GHG emissions for each of the 15 scope 3 categories, data sources, and worked examples.

Category 3 excludes emissions from the combustion of fuels or electricity consumed by the reporting company because they are already included in scope 1 or scope 2. Scope 1 includes emissions from the combustion of fuels by sources owned or controlled by the reporting company. Scope 2 includes the emissions from the combustion of fuels to generate electricity, steam, heating, and cooling purchased and consumed by the reporting company.

Overview – Category 3 Fuel and Energy Related Activities Not Included in Scope 1 or Scope 2

Category 3 Fuel and Energy Related Activities Not Included in Scope 1 or Scope 2 (often abbreviated as Category 3 emissions) refer to indirect emissions associated with a company’s value chain, which are not directly controlled or owned by the organization but result from its activities. These emissions primarily stem from sources such as upstream and downstream activities, including extraction, production, and distribution of fuels and energy that a company utilizes but does not directly manage. Here’s a comprehensive overview:

Definition and Classification:

  1. Scope 1, 2, and 3 Emissions: The categorization of greenhouse gas (GHG) emissions is defined by the Greenhouse Gas Protocol. Scope 1 emissions are direct emissions from sources that are owned or controlled by the company, such as onsite fuel combustion. Scope 2 emissions are indirect emissions from purchased electricity, heat, or steam. Scope 3 emissions encompass all other indirect emissions along the value chain, including both upstream and downstream activities.
  2. Category 3 Emissions: Within Scope 3 emissions, Category 3 specifically focuses on fuel and energy-related activities that are not included in Scopes 1 or 2. These emissions arise from sources outside the company’s direct control but are associated with the company’s activities, such as the extraction, production, and transportation of fuels and energy sources used by the organization.

Characteristics:

  1. Indirect Nature: Category 3 emissions are indirect emissions, meaning they result from activities associated with the company’s value chain but occur outside of the company’s operational boundaries.
  2. Complexity: Assessing and managing Category 3 emissions can be challenging due to the complexity of tracing emissions throughout the supply chain, as well as the diverse range of activities involved in fuel extraction, production, and distribution.
  3. Scope and Coverage: Category 3 emissions cover a broad spectrum of activities, including but not limited to upstream activities such as extraction and processing of raw materials, transportation of fuels, and downstream activities like refining and distribution.

Examples:Category 3 Fuel and Energy Related Activities

  1. Upstream Activities: Emissions associated with the extraction of fossil fuels such as oil, natural gas, and coal, including drilling, mining, and processing.
  2. Transportation: Emissions from the transportation of fuels and energy sources, including shipping, pipeline transport, and road transport of crude oil, refined products, and natural gas.
  3. Refining and Processing: Emissions generated during the refining and processing of crude oil and natural gas into usable fuels and energy products, such as gasoline, diesel, and electricity.
  4. Distribution: Emissions related to the distribution of fuels and energy sources to end-users, including storage, handling, and transportation to retail outlets or industrial consumers.

Importance:

  1. Comprehensive Emissions Accounting: Addressing Category 3 emissions allows companies to achieve a more comprehensive understanding of their carbon footprint and environmental impact, enabling better-informed decision-making and targeted emission reduction efforts.
  2. Supply Chain Management: Managing Category 3 emissions necessitates collaboration and engagement with suppliers and partners throughout the value chain, promoting sustainability and environmental stewardship across the entire supply network.
  3. Risk Mitigation: Understanding and mitigating Category 3 emissions can help companies reduce their exposure to regulatory, market, and reputational risks associated with climate change and carbon-intensive activities.

Considerations:

  1. Data Availability and Accuracy: Assessing Category 3 emissions requires access to reliable data on emissions factors, energy consumption, and supply chain activities, which may pose challenges due to data availability and accuracy issues.
  2. Supply Chain Engagement: Engaging with suppliers and partners to address Category 3 emissions requires collaboration, transparency, and alignment of goals and objectives, which may necessitate developing partnerships and implementing supply chain sustainability initiatives.
  3. Lifecycle Analysis: Conducting lifecycle assessments of products and services can help identify hotspots and opportunities for emissions reductions across the entire value chain, including Category 3 activities.

