The focus of the project is to explore whether and how financial statements can better communicate information about climate-related risks. This project and the work of the International Sustainability Standards Board (ISSB) complement each other, helping investors to connect information included in different parts of general purpose financial reports.

The staff sought feedback on the following:  

• Nature of concern:
  • What concerns do IFRS IC members have about the reporting of climate-related risks in the financial statements?
  • How prevalent is the issue in IFRS IC members’ jurisdiction?
• Causes of concern:
  • What are the causes of the concerns IFRS IC members identified in Question 1? 
    Particularly, the staff would like to see IFRS IC members’ feedback on the following:
    • Financial statement information appears inconsistent with disclosures made elsewhere about climate-related risks
    • Insufficient information about how climate-related risks are reflected in the financial statements
    • Unclear requirements in Accounting Standards
    • Lack of compliance
    • Limitations in IFRS Accounting Standards
    • User information needs beyond the objective of financial statements

• Courses of action:
  • How could the IASB address these concerns?
    
    To help entities properly consider climate-related risks, the IASB could explore:
    • Possible minor amendments to IFRS Accounting Standards
    • Limited new application guidance
    • New illustrative examples
    • Educational material

• Scope of the project:
  • Should the IASB consider expanding the scope of the project to cover:
    • Risks in addition to those related to climate
    • Opportunities as well as risks

The appendix to the paper included examples of the type of feedback that the staff are interested in, which included impairment of assets, recognition of liabilities and disclosures of assumptions and other sources of estimation uncertainty.

IFRS IC discussion

IFRS IC members shared their thoughts on different areas of the project:

On nature and courses of concerns, some IFRS IC members commented that there is insufficient information about how climate-related risks are reflected in the financial statement because some risks may not affect the current financial statements quantitatively but are not being currently disclosed. However, disclosure of those may be useful. One IFRS IC member admitted that it would be difficult to distinguish which risks affect the entity at present and which will affect the entity in the future, and among these, which to disclose.

Some IFRS IC members said they observed inconsistency in disclosures in financial statements with those made elsewhere about climate-related risks. Even though they are not “material” to financial statements quantitatively, they could be considered material applying the materiality definition in IAS 1 and the IFRS Practice Statement 2 if they are considered “relevant” or “important” and users of the financial statements expect to see them. However, some IFRS IC members commented that it would be redundant, not useful to users and bring some general forward-looking information to be disclosed in the financial statements. Accordingly, they suggested that it should not be a generic disclosure of risk and uncertainty but of those risks and uncertainties that may affect the recognition and measurement of assets and liabilities.  

Some of the IFRS IC members said that there are limitations in the current accounting standards that apply to asset and liabilities affected by climate risks. For example, a net zero commitment does not result in a provision to be recognised under IAS 37 because it relates to future cost to be incurred. If there is no provision, users will expect disclosures that such a commitment is made. Some of the IFRS IC members expressed concerns on how the current standards (IFRS 9 and IFRS 13) address classification and measurement of assets and liabilities affected by climate risk. The strategy of an entity and long-term effect that the regulatory or other risks bring could not be addressed by existing Standards. For the suggestion of removing the 5-year forecast criteria in IAS 36, all those who commented did not agree with that.

In terms of courses of action, some IFRS IC members considered that there is no deficiency in the Standards with regard to the application to assets and liabilities affected by climate or other risks. Most IFRS IC members considered that publishing educational material would be a possible course of action because it is faster and easier to execute, and useful for preparers and users to have guidance. A few of them considered illustrative examples (like for IAS 36 and IAS 37) would be helpful. However, the staff doubted the enforceability of educational material and difficulties in auditing resulting information. IFRS IC members said that while examples illustrating how the concepts and principles in a standard apply to certain scenarios are not a perfect solution but are considered meaningful. A few IFRS IC members commented on IAS 36, saying it may be possible to consider re-opening IAS 36 to brainstorm what is worth amending. One IFRS IC member said the extensive disclosure requirements under IAS 36 for cash-generating units may be useful for climate and other risks disclosures and suggested it could be applied to other long-life assets as well. It was therefore recommended for future standard-setting.

Regarding the scope of project, most IFRS IC members said that it should not be too narrow to cover climate risk only but to cover some other risks (e.g. other sustainability-related risks and political risks) which affect an entity materially. Nonetheless, they understood it would be challenging to do so within a short time frame. One IFRS IC suggested addressing climate risk as the starting point, followed by other risks so that it could be done in a short time. However, some IFRS IC members highlighted the practicability of only addressing climate risks because it may be challenging to separate climate risks from other risks when valuing financial instruments.