Standard setters discuss climate-related risks in the financial statements

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27 Sep, 2023

The International Forum of Accounting Standard Setters (IFASS) is currently holding its fall meeting in London. The first session of the meeting was devoted to research on climate-related risks in the financial statements and the related IASB project.

The session began with two presentations of recent research on climate-related risks in the financial statements that illustrated the backdrop against which the IASB is pursuing its project.

A representative of the Australian Accounting Standards Board (AASB) presented forthcoming research Climate-related risks disclosures in the notes to financial statements: Descriptive evidence from Australia that examines whether entities have considered the effects of climate-related risks on their financial statement items and developments by comparing 2018 and 2022 financial statements. Findings included an increase in disclosures, disclosures provided in a broader range of industries, more items in the financial statements considered, but also many generic disclosures and much room for improvement. Findings also showed that larger entities are more likely to make detailed disclosures about climate-related risks in their financial statements and some disclosures may be included to mitigate litigation risks. In addition, general AASB research on the topic revealed that users of financial statement bemoan a lack of transparency, consistency in disclosing the issues, disclosures of assumptions and effects, and quantification.

A representative of the UK Endorsement Board (UKEB) presented recent research on the topic, including the two recently published research reports on connectivity. The research revealed a significant increase in the frequency of climate reporting in annual reports, however also concerns with the lack of connectivity within annual reports. Estimates and judgements were identified as a critical area of poor connectivity. In discussing the research findings, the UKEB advisory and working groups did not consider that accounting standards were deficient but noted a disparity between investor expectations and preparer’s ability and willingness to disclose potential impacts of climate in the financial statements. Also, while users accepted that entities cannot determine the full potential impact of climate risks, they expect the next phase of reporting to connect material sustainability disclosures to the financial statements.

Meeting participants were then presented with an overview of the IASB project recently renamed "Climate-related and other uncertainties in the financial statements". The presentation focused especially on the IASB's September 2023 discussions and decisions on the project where Board members concluded that requirements in IFRS Accounting Standards are generally sufficient, that there are some challenges in application, that there is the desire for timely action, and that this is an evolving area particularly with reporting developments from the ISSB and others. The Board decided to explore the development of a package of practical examples, to explore possible targeted amendments to improve disclosures about estimates in the financial statements, to refer some issues to the IFRS Interpretations Committee and to consult with the IFRS IC on others, and to continue to monitor developments in this area.

Following these three presentations, participants were invited to discuss the research findings and whether the IASB decisions would help to address them. Comments included:

  • Some participants felt that the IASB's planned actions lacked ambition and called for "brave" decisions. They noted that the IASB should not duck away from more decisive action just because it would be difficult. Others, however, conceded that by exploring targeted improvements regarding estimates and judgements had indeed chosen the most difficult issue.
  • While research had revealed that some preparers agree that the requirements especially in IAS 1 are sufficient, some seemed to use that as an excuse to continue not to report in a meaningful manner about climate-related risks or other uncertainties.
  • It was noted that messaging was important so that the statement that IFRS accounting requirements are sufficient does not translate into the message that no change is needed. It might also help to clarify what financial statements are meant to achieve.
  • Participants agreed that the change needed is behaviour change. It was questioned whether this could be achieved without standard setting or other more decisive actions. It was noted repeatedly that the November 2019 article by Board member Nick Anderson about how existing requirements within IFRSs relate to climate change risks was brilliant and shared often, but had not lead to any discernible change in behaviour.
  • Participants supported the re-calibration of the project towards climate-related "and other uncertainties". It was noted that this reflected the IASB's principle-based approach to standard setting and also reflected practice where climate-related risks could not always be isolated from other uncertainties. However, it was also warned that the IASB should not lose sight of the most important issues by looking at too many uncertainties and should also not lose sight of short-term risks.
  • While there was general support for the IASB to take action, it was noted that the IASB should not stray into the ISSB's remit, that duplication should be avoided, but also that connectivity should always be kept in mind and that IASB and ISSB should work together to provide missing links. It was noted that language is a very important means of linking sustainability issues with financial reporting requirements.
  • On the question what national standard setters could contribute to the needed behaviour change suggestions included monitoring and reviewing developments, publishing results of research and reviews, communicating expectations, highlighting improvements and providing best practice examples, as well as working, where possible, with preparers in reporting lab environments.
  • Overall there seemed to be a view that the project might be more complex than the IASB thinks and more decisive action might be needed, but participants also encouraged the IASB to build on the established concepts people already use and not to "throw the baby out with the bathwater".


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