IFRS standards and climate-related disclosures

28 July: A recent webinar from ICAEW’s Financial Reporting and Audit and Assurance faculties explained how international accounting standards apply to climate change and other emerging risks, despite those risks not being mentioned explicitly in the standards.

Take a look at the 38 pages of index to International Financial Reporting Standards (IFRS) and you won’t find the terms climate change or climate risk listed. Nor, for that matter, will you find the terms coronavirus or COVID-19. Does that mean IFRS do not apply to these important topics, and that investors, as the primary users of financial statements, cannot expect to see the impact of those risks on a business reflected in accounts prepared under IFRS? Not at all. 

“IFRS are designed as principles-based requirements,” explains Nick Anderson, member of the International Accounting Standards Board (IASB). “Although the term ‘climate change’ is not explicitly mentioned, the standards are still applicable to climate change.” Anderson was speaking during a webinar aimed at raising awareness of the recent article he authored for the IASB, IFRS Standards and climate-related disclosures.

As ICAEW Chief Executive Michael Izza stated in an article in June, investors expect and need high-quality financial and non-financial information around climate change. Although currently, climate-related risks are predominantly discussed in reports outside the audited financial statements, their material impact indicates that they should also be reflected inside the audited accounts.

Materiality was a key feature in Anderson’s presentation, during which he noted that users of financial statements do not always fully appreciate the definition of materiality contained in IAS 1 Presentation of Financial Statements. In particular, that materiality is defined through the prism of the user rather than the prism of the entity. Furthermore, assessments of materiality should be on the basis of size and nature, or a combination of both. Anderson also highlighted that making disclosures in other documents such as a sustainability report does not compensate for the omission of disclosures required in financial statements prepared under IFRS. He added that audited financial statements that comply with the requirements of accounting standards are ‘pivotal’ to investors: they are the ‘foundation’ of their work to gather evidence from a range of sources, which ultimately enables them to make decisions on whether to buy, sell or hold investments.

Anderson explained that while the IASB’s article was primarily written as an educational piece, aimed at bridging the communication gap between the investment community and accounting profession, he hopes that it will also be a useful reminder of the requirements of the Standards to preparers, auditors and regulators. Emphasising that the article does not herald any changes to those requirements, he drew attention to what has changed – that through the eyes of investors, climate-related risk is now a material issue.

A recording of the webinar, available to all, can be accessed here.