Demand from stakeholders continues to increase the focus on how environmental, social and governance (ESG) matters can affect companies’ financial position and performance, and the associated risks that they face.

This increased focus has led to legislation and guidance on the content of the narrative sections of the annual report, such as requiring disclosure of greenhouse gas emissions or providing information about emissions reduction strategies. But less attention has been paid to the financial statements themselves. The Financial Reporting Council (FRC) has helped drive improved reporting in this area with recent publications including the Climate Thematic and the Statement of Intent on Environmental, Social and Governance challenges. These publications emphasised that preparers need to consider the impact of climate-related matters on the financial statements as well as on the narrative reporting. This is reinforced by a new FRC staff factsheet, Climate-related matters, part of a series that accompanies FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. The factsheet has a similar aim to educational material previously issued by the IASB for IFRS preparers.

Financial reporting

FRS 102 does not contain any explicit references to climate-related matters. It is designed for general-purpose financial statements, and to provide proportionate information for entities of all sizes, so does not (with some limited exceptions) focus on specific industries or issues. The staff factsheet emphasises that FRS 102 already requires preparers to take into account climate-related matters, when relevant.

The main part of the factsheet sets out how climate-related matters may impact a set of financial statements prepared under FRS 102. The key considerations are:

• How the general principles of FRS 102 should be applied in the context of climate-related matters;
• How climate-related matters could impact upon recognition and measurement of items in the financial statements; and
• How climate-related matters need to be reflected in the financial statement disclosures.

The factsheet does not introduce new requirements to FRS 102, since its general principles already require consideration of anything that materially impacts the financial statements; nor does it document every climate-related matter that could impact the financial statements. It is designed as a guide for preparers of FRS 102 financial statements on how climate-related matters should be considered when preparing financial statements.

Auditors and users of financial statements may also find the factsheet helpful when determining whether an entity has properly considered climate-related matters and has incorporated the information needed to comply with the overall requirements of FRS 102.

Narrative reporting

The factsheet also sets out the legal and regulatory requirements that preparers need to consider for their narrative reporting, such as Streamlined Energy and Carbon Reporting or the framework of the Task Force on Climate-related Financial Disclosures. The purpose of this is to highlight the elements of narrative reporting that need to be considered and emphasise the need for linkage between the narrative reporting and the financial statements. The factsheet does not set out how a preparer should address these narrative reporting requirements.

Linkage

One of the key findings of the FRC’s Climate Thematic was that themes incorporated within preparers’ narrative reporting were often not reflected in the financial statements (for example, discussing ‘net-zero’ pathways, but without clarity as to whether the commitments made under these pathways were reflected in the budgets and forecasts used for impairment assessments). One of the aims of the factsheet is to emphasise the importance of consistency (of disclosures, judgements, assumptions, etc) across the entire annual report and accounts.

Looking ahead

The FRC intends to update the factsheet periodically to keep pace with emerging climate-related matters and changes in reporting and legal frameworks.

About the author
Merrik Bousfield, Project Director, Financial Reporting Council