Judgement, Uncertainties and Errors

Author

Shel

In preparing sustainability-related financial disclosures, an organisation makes various judgements, other than estimations, that can significantly affect the information reported. For example, an organisation makes judgements in:

  1. identifying sustainability-related risks and opportunities that could reasonably be expected to affect its prospects;
  2. determining which sources of guidance to apply;
  3. identifying material information to include in its sustainability-related financial disclosures; and
  4. assessing whether an event or change in circumstances is significant and requires a reassessment of the scope of all affected sustainability-related risks and opportunities across its value chain.

An organisation should explain the key judgments it made, excluding estimates of amounts, that significantly affect its sustainability-related financial disclosures, so users can better understand the information provided.

When amounts in sustainability-related financial disclosures cannot be measured directly and must be estimated, measurement uncertainty arises. In some cases, these estimates require assumptions about possible future events with uncertain outcomes.

Using reasonable estimates is a necessary part of preparing sustainability-related financial disclosures and does not reduce the usefulness of the information, as long as the estimates are clearly described and explained. Even when there is a high level of measurement uncertainty, the estimate may still provide useful information.

An organisation should disclose information that helps users of general purpose financial reports understand the most significant uncertainties affecting the amounts reported in its sustainability-related financial disclosures.

An organisation should:

  1. identify the amounts it has disclosed that are subject to a high level of measurement uncertainty; and

  2. for each amount identified above, disclose information about:

    1. the sources of measurement uncertainty, such as reliance on the outcome of a future event, a particular measurement technique, or the availability and quality of data from the organisation’s value chain; and

    2. the assumptions, approximations and judgements the organisation has made in measuring the amount.

This requirement for an organisation to disclose information about the uncertainties affecting the amounts reported in sustainability-related financial disclosures applies to estimates that involve the organisation’s most difficult, subjective or complex judgements. As the number of variables and assumptions increases, those judgements become more subjective and complex, and the uncertainty in the reported amounts also increases.

The type and extent of the information an organisation should disclose will vary depending on the nature of the amount reported in its sustainability-related financial disclosures, the sources of and factors contributing to the uncertainty, and other relevant circumstances.

Examples of the type of information an organisation might need to disclose include:

  1. the nature of the assumption or other source of measurement uncertainty;
  2. how sensitive the disclosed amount is to the methods, assumptions and estimates used in its calculation, and the reasons for that sensitivity;
  3. the expected resolution of the uncertainty and the range of reasonably possible outcomes for the disclosed amount; and
  4. an explanation of any changes made to past assumptions related to the disclosed amount, if the uncertainty is still unresolved.

An organisation should correct material errors from a previous period by restating the comparative amounts for that prior period, unless it is not practical to do so.

Prior period errors are omissions or mistakes in an organisation’s sustainability-related financial disclosures for one or more earlier periods. These errors result from not using, or incorrectly using, reliable information that:

  1. was available when the disclosures for that period were authorised for issue; and
  2. could reasonably have been obtained and considered when preparing those disclosures.

These errors may involve:

  1. calculation mistakes,
  2. incorrect application of metric or target definitions,
  3. oversights or misinterpretations of facts, and
  4. fraudulent activity

Corrections of errors are different from changes in estimates. Estimates are approximations that an organisation might need to update as new information becomes available.

Errors found during the current reporting period must be corrected before authorizing the sustainability disclosures for release. However, significant errors may only be identified in later periods.

When an organisation finds a significant error in previous sustainability disclosures, it must report:

  1. what type of error occurred;
  2. how each affected prior period is being corrected, where possible; and
  3. if correction isn’t feasible, the reasons why and how/when the error was ultimately addressed.

When unable to fully assess an error’s impact on all prior reporting periods, the organisation must adjust comparative data to correct the error starting from the earliest feasible date.


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