FM August: IFRS S1 and IFRS S2, circular business models

FM August: IFRS S1 and IFRS S2, circular business models

IMAGE BY NEW AFRICA/ADOBE STOCK

The latest podcast episode provides a preview of content in the August digital edition of FM. To focus on the edition’s overall theme of sustainability, FM editor-in-chief Oliver Rowe and podcast host Neil Amato are joined for the episode by Jeremy Osborn, FCMA, CGMA, FCPA (Australia), global head of sustainability at the Association of International Certified Professional Accountants.

Rowe summarises articles on topics such as change fatigue, circular business models, Excel Compatibility Versions, and landing a finance job in the era of AI-enabled hiring. Osborn focuses on the state of adoption of global sustainability standards and how the standards will affect the role of finance and accounting professionals.

What you’ll learn from this episode:

  • Highlights of the August digital edition cover an article on change fatigue.
  • Osborn’s assessment of the “accelerating” global adoption of IFRS S1 and IFRS S2 sustainability standards.
  • How the UK’s sustainability standards differ slightly from the IFRS standards.
  • A definition and examples of circularity in business.
  • Other highlights from the FM digital edition, including an article on Excel Compatibility Versions.

Play the episode below or read the edited transcript:

— To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Transcript

Neil Amato: The theme of the August digital edition of FM is sustainability, and that’s the topic of this episode of the FM podcast. I’m Neil Amato, and joining me to discuss that and other topics in the edition are Jeremy Osborn, the AICPA and CIMA’s global head of sustainability, and Oliver Rowe, FM’s editor-in-chief. Jeremy, we will get to the sustainability theme in just a bit. But first, for Oliver, tell the listeners some about the cover feature on change fatigue. What are some of the elements of that article?

Oliver Rowe: Thanks, Neil. As you say, the cover feature of the August edition, we’ve got a striking cover image that illustrates change fatigue. The headline is “Change Fatigue’s Causes, Effects, and Solutions”. Change fatigue, it’s obviously caused by change, but change that is poorly communicated, doesn’t have a clear goal, doesn’t have sufficient resources or support, and change without effective leadership.

That’s covered in this article, which also goes on to look at the ways that change fatigue shows itself. Typical symptoms are stress, anxiety, and exhaustion in employees. They might be cynical, they might express scepticism, people might push back or complain. It leads to things like employee burnout, poor employee retention rates, and other negative effects. But just to come back, the article provides solutions, and these are for leaders looking to implement solutions.

It’s recognising that staff react differently to change, and it’s often the smaller changes that are more tiring than large changes. It’s listening to employee concerns. It’s about company culture, and this can be worked on and improved. It’s about making sure there are high levels of trust. There’s Gartner research that shows that high levels of trust and team cohesion have a much higher capacity for change than those with low levels.

Amato: Thank you for that. As mentioned earlier, sustainability is the overall issue theme. One article on that theme is titled “What the Global Rollout of IFRS S1 and IFRS S2 Means for Finance”. For Jeremy, why in your mind is that a timely article?

Jeremy Osborn: Well, firstly, thanks, Neil for inviting me on to today’s podcast, and we’re very much looking forward to the article coming out in Financial Management. IFRS sustainability accounting standards — I think it would be fair to say or describe the global rollout as accelerating. We’re recording this podcast towards the end of July. At this point in time, nearly 40 jurisdictions have adopted or otherwise used the IFRS sustainability disclosure standards or are in the process of finalising steps towards adopting them.

The most prominent recent example of this is the UK, which issued the exposure drafts at the end of June for the UK Sustainability Reporting Standards S1 and S2. There is a consultation process that will run through September. This matters because the UK is a G7 economy. It will be one of the largest G7 economies that has signalled that it is endorsing IFRS S1 and S2.

The UK for many years now has played a leadership role globally in sustainable business, so this will send a signal to other jurisdictions around the world that may not yet have reached a decision on whether to adopt these standards.

