The International Accounting Standards Board (IASB) on July 31, 2024, released eight illustrative examples, including one that would encourage companies to disclose how climate-related risks and opportunities might affect their financial performance and position.
The examples were developed to demonstrate how to apply International Financial Reporting Standards (IFRS) to climate-related and other uncertainties in financial statements, the board said.
“Investors have clearly communicated that they factor climate-related risks into their decision-making process,” Chair Andreas Barckow said in a statement. “Although our Accounting Standards already address such risks, we have identified a need for illustrative examples to improve the application of these requirements,” he said. “Our proposed examples aim to provide this clarity, helping companies better communicate in their financial statements how climate-related and other uncertainties affect their financial position and performance.”
Disclose in Notes to Financial Statements
The IASB is seeking public input on these examples, which would encourage companies to disclose more information about their climate change management strategies, such as assumptions about future costs, regulatory developments, and asset values, as well as their plans for decommissioning and restoring sites.
A critical aspect of the examples is understanding materiality judgments and key assumptions, an analysis of the rules reveals. Materiality judgments involve determining whether a particular piece of information is important enough to be disclosed, while key assumptions refer to the underlying estimates and forecasts used to prepare financial reports.
Under the provisions, which wouldn’t be mandatory, companies would disclose:
- key assumptions related to climate-related risks, such as future costs of emission allowances, regulatory developments, and assumptions affecting asset values;
- how climate-related risks affect their credit risk exposures and management practices, including how these risks influence the recognition and measurement of expected credit losses;
- their obligations to decommission and restore sites, even if the financial impact is currently small; and
- detailed information about different types of property, plant, and equipment based on their climate-related risk characteristics.
These disclosures would be integrated into the notes to the financial statements, primarily on an annual basis, with potential quarterly updates, according to the proposal.
Further, the International Sustainability Standards Board’s (ISSB) disclosure rules (IFRS S1 and IFRS S2) would complement these financial statement disclosures by providing additional sustainability-related information, ensuring a comprehensive and connected reporting framework.
Provisions Come Amid Ongoing Debate
The provisions come amid ongoing dialogue about climate-related disclosure rules, with some arguing that they are necessary to provide transparency and consistency in reporting climate-related risks and opportunities, while others have expressed concerns about the potential costs and burdens associated with implementing such rules.
The IASB said it developed the examples in response to strong demand from respondents to its Third Agenda Consultation. In April the board voted to issue the examples, explaining they won’t change existing IFRS. (See IASB to Propose Examples for Reporting Climate, Other Uncertainties in Financial Statements in the April 23, 2024, edition of Accounting & Compliance Alert.)
The examples were proposed under Exposure Draft (ED) No. 2024-6, Climate-related and Other Uncertainties in the Financial Statements Proposed illustrative examples.
The comment period runs until November 28.
This article originally appeared in the August 1, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
Get all the latest tax, accounting, audit, and corporate finance news with Checkpoint Edge. Sign up for a free 7-day trial today.
