The International Accounting Standards Board (IASB) has launched a project to investigate whether and how companies could provide better information about climate-related risks in their financial statements.
IASB initiated the probe in response to its recent Third Agenda Consultation, which indicated that companies often perceive climate risks as remote and long term in nature, so may not be appropriately considering them when preparing their statements. Meanwhile, from an end users’ perspective, the consultation found that investors require better qualitative and quantitative data about the effects of climate risks on the carrying amounts of assets and liabilities that companies are reporting.
On that point, some respondents signalled concerns in three areas: why companies that are expected to be affected by climate risks are not providing information about those effects in their financial statements; why companies that have made net-zero commitments are failing to recognise applicable liabilities, or impair the value of relevant assets, as a result of those pledges, and how companies should factor long-term uncertainties into the way they measure amounts in their financial statements.
In its meeting notes on the project’s commencement, the IASB speculated on which sorts of factors it may discover behind end users’ concerns, citing the potential for:
- Unclear requirements in Accounting Standards The wording of key stipulations may be insufficiently clear on whether and how the effects of climate risks should be considered when an entity prepares its financial statements – even when viewed through the lens of relevant educational materials.
- Lack of compliance Conversely, the Accounting Standards’ requirements may be sufficiently clear – but some entities may not be considering, either adequately or at all, the effects of climate risks when applying those requirements.
- Insufficient disclosure of the effects of climate-related risks Some entities may have considered the effects of climate risks when preparing their financial statements, but the information disclosed may be either: a) insufficient for users to understand what those effects are, or how they have been reflected in the reporting, or b) inconsistent with other data on climate risks provided elsewhere in the entity’s annual report – or in its other publications, such as sustainability reports.
- User information needs range beyond the objective of financial statements Such needs fall outside the scope of the probe and may be more appropriately addressed by – and indeed, may have already been addressed in – Sustainability Disclosure Standards.
Risks and opportunities
In a special blog post, IASB Chair Andreas Barckow clarified that this is a maintenance project, so any outcomes will be narrow in scope – for example: minor amendments to IASB Standards, limited new application guidance, new illustrative examples to guide preparers and/or the provision of further educational materials.
What the project would not seek to do, he stressed, is develop a new IASB Standard on climate risks, or extensive application guidance on how to consider the effects of such risks when applying IASB Standards. Nor would it attempt to broaden the objective of financial statements, or change the definitions of assets and liabilities.
However, Barckow noted, through its links to the work of the International Sustainability Standards Board (ISSB), the project would support ‘connectivity’ in reporting – given that financial statements (applying the IASB’s Standards) and sustainability-related financial disclosures (applying the ISSB’s) both focus on generating data to inform investment decisions.
“For example,” he wrote, “disclosures may explain the sustainability-related risks and opportunities arising from an entity’s activities and its assets and liabilities. Such disclosures may also provide early indications of matters that will subsequently be reflected in financial statements – eg, a company’s commitment to net-zero emissions could, over time, result in liabilities being reported in the financial statements.”
He added: “Now that the ISSB has completed its deliberations on its first two Standards, we have a stable set of decisions to inform our project. We also have ISSB staff experts to support our project team.”
Sarah Dunn, Senior Manager in ICAEW’s Corporate Reporting Faculty, notes: “Ensuring that climate-related risks are appropriately reflected in the financial statements is a high priority. While the IASB has already issued useful educational material on this matter, we support the organisation’s project to consider whether additional guidance is required, as well as its plans to coordinate with the ISSB.”
Join the Sustainability and Climate Change Community
Join professionals with a collective ambition to deliver a #sustainable world. Membership is free and open to everyone.
Latest on the energy crisis
A look at how supply difficulties, rising electricity prices and sanctions against Russia are contributing to turmoil in energy markets and an examination of what businesses can do to lessen the impact.Read more
Energy & Natural Resources
Tailored content and networking opportunities for accounting and finance professionals in the energy sector, to help you stay up to date with the latest news and developments in your industry.Find out more
Trusted business advice
ICAEW Business Advice Service
The Business Advice Service connects owners of SMEs with ICAEW regulated firms who will provide a free initial consultation, without obligation.Find out more