Conclusion:

Category 3 Fuel and Energy Related Activities Not Included in Scope 1 or Scope 2 represent a significant component of a company’s indirect emissions profile, reflecting the environmental impact associated with the extraction, production, and distribution of fuels and energy sources used in its operations. By comprehensively addressing Category 3 emissions and integrating sustainability principles into supply chain management practices, companies can enhance their environmental performance, mitigate risks, and contribute to global efforts to combat climate change.

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Category 1 Purchased Goods and Services – The best calculation guidance

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Calculating Scope 3 Emissions GHG Category 1 Purchased Goods and Services

Category description – Category 1 Purchased Goods and Services includes all upstream (i.e., cradle-to-gate) emissions from the production of products purchased or acquired by the reporting company in the reporting year. Products include both goods (tangible products) and services (intangible products).

This guidance page for Category 1 Purchased Goods and Services serves as a companion to the Scope 3 Standard to offer companies practical guidance on calculating their scope 3 emissions. It provides information not contained in the Scope 3 Standard, such as methods for calculating GHG emissions for each of the 15 scope 3 categories, data sources, and worked examples.

Category 1 includes emissions from all purchased goods and services not otherwise included in the other categories of upstream scope 3 emissions (i.e., category 2 through category 8). Specific categories of upstream emissions are separately reported in category 2 through category 8 to enhance the transparency and consistency of scope 3 reports.

Emissions from the transportation of purchased products from a tier one (direct) supplier to the reporting company (in vehicles not owned or controlled by the reporting company) are accounted for in category 4 (Upstream transportation and distribution).

Companies may find it useful to differentiate between purchases of production-related products (e.g., materials, components, and parts) and non-production-related products (e.g., office furniture, office supplies, and IT support). This distinction may be aligned with procurement practices and therefore may be a useful way to more efficiently organize and collect data (see box 5.2 of the Scope 3 Standard).

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Category 11 Use of Sold Products – Best read

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Category 11 Use of Sold Products

Category description – Category 11 Use of Sold Products includes emissions from the use of goods and services sold by the reporting company in the reporting year. A reporting company’s scope 3 emissions from use of sold products include the scope 1 and scope 2 emissions of end users. End users include both consumers and business customers that use final products.

The Scope 3 Standard divides emissions from the use of sold products into two types (see also table 11.1):

  • Direct use-phase emissions
  • Indirect use-phase emissions.

Category 11 Use of Sold Products

In category 11, companies are required to include direct use-phase emissions of sold products. Companies may also account for indirect use-phase emissions of sold products, and should do so when indirect use-phase emissions are expected to be significant. See table 11.1 for descriptions and examples of direct and indirect use-phase emissions.

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Carbon dioxide equivalent defined – 1 Best read

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Carbon dioxide equivalent defined

In study material each GHG described has a different global warming potential (GWP). The GWP of a given GHG indicates how much energy one unit of the GHG absorbs (i.e., the ability of that gas to trap heat in the atmosphere) compared to one unit of carbon dioxide, generally over a 100-year period.

The larger the GWP, the more that the GHG warms the earth compared to carbon dioxide over the stated time period. For example, PFCs and HFCs often absorb thousands of times more energy than carbon dioxide. The GWP of each GHG is published as a factor and used to translate GHGs, other than carbon dioxide, into carbon dioxide equivalent (C02e) units.

The GHG Protocol considers C02e to be the universal unit of measurement for GHGs since it expresses the GWP of each GHG in terms of the GWP of one unit of carbon dioxide. C02e and individual GHGs are often expressed in metric tons, which is the equivalent of 1,000 kilograms (or approximately 2,204 pounds).

The purpose of this measure is to enable a reporting entity, users and other stakeholders to compare the potency of the overall emissions from a reporting entity, both across entities and over time, even when the composition of the GHG emissions changes.

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Emissions over Time – The 1 Best read

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Emissions over Time

The GHG Protocol is designed to enable reporting entities to track and report consistent and comparable emissions data over time. The first step to tracking emissions over time is the establishment of a base year. A base year is a benchmark against which subsequent emissions can be compared to create meaningful comparisons over time and may be used for setting GHG reduction targets.

