Effects of climate-related matters on financial statements
Climate change is currently a hot topic and many investors and stakeholders have asked the International Accounting Standards Board (IASB) why it is not explicitly mentioned in IFRS standards. In response, Nick Anderson (IASB board member) published an article in November 2019 to help investors understand which IFRS requirements already address climate risks, as well as how materiality relates to these risks. In December 2020, the IFRS Foundation supplemented this article with educational material to highlight how existing IFRS standards require companies to consider climate-related matters when their effect is material to financial statements.
Making materiality judgements
IFRS Practice Statement 2 Making Materiality Judgements provides companies with guidance on how to make materiality judgements when preparing their financial statements in accordance with IFRS standards. The Practice Statement is not mandatory, but companies may find it useful when making materiality judgements in respect of disclosures about climate-related and other emerging risks.
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 quantitative impact. 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.
Which IFRS standards require consideration of climate-related matters?
The educational material includes a summary table showing which paragraphs in IFRS standards require consideration of climate-related matters. Some of the areas impacted include:
- Disclosure about sources of estimation uncertainty and judgements, as well as going concern (IAS 1 Presentation of Financial Statements)
- Inventory obsolescence and net realisable value (IAS 2 Inventories)
- Recognition of deferred tax assets due to reduced profitability (IAS 12 Income Taxes)
- Annual assessment of estimated useful lives and residual values (IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets)
- Impairment of goodwill, intangibles and other non-current assets – effects of increased costs and reduced demand for products that emit greenhouse gases, regulatory changes relating to climate matters, disclosure about events that led to impairment write-downs, etc. (IAS 36 Impairment of Assets)
- Increases in provisions for onerous contracts, restructuring and rehabilitation (IAS 37 Provisions, Contingent Liabilities and Contingent Assets)
- Increases in provisions for fines, penalties (IFRIC 21 Levies)
- Increases in expected credit losses due to climate events, e.g. bush fires, floods (IFRS 9 Financial Instruments)
- Classification of financial instruments by lenders if loan contractual cash flows are linked to achievement of climate-targets, i.e. whether contractual cash flows are solely payments for principal and interest (IFRS 9 Financial Instruments)
- Fair value of assets (IFRS 13 Fair Value Measurement)
- Increased frequency of insurance claims due to climate events, e.g. floods, bushfires (IFRS 17 Insurance Contracts).
The educational material also points out where disclosure about climate-related matters would be required in the various IFRS standards. Please refer to the educational material for more details.