IFRS S1/S2 First-Year Adoption: Three Key Preparations Companies Should Complete by March 2026 - Article

2026 is a critical year in which the sustainability disclosure standards issued by the ISSB (IFRS S1 and IFRS S2) begin to be applied in phases. As the integration of sustainability disclosures with financial information becomes a global regulatory trend, companies can no longer treat sustainability information as a supplementary report independent of financial statements.

March is the period when financial statements are finalized and reviewed by the board of directors, making it a crucial timing to reassess whether sustainability disclosures are consistent with financial information.

Rushing to complete documentation or hastily preparing disclosures at year-end not only increases operational costs but also introduces risks such as inconsistencies in disclosures and deficiencies in governance accountability.

This article provides a practical perspective on the three key preparations that companies should complete by March.

1. Why IFRS S1/S2 Change the Logic of Corporate Disclosures

(1) From “Sustainability Reporting” to a “Risk Disclosure Framework”

IFRS S1 sets out general requirements for sustainability-related disclosures, while IFRS S2 establishes specific standards for climate-related disclosures.

The core principle is that when sustainability-related risks affect future cash flows, asset values, or cost of capital, they must be incorporated into and explained within the financial reporting framework.

In other words, the focus of disclosure shifts from the volume of corporate activities to how those risks and opportunities impact management assumptions and valuation.

(2) Fundamental Differences from Traditional CSR/ESG Reports

Traditional CSR or ESG reports focus on achievements and social contributions. In contrast, IFRS S1/S2 emphasize the impact on enterprise value.

Companies are required to explain how risks affect:

Cash flow projections
Assumptions used in impairment testing
Long-term capital expenditure plans
Financing conditions and cost of capital

The logic of disclosure shifts from “what has been done” to “what impact it has had.”

(3) Expansion of Board Responsibilities

These standards place strong emphasis on governance structures. Companies must disclose:

Whether risk identification has been discussed by the board
Whether key decisions are properly documented
Whether evidence supporting decision-making and control processes is retained

If decision-making processes are not properly documented, governance deficiencies may be questioned even if disclosures appear complete.

Image source: FREEPIK

2. First Preparation to Complete by March: Reassessment of Materiality and Risk Identification

(1) Have Material Sustainability Risks Been Properly Identified?

Companies should reassess whether key risks such as the following have been properly identified:

Transition costs related to climate change (e.g., carbon taxes, CBAM, and regulatory impacts)
Energy and supply chain risks
Labor and governance stability risks

Rather than listing all possible issues, the focus should be on identifying risks that have a material impact on enterprise value.

(2) Are There Traceable Records for Key Judgments?

Important decisions should not remain at the level of verbal discussions. Companies should ensure:

Meeting records are maintained
The rationale and analytical basis for risk assessments are clearly documented
Judgments can be explained to external stakeholders

Without proper documentation, external explanations may be insufficient.

(3) Are Financial Assumptions Aligned?

This is one of the most common areas where gaps arise in practice. Companies should confirm:

Whether transition costs are incorporated into impairment testing assumptions
Whether energy and carbon cost changes are reflected in cash flow projections
Whether long-term capital expenditure plans align with transition strategies

If risks are disclosed but not reflected in financial assumptions, inconsistencies between disclosures and financial logic will arise.

3. Second Preparation to Complete by March: Integration of Data Sources and Disclosure Standards

(1) Are Financial Data and Sustainability Data Consistent?

A common issue is inconsistency between financial statements and sustainability disclosures for the same risks, or reliance on different data sources. Companies should confirm:

Whether the same databases are used
Whether consistent assumptions are applied
Whether inconsistencies exist across reporting periods

Consistency is the foundation of disclosure credibility.

(2) Are Assumptions Standardized?

Examples include:

Carbon pricing assumptions
Cost escalation rates
Transition investment schedules

If each department develops its own assumptions independently, inconsistencies may arise across disclosures.

(3) Is a Cross-Functional Integration Process Established?

The implementation of IFRS S1/S2 requires collaboration across finance, HR, operations, and sustainability teams.
Without regular communication and update processes, data integration may remain superficial.

Image source: FREEPIK

4. Third Preparation to Complete by March: Strengthening Governance and Evidence-Based Decision Processes

(1) Are Sustainability Issues Formally Reviewed by the Board?

Companies should confirm:

Whether formal board agendas are established
Whether minutes of decisions are properly documented

If sustainability issues remain at a reporting level rather than decision-making level, governance effectiveness cannot be ensured.

(2) Are Roles and Responsibilities Clearly Defined?

Companies should clearly define:

Responsibility for data aggregation
Responsibility for validation
Responsibility for external disclosure

Unclear accountability increases the risk of errors in disclosures.

(3) Are Internal Control Processes Established?

Key elements include:

Data update frequency
Document retention policies
Periodic review mechanisms

Without institutionalized processes, maintaining disclosure quality over time is difficult.

5. Three Common Pitfalls

In the first year of IFRS S1/S2 adoption, several critical blind spots may arise. These are not due to a lack of technical capability, but rather misunderstandings of the fundamental logic of disclosures.

Common pitfalls include:

(1) Treating IFRS S1/S2 as a Formatting Exercise
Some companies mistakenly believe that minor adjustments to report structure or wording are sufficient, without rebuilding the linkage between risks and financial estimates.

(2) Misalignment Between Disclosed Risks and Financial Assumptions
Companies may disclose transition risks in sustainability reports but fail to reflect them in financial statements, such as impairment tests, cash flow projections, or capital expenditure plans, leading to inconsistencies.

(3) Lack of Board-Level Review and Approval Processes
If there are no documented minutes or supporting evidence for key decisions, it becomes difficult to demonstrate that governance is functioning effectively, even if disclosures appear adequate.

These issues often surface during year-end reviews, requiring significant time to correct and potentially undermining external trust.

Image source: FREEPIK

6. Key Role of Certified Public Accountants in the First Year

During the initial adoption phase of IFRS S1/S2, the most critical need for companies is not additional reporting, but the establishment of a consistent and verifiable disclosure framework.

Accounting professionals primarily support:

Structuring disclosure frameworks
Ensuring the reasonableness of estimates

Key areas of support include:

Supporting the development of logical frameworks for key judgments
Establishing robust estimation methodologies aligned with financial models
Integrating financial and disclosure language to ensure consistency
Strengthening the linkage between board decisions and disclosure evidence

The core role is not to make decisions on behalf of the company, but to support the establishment of a clear, explainable, and verifiable disclosure system.

7. Conclusion

IFRS S1/S2 are not merely about reporting formats, but about governance and risk management responsibilities.

March represents a critical opportunity to reassess and align disclosure logic with financial assumptions. Delaying this process may lead to increased workload at year-end, concentration of risks, and inconsistencies in disclosures.

If companies complete the three key preparations—reassessing materiality, integrating data, and establishing evidence-based governance—by this stage, they will be better positioned to enhance disclosure quality and stabilize governance structures.

To support companies in completing these preparations by March, we provide the “IFRS S1/S2 Practical Implementation Diagnostic Tool.”

This tool can be used for initial internal self-assessment and identification of key gaps. By following the tool’s categories, companies can:

Evaluate materiality by item
Assess data consistency
Review evidence and governance structures

This enables companies to quickly identify and prioritize areas requiring improvement.

Download the Tool

➡️ IFRS S1/S2 Practical Implementation Diagnostic Tool

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