To comply with the GHG Protocol principles of relevance and consistency, a reporting entity is required to establish and report a base year for its Scope 1 and Scope 2 GHG emissions. A base year is only required for Scope 3 emissions when Scope 3 performance is tracked or a Scope 3 reduction target has been set. That is the case whether the entity is reporting under the Corporate Standard or the Scope 3 Standard (see below How to apply the Corporate Standard, Scope 2 Guidance and Scope 3 Standard?).

How to apply the Corporate Standard, Scope 2 Guidance and Scope 3 Standard?

An entity reporting under the Corporate Standard is not required to disclose Scope 3 emissions. As a result, there are three options under the GHG Protocol for reporting Scope 3 emissions, as described in the following table, which is based on Table 1.1 in the Scope 3 Standard:

Option

Description

Applicable GHG criteria

1

A reporting entity reports its Scope 1 and Scope 2 GHG emissions and either (1) no Scope 3 emissions or (2) Scope 3 emissions from activities that are not aligned with any of the prescribed Scope 3 categories (the latter is very rare).

  • Corporate Standard

  • Scope 2 Guidance

2

A reporting entity reports its Scope 1 and Scope 2 GHG emissions and some, but not all, relevant and material Scope 3 GHG emissions in accordance with the Scope 3 calculation guidance but not with the Scope 3 Standard.

  • Corporate Standard

  • Scope 2 Guidance

  • Scope 3 Guidance

3

A reporting entity reports its Scope 1 and Scope 2 GHG emissions and all relevant and material categories of Scope 3 GHG emissions

  • Corporate Standard

  • Scope 2 Guidance

  • Scope 3 Standard

  • Scope 3 Guidance

Consider this!

The GHG Protocol encourages reporting entities to begin reporting GHG emissions information and improve the completeness and precision of that information over time.

While the GHG Protocol requires a company to establish and report a base year for its Scope 1 and Scope 2 emissions, a reporting entity that recently started to report GHG emissions information and has not established an emissions reduction target may choose not to set a base year until the precision and completeness of their emissions inventory have improved.

In this situation, the reporting entity should disclose that a base year has not yet been established and the reason for not establishing a base year.

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Scope 1 emissions – Best read

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Scope 1 emissions

Scope 1 emissions are emissions from sources owned or controlled by a reporting entity. For example, emissions from equipment, a vehicle or production processes that are owned or controlled by the reporting entity are considered Scope 1 emissions. These emissions include all direct emissions within the entity’s inventory boundary.

The combination of organizational and operational boundaries make up a reporting entity’s inventory boundary, which is also called the reporting boundary. Refer to Organizational boundaries for information on organizational boundaries and Operational boundaries for information on operational boundaries.

The GHG Protocol is designed to avoid double counting GHG emissions. That is, two or more reporting entities should never account for the same emissions as Scope 1 emissions. For example, emissions from the generation of heat, electricity or stream that is sold to another entity are not subtracted from Scope 1 emissions but are reported as Scope 2 emissions by the entity that purchases the related energy.

Theoretically, if every entity and individual throughout the world reported their GHG emissions using the same organizational boundary (e.g., equity share, financial control or operational control approach), the total of all Scope 1 emissions would equal the total GHGs emitted throughout the world.

Types of Scope 1 emissions

The GHG Protocol describes four types of Scope 1 emissions: stationary combustion, mobile combustion, process emissions and fugitive emissions. The type of emissions that are included in Scope 1 will vary based on the industry and business model of the reporting entity.

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Metrics in use for ESG Reporting- 1 Best and complete read

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Metrics in use for ESG Reporting

Here is a list of Metrics in use for ESG Reporting that companies can use to start communicating on the ESG issues. The metrics have been divided into four categories:

Each category contains recommended disclosure metrics (both qualitative and quantitative) that have been marked either as minimum disclosures (relevant to all companies) or additional disclosures (that might not be relevant to all companies).