Why does it matter to finance and accounting professionals? We’re going to be on the receiving end of these standards. If anybody who’s listening to this podcast is working in a jurisdiction that has adopted or is adopting or is planning to adopt IFRS S1 and S2, the chances are pretty high, I’d say 100%, that you and your finance teams will be responsible for the reporting.

Now, the reason that this is different from the situation we’ve had to date with sustainability reporting, which has generally, although not always, come through the sustainability team and often up through ultimately to the head of corporate affairs, the head of external relations, occasionally the CFO. The reason that it’s different this time is this is first and foremost information for the capital markets, and it’s information about sustainability-related risks and opportunities, which in the view of the executive management team are likely to have an impact on the performance of the prospects of their organisation.

We as professional accountants should be thinking about this information as on a par with financial information. Now, it will never quite be on the same level, and we see this in the nature of the audit process for this information. Financial auditors aren’t able quite to apply the same degree of rigour and oversight to sustainability-related information that they can to financial information. Instead, they offer something called limited assurance or reasonable assurance over this information.

But nonetheless, it can be assured. The reasonable assurance in particular is often described as being on a par with the financial audit. I think, arguably, it’s not quite. But what this presents is a picture in which finance teams will be preparing the information, CFOs will be signing off on it, investors will be using it. In order for the investors to have confidence in the information, the chances are pretty high that at least some of the information will be externally assured, and that will likely be assured by an audit firm. It may not necessarily have to be. Every jurisdiction has different rules and requirements around it.

But for the purposes of this discussion, anybody who’s listening to this podcast should be thinking about this information required by S1 and S2 as being on a par with financial information. Therefore, as a professional accountant, working business or industry or as an auditor working for an audit firm, you and your colleagues will be responsible for this information.

Even if the jurisdiction where your organisation is headquartered or domiciled has not yet adopted S1 and S2, if you think there is a whiff of an opportunity that they might, or the jurisdictional regulator signalled that they will be, I would recommend that you get your head around IFRS S1 and S2 because they are quite complicated, and I think businesses will benefit from having the opportunity to do a trial run before they publish the information.

It might be that an organisation will want to do a year’s worth of trial running, perhaps keeping the information if they’re allowed to internal in the first reporting cycle and then to publish that externally in the second reporting cycle. But it does depend on what your jurisdictional regulator allows you to do. In the UK, for example, the regulator has signalled that adoption of UK SRS S1 and S2 will be voluntary in the first instance, but we’ll find out later in the year what the detail is around this.

Every organisation will need to work out for itself based on the reporting requirements on what it can or can’t do. But if you’re new to this with S1 and S2 and you’re allowed to do it, it may well be worth doing a trial run for the first reporting cycle.

Amato: That’s great. Thank you for that overview. You mentioned the UK-specific sustainability reporting standards. We did cover the news on the FM website of the release of those, I guess, officially the exposure drafts that came out in late June. CIMA’s comment on those drafts included some of your thoughts. For those who may not know, how widespread is either the adoption or the intent to adopt these standards?

Osborn: Again, it very much depends on the context of a jurisdiction. In the UK, at first sight, the UK SRS S1 and S2 would appear to be nearly identical to IFRS S1 and S2. But there are a handful of amendments which have been incorporated into the UK standards. If I just call out two by way of example. The first is references to SASB standards, the Sustainability Accounting Standards Board. Actually, the SASB standards are part and parcel of the IFRS Foundation.

In the IFRS standards, there’s a requirement for organisations to consult the SASB standards, but they don’t have to report against them. But they must consider whether they should be reporting against them. Now, this raises interesting questions around how an organisation would demonstrate that it has considered SASB standards if it subsequently doesn’t report anything against them. In the UK, the wording has been amended slightly to say that a company reporting against the UK sustainability reporting standards “may” consider and report against the SASB standards. There’s not a requirement to consider the SASB standards.

The other by way of example is there is a reference in IFRS S2 to organisations referring or using an industry classification system called GICS, G-I-C-S. In the UK Sustainability Reporting Standards, it’s not a requirement to use GICS. Organisations, if they are already using another industry classification, perhaps they’re a complex organisation with different business units as part and parcel of different industry sub-segments, for example, may find that it’s already adopted a different industry classification system. It’s not a requirement in the UK to use GICS.

