Navigating International Financial Reporting Standards and ESG Reporting

Companies face numerous challenges when they acquire businesses in foreign countries or expand their existing businesses internationally. In this article, we highlight issues that such companies should consider, focusing on financial reporting and ESG (Environmental, Social, and Governance) standards.

ESG and Sustainability Regulatory Requirements

Businesses expanding internationally should consider local, state/provincial, and federal ESG and sustainability regulatory requirements. While each country typically has unique requirements and focus areas, the global emphasis has generally been on climate-related topics and supply chain human rights risks.

Key regulatory frameworks to consider include:

• The European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD)
• The EU’s Corporate Sustainability Due Diligence Directive (CSDDD)
• Mandatory sustainability reporting under the International Financial Reporting Standards’ (IFRS) sustainability reporting standards

For more information on these and related topics, see the following resources:

• Assessing the Impact of the Corporate Sustainability Reporting Directive (CSRD) on Non-EU Groups & Their EU Subsidiaries
• Preparing for the Corporate Sustainability Reporting Directive (CSRD)
• European Sustainability Reporting Standards Set 1: What Companies Should Know to Prepare
• Preparing for Implementation Challenges of IFRS Sustainability Reporting
• EU Taxonomy Guide: Navigate the EU Taxonomy and Related Regulations
• First Omnibus proposal: Navigating the future of sustainability reporting

Financial Reporting Considerations

When acquiring a foreign entity, it is important to understand the financial reporting requirements of the newly acquired entity and the parent entity. Certain countries require statutory audits for entities exceeding a revenue threshold, with some thresholds as low as $10,000. These statutory audits may require financial statement audits under an accounting framework different from the parent.

In addition to national requirements of the respective countries, lender requirements may change under the new organizational structure.

It is important to get all lending parties involved in international expansion discussions early, so that lender documents can be aligned and companies can work with lenders and other financial statement users to enhance the consistency of reporting across user groups.

Related to acquisitions, these changes in financial reporting requirements may also impact valuations and other key assumptions made in due diligence.

Key Financial Reporting Considerations

Here's a table summarizing key aspects of financial reporting to consider when expanding internationally:

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