The selection of recommended disclosure metrics has been informed by relevant regulatory initiatives i.e. the CSRD and the ESRS as well as the Warsaw Stock Exchange corporate governance code. Moreover, to address increasing investors’ data needs, they have been also aligned with the mandatory PAI indicators for corporate investments required by the SFDR (see mapping in the Appendix – Relevance of the Guidelines to investors). References have been added below each section to other frameworks and resources that companies may also consider (Appendix – Alignment with EU regulations and other frameworks).

It should be emphasized that the Guidelines do not provide an exhaustive list of indicators and topics. Rather they aim to offer less advanced companies a minimum set of carefully selected disclosure metrics that will help them to prepare for the upcoming requirements stemming from the CSRD and the ESRS and better respond to investors’ ESG data needs. Companies in scope of the CSRD should use the ESRS to prepare their disclosures on material sustainability topics.

Metrics in use for ESG Reporting – General information

General information metrics provide essential context to understand the company business activities and value creation model, it’s material ESG impacts, risks and opportunities, and how it is managing them.

General information

What should be disclosed:

I

M 1

Business model
  • Short description of the company business model and value chain.
  • Whether the company is active in the following sectors: fossil fuel (coal, oil and gas), controversial weapons along with related revenues.

Companies may consider including the following characteristics when describing their business model: economic activities; products and services offered; markets of operation, company size (in terms of workforce, business locations, revenue, etc.)

I

M 2

Sustainability integration
  • Whether and how sustainability matters are integrated in the company strategy and business model.
  • Resilience of the company strategy and business model(s) to material sustainability risks.
  • Policies and actions adopted to manage material sustainability matters.
  • Targets related to management of sustainability matters.

I

M 3

Sustainability governance
  • Governance bodies roles and responsibilities with regard to sustainability matters (e.g. in relation to risk management, target setting, sustainability disclosure).
  • Whether governance bodies are informed about sustainability matters, and how they are addressed by administrative and/or management bodies.
  • Whether incentive schemes are offered to members of governance bodies that are linked to sustainability matters.

I

M 4

Material impacts, Risk and Opportunities
  • The processes used to identify material impacts, risks and opportunities.
  • Sustainability due diligence process.
  • Outcome of the materiality assessment (identified material impacts, risks and opportunities).
  • How material impacts, risks and opportunities interact with the company strategy and business model.

I

M 5

Stakeholder engagement
  • Description of the company main stakeholders, and how the company engages with them.
  • How the interests and views of stakeholders are taken into account by the undertaking’s strategy and business model.

Metrics in use for ESG Reporting- Environmental disclosures

Environmental metrics cover issues that arise from or impact the natural environment.

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The International Sustainability Disclosure Standards – IFRS S1 and IFRS S2 – Best read

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The International Sustainability Disclosure Standards – IFRS S1 and IFRS S2

On 26 June 2023 the International Sustainability Standards Board (ISSB) released its first two International Sustainability Disclosure Standards (IFRS SDS or the Standards) that become effective for periods beginning on or after 1 January 2024. Together they mark the start of a new era of requiring companies to make sustainability-related disclosures.

The ISSB was launched by the IFRS Foundation at COP26 with the aim of improving the consistency and quality of sustainability reporting across the globe, by matching the importance of sustainability reporting with the current regulations around financial reporting. To reinforce this message, the ISSB sits alongside the International Accounting Standards Board (IASB) and is overseen by the trustees of the IFRS Foundation and the Monitoring board.

The International Sustainability Disclosure Standards – IFRS S1 and IFRS S2

The ISSB brings together the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF), the name behind the Integrated Reporting Framework and the Sustainability Accounting Standards Board (SASB) Standards.

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Startup valuation

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Startup valuation

If every business starts with an idea, young companies can range the spectrum. Some are unformed, at least in a commercial sense, where the owner of the business has an idea that he or she thinks can fill an unfilled need among consumers.

Others have inched a little further up the scale and have converted the idea into a commercial product, albeit with little to show in terms of revenues or earnings. Still others have moved even further down the road to commercial success, and have a market for their product or service, with revenues and the potential, at least, for some profits.

Since young companies tend to be small, they represent only a small part of the overall economy. However, they tend to have a disproportionately large impact on the economy for several reasons.

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