The amounts and balances in the balance sheet, income statements, cash flow statements and notes reflect the estimates and judgments an organisation applies when preparing the financial statements.
For example, on the balance sheet, assets and liabilities held by the organisation are recorded at different carrying values.
These include fair value balances derived using assumptions and estimates to perform the valuation and historical costless depreciation balances, which are values derived using an estimate of useful life to determine the depreciation rate for such assets on the balance sheet. Therefore, the financial statements reflect the decisions and plans undertaken by an organisation over time.
The execution of a sustainability strategy by an organisation requires organisations to make certain decisions and enter into plans and arrangements that are captured in the financial statements at various periods, depending on the nature of those arrangements.
As an organisation makes ESG and other sustainability commitments to stakeholders, it should assess the financial reporting impact of these commitments and apply them in preparing the financial statements in line with its chosen accounting policies.
The financial statements, therefore, need to be aligned with the information contained in the sustainability reports to avoid greenwashing.
It is not appropriate for an organisation’s sustainability report or other non-financial reports to include information not reflected or considered in preparing the financial statements.
It could imply to the organisation’s stakeholders that it is simply paying lip service to issues of sustainability. It could result in adverse consequences such as a loss of trust with stakeholders and damage to the organisation’s brand in the market. The financial statements are one way to confirm whether an organisation is sincere about the plans and commitments made in the sustainability reports.
For example, how has an organisation accounted for the costs associated with its net zero commitments in the financial statements? Has an organisation assessed the adverse impact of climate on the depreciation or amortisation of its assets?
Has an organisation taken the sustainability risks and opportunities impacting its business into consideration during asset impairment testing in the financial statements? Also, organisations should include relevant disclosures in the notes of the financial statements on how the information contained in the sustainability report has affected the financial statements.
Akinyemi Awodumila is a Partner at Deloitte East Africa. He is an author who writes and speaks widely on corporate reporting topics.
