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Accounting for climate change: new IASB Guidance

16 June 2020: ICAEW CEO Michael Izza explains the new IASB guidance on climate-related disclosures.

The coronavirus pandemic has become the defining issue of 2020. But climate change will be the defining issue of this decade, if not this century. It affects us all, and ICAEW is committed to ensuring that chartered accountants are at the forefront of efforts to tackle the severe challenges it presents.

Their role involves helping to ensure that the impact of climate change is accounted for and disclosed appropriately in the audited financial statements. Recent IASB guidance on this topic, discussed below, reflects this challenge.

Boards and audit committees of IFRS reporters should take stock of this guidance when considering the impact of climate-related risks on their financial reporting and the appropriate disclosure of assumptions and other relevant information in the notes to the financial statements.

What investors expect

Investors expect high quality financial and non-financial information, including around climate change. Changing temperatures and weather patterns around the globe pose significant risks for many businesses. The downsides may well have a financial statement impact, for example, through impairments to goodwill, or reductions in the useful economic lives of assets. Costs may increase, due for instance, to effects on supply chains, and revenues may fall, as consumer demand for goods and services changes over time in response to climate change, for example.

The key objective in all of this should be providing investors with the information they need to assess the impact of climate risks on the business. For instance, some investors tell us that disclosures of relevant assumptions and sensitivities are not clear and transparent enough. They do not allow them to interrogate effectively any apparent inconsistencies between what appears in the financial statements and the language on climate change used in accompanying narrative and CSR reports.

IASB guidance on climate change - the key to improving investor confidence

Today, climate-related risks are predominantly discussed outside of the audited financial statements. However, where a business may be materially impacted by climate change, the impact should be reflected in the audited financial statements, with clear disclosure of the key assumptions made by the directors. 

In November, the IASB published a briefing document containing guidance on this topic, IFRS Standards and climate-related disclosures. This is not part of the mainstream, formal body of IFRS literature, a standard or IFRIC interpretation. As a result of its unusual status, it may not have attracted the level of attention from business we think it deserves, particularly as it identifies investors as its primary audience and provides persuasive and important guidance. 

What the guidance does

The guidance document explains how the impacts of climate change are dealt with – albeit not explicitly – in existing IFRS Standards, and how to apply the guidance in IFRS Practice Statement 2: Making Materiality Judgements, to climate-related risks. A table sets out requirements in IFRS Standards that could require companies to consider climate-related risks when making judgements about what to account for in the financial statements and about measuring assets and liabilities.

It also covers the disclosure of climate-related risks in the audited financial statements, supplemented by management commentary designed to provide context to the financial statements. It provides useful examples of business sectors likely to be most impacted by climate-related risks. It calls for businesses to consider disclosing the converse when a business in a heavily affected sector has not been impacted by climate change due to successful risk management.

Importantly, the guidance emphasises that “qualitative external factors, such as the industry in which the company operates, and investor expectations may make some risks ‘material’ and may warrant disclosures in financial statements, regardless of their numerical impact”. It explains that, given investor statements on the importance of climate-related risks to their decision-making, companies, “may need to consider such risks in the context of their financial statements rather than solely as a matter of corporate-social-responsibility reporting”. 

Gearing up for reporting on 2020

The impact of COVID-19 will, of course, loom large in 2020 financial reports. Notwithstanding this, ICAEW urges companies and their auditors to take all appropriate steps to ensure that 2020 IFRS reports also provide clear and transparent information on climate-related risks and the key assumptions made by directors. Investors and other users of financial statements will expect nothing less.

Companies, auditors, regulators and investors themselves all have a role to play in getting this right. Reference to the IASB guidance is the place to start.

With that in mind, our Financial Reporting Faculty is hosting a webinar with the author of the guidance document, IASB Board member Nick Anderson, on Friday 10 July. The webinar is free and open to all.