That’s just two examples. The differences are subtle, but they’re important. These weren’t plucked out of thin air. The UK has developed a very comprehensive approach to reviewing the IFRS sustainability accounting standards. There’s actually two government-appointed committees. One is looking at the content of the standards, and the other is looking at the adoption mechanisms. Those two committees report through to central government. The changes that we see in the UK reporting standards reflect the recommendations from those two committees.

Amato: The August edition also focuses on the topic of circular business models — in particular, how finance can use a framework and tool developed by CIMA-sponsored researchers. For Oliver, what are some the details in that article?

Rowe: Thanks, Neil. Yes, you’re absolutely right. We’ve got the article, “How Finance Can Start the Journey to a Circular Business Model”. The article provides a definition, the current model of the linear economy takes, uses, and disposes, and then in the circular economy, the cycle is to use, reuse, maintain, refurbish, and recycle to avoid waste. As the article points out, circular business models can have a positive influence on revenue, resilience, and cost.

The article is by researchers Regina Frei, Danni Zhang, and Felipe Merlano, and it introduces a framework, as you say, an accompanying tool, which is called the circularity radar. This tool provides a self-assessment exercise that can help businesses evaluate their current situation and their potential for improving. It can also be used to set measurable targets for circularity, aligning with financial objectives and ESG goals.

Amato: Jeremy, in your work on sustainability, how are companies introducing elements of circularity into their business models, and is this something that’s happening more frequently?

Osborn: It is, and as Oliver has suggested, this is partly about resource efficiency, that if you’re able as a business to reabsorb back into the beginning of your supply chain or your manufacturing process a product that has reached the end of its useful life, then there can often be considerable savings from doing that.

Early examples, for example, which were sort of well known at the time, is organisations like Patagonia, the US outdoor clothing company, that ran a retail campaign and took out a huge advert with pictures of their jackets saying, “Do not buy this product”. Because they were trying to promote exactly as Oliver said, the idea that if you already own one of our products, send it back to us. We’ll repair it. We’ll keep it going. These products are built to last. It’s that sort of idea that if you can keep a particular consumer product going, and the manufacturing organisation that’s created the product is able to support that, then one should do so.

Other early examples were AkzoNobel, which is one of the largest paint companies, was working out how to recycle paint because of all the paint that they sell. I think a fairly high proportion of it is just half used in cans at the end of a room being painted, for example. And they were working out how to create a system where they could take back the half-empty paint pots and reintegrate the raw materials back into the manufacturing process.

The circular business model is partly an efficiency thing. It’s partly about security of supply chain, that if you can create almost a closed loop with your consumers where the product that hasn’t been used or has reached a point where it needs to be repaired or refurbished in some capacity can come back to you, then it’s potentially better value for the consumer, and it potentially creates security of supply for you as an organisation.

I think many industries have been very actively exploring what they can do in this area, and some have to do it in terms of regulation. I think within the EU, there’s a requirement for car makers that all of the constituent parts of the car must be recyclable. Again, that’s another nice example of a product that inherently wears out over time. As we all know, when we do our annual car service, parts do need replacing. But if there’s a mechanism in place where as much of the original raw materials can be repurposed, then that’s of benefit to the company, it’s potentially a benefit to the consumer.

Actually, I’m just thinking of an example off the top of my head. For anybody listening to this with children, you’ll know what it’s like when you walk into a children’s playground and the tarmac is slightly bouncy. That’s created by recycled car tyres. The car tyre by that point obviously can’t be reused because it’s dangerous, but it can be reused by another industry in another capacity.

It’s a really good example of thinking more systematically across an economy of how can we, as Oliver said, repurpose, reuse, repair, and I always think there’s one missing from that, which is to refuse. Do you really need this product? Could you refuse to have it? Would that actually make your life better and happier by not burdening it with another thing? But that’s another issue.

Amato: Yeah, it is, and those are good examples. Thank you. Oliver, what other articles would you like to highlight in the August edition?

