The Climate Disclosure Standards Board (CDSB), an international consortium of business and environmental NGOs, has issued new guidance on the disclosure of the financial effects of climate-related issues on a company’s financial statements. This guidance helps finance and accounting professionals on boards and audit committees, or working as report preparers, to ensure that companies account for material climate factors, and therefore provide the financial-related information to investors about profits and valuations that reflect climate-related risks and events.
Following the launch of the recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD), the disclosure of climate-related financial information has been increasing (see 2020 Status Report). Disclosures will continue to be driven by a combination of investor demand and mandatory climate reporting which is on the agenda of governments and regulators in various countries (New Zealand has become the first to implement mandatory TCFD reporting).
Although the wider adoption of TCFD recommendations, and potential move to international sustainability standards, should lead to improving the quantity, quality and comparability of climate-related disclosures, the inclusion of material climate related information within financial statements (often the ‘back-half’ of annual reports) needs to be improved and aligned to the narrative disclosures in the “front half” of annual reports. This will ensure greater transparency on the climate-related risks impacting the financial position, performance, and prospects of a company.
For their part, auditors are increasingly considering the implications of climate-related matters as part of their work conducting an audit of financial statements. The International Auditing and Assurance Standards Board (IAASB) has recently clarified in their Staff Audit Practice Alert how existing International Standards on Auditing require consideration and assessment of climate-related risks in an audit of financial statements.
In their work to identify and assess the risks of material misstatement of the financial statements, if climate-related risks have a significant impact on a company, the auditor will need to consider whether the financial statements have appropriately reflected this in line with the relevant accounting standards. Auditors will also read and consider other information accompanying financial statements for material consistency with the audited financial statements.
The CDSB’s guidance explains how material climate-related matters can be incorporated in financial reporting under existing IFRS Standards and where climate change can have an effect on financial performance or position. Although IFRS standards do not refer explicitly to climate-related matters, companies must consider climate-related matters in applying IFRS standards when the effect of those matters is material in the context of the financial statements taken as a whole i.e., information is material if omitting, misstating or obscuring it could reasonably be expected to influence investor decisions. Consequently, material climate-related matters may need to be reflected in the amounts recognized in a company’s financial statements and / or require disclosure in the relevant notes to the financial statements.
The guidance focuses on four specific IFRS Standards relevant for most companies and applicable to a range of sectors and geographies (other standards may also apply):
- IAS 1 Presentation of Financial Statements
Where assumptions related to the impact of climate change have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year and / or could influence investors’ decision-making, disclosures about the nature of the assumptions should be provided. IAS 1 also covers disaggregation of line items and assessments related to going concern which both can be relevant considerations in relation to climate matters.
- IAS 37 Provisions, Contingent Liabilities and Contingent Assets
The pace and severity of physical climate change risks, as well as accompanying transition risks such as government policy and regulatory measures, may impact the recognition, measurement and disclosure of provisions (e.g., for decommissioning or rehabilitation), contingencies (e.g., for potential, fines, litigation and penalties), and onerous contracts (e.g., related to the potential loss of revenues and increased costs).
- IAS 36 Impairment of Assets
Physical and transition (including expected changes in consumer demand as well as expected government or regulatory action) climate-related events could affect the related cash flows for impairment calculations and recoverable amount calculations.
- IAS 16 Property, Plant and Equipment
Climate-related factors, such as a changing consumer preferences or introduction carbon taxation, may affect the useful lives and residual value of assets, and therefore the amount of depreciation or amortization recognized each year.
For each of these four standards, the guidance identifies essential accounting and disclosure matters relevant from a climate perspective illustrating with examples (see diagram), the key matters that companies and their preparers might need to consider.
To ensure complete and robust consideration and integration of climate-related matters into financial reporting, those preparing financial statements will need to work in collaboration with a variety of teams across the organization, especially those who own the source data and who may have a deeper understanding of how climate-related matters are relevant to the organization.
CDSB, Accounting for Climate
IFRS Educational material: the effects of climate-related matters on financial statements prepared applying IFRS Standards