Rowe: Thanks, Neil. We’ve got the regular FM columns from Andrew Harding, chief executive–Management Accounting at the Association, and also CIMA President John Graham. In addition, I’d like to highlight an article from Liam Bastick, “Compatibility Versions in Excel: What You Need to Know”. This actually is quite a fundamental change that Microsoft is introducing.

The article is about how improvements to functions will be rolled out in what are termed Compatibility Versions, and the way these work are explained in detail in the article. But, essentially, they’re to ensure that calculations in existing Excel workbooks won’t change inadvertently when functions are improved. The second article I’d like to highlight is “How to Land a Finance Job in the Age of AI-Enabled Hiring”.

There’s advice in this article from a number of CGMA designation holders. A recent poll found that a strong majority, and this is in the article, a strong majority, 68% of business leaders plan to use AI this year to review CVs and also assess candidates. But it’s not just about impressing an applicant tracking system algorithm, and the article talks about this.

It also talks about developing what we call power skills. These are strategic and critical thinking skills, communication, emotional intelligence, and exceptional power skills can help candidates stand out. Not just about the AI, but it’s also having those extra skills. There’s also Institute News in every edition, which has regular updates on the profession and your membership.

Amato: This has been a great conversation. I’ve learned a lot, both about the edition and about the theme in the edition. Any closing thought for each of you? We’ll go with Jeremy first.

Osborn: Thanks, Neil. I think my closing thought would be an optimistic and a positive one. I think this is a really exciting moment for the profession and for finance and accountants, professionals working in business and industry in particular. Sustainable business is coming of age. Despite some of the political headwinds that sustainability is facing, particularly in the US but to a lesser degree in the EU, research that’s been published this month suggests that companies are either maintaining, and this is in a US context, they’re either maintaining their investments in sustainable business or actually increasing them. They’re just talking less about them, and this is often referred to as green hushing. It’s an exciting moment, I think, because, fundamentally, this provides a different perspective on the risks and the opportunities that the business may face.

Accountants with the discipline they have and the objectivity that they have and the scepticism that is integral to the profession and the information it prepares, whether that’s for external disclosure or internal reporting and application, are probably the best placed of any function within an organisation to support the identification of sustainability-related risks and opportunities.

Now, the theory when it comes to the external disclosure, is that through communicating to investors material, sustainability-related risks, and opportunities, this should be a source of competitive advantage to the business. It should also provide them with readier access to capital and a cheaper cost of capital. Now, this isn’t just me saying this as wishful thinking.

This is exactly what the chair of the IAASB says in public pronouncements. I suppose my closing remarks would be for anybody listening to think about their role in terms of how this information, whether used internally or externally, supports sustainable resource allocation and sustainable decision-making and therefore long-term value creation for the organisation, but also is a source and a significant source of competitive advantage and should open up new avenues to capital and at a cheaper rate, ie, the cost of doing business will reduce.

Therefore, that’s a really positive contribution that our colleagues can make to their businesses. Sustainability is now being framed in a very different way from how it was when I first started working this area 15-plus years ago, where it was about doing the right thing. It’s still about doing the right thing, but it’s about doing things which will directly benefit you as an organisation. For many decades, CIMA has advocated for the role of particularly management accountants with supporting the sustainability of their businesses. I think this is another really good example of how our members can support sustainable business.

Amato: Oliver?

Rowe: Absolutely, Neil. There are three ways to access the FM digital editions, including the August edition. You can go to the FM website at fm-magazine.com and in the Menu, go to Digital Edition. Click on the August edition and this will take you to the AICPA and CIMA website where you’ll need to log in with your AICPA and CIMA login. Or you can go direct to the AICPA and CIMA website at aicpa-cima.com. From the main menu, go to Resources and then Publications, and you’ll see Financial Management magazine. Thirdly, lastly, there’s the FM email alerting members to each new edition.

Amato: Thanks to Jeremy Osborn and Oliver Rowe for their time and insights today. I’m Neil Amato. Thanks for listening to the FM podcast.

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