Are you ready for the IASB's enhanced climate risk reporting?
The International Accounting Standards Board (IASB) has taken a significant step to address investor concerns about climate risk disclosure, proposing eight new illustrative examples to guide companies in reporting climate-related and other uncertainties in their financial statements.
In response to growing demand from investors and other stakeholders, the IASB has developed these examples to tackle concerns that information about climate-related uncertainties in financial statements was often insufficient or appeared inconsistent with disclosures made elsewhere in company reports.
The proposed examples cover key areas such as materiality judgements, disclosures about assumptions and estimation uncertainties, and disaggregation of information. While focusing primarily on climate-related risks, the IASB emphasises that the principles illustrated apply equally to other types of uncertainties.
“Investors have clearly communicated that they factor climate-related risks into their decision-making process. Although our Accounting Standards already address such risks, we have identified a need for illustrative examples to improve the application of these requirements,” said Andreas Barckow, Chair of the IASB.
The examples aim to improve transparency in financial statements and strengthen the connection between these statements and other parts of a company’s reporting, such as sustainability disclosures. This initiative is part of a broader effort by the IASB to enhance the reporting of climate-related and other uncertainties in financial statements.
Notably, the IASB collaborated with members of the International Sustainability Standards Board (ISSB) and its technical staff in developing these examples. This cooperation ensures alignment with the ISSB’s sustainability-related disclosure requirements, potentially offering companies a more cohesive framework for reporting.
It’s important to note that these illustrative examples do not add to or change the requirements in IFRS Accounting Standards. Instead, they provide guidance on how existing requirements should be applied to offer investors better information about climate-related risks and other uncertainties.
The proposed examples, open for consultation until 28 November 2024, cover several key areas:
The first two examples illustrate how companies should make materiality judgements regarding climate-related information. Example 1 shows a scenario where additional disclosures are necessary due to qualitative factors, even when there’s no direct financial impact. Conversely, Example 2 demonstrates when such additional disclosures aren’t required.
These examples are particularly relevant for companies that disclose climate strategies or risks in other reports but struggle to determine what information is material for financial statements.
Five examples focus on disclosing assumptions related to climate risks:
These examples address concerns that companies often fail to provide sufficient information about climate-related assumptions affecting their financial position and performance.
“Our proposed examples aim to provide clarity, helping companies better communicate in their financial statements how climate-related and other uncertainties affect their financial position and performance,” says Barckow.
The final example shows how a company might disaggregate information about property, plant and equipment based on differing climate-related risk characteristics. This could be particularly relevant for companies in industries highly exposed to climate transition risks.
The IASB is now inviting feedback from all stakeholders on the proposed illustrative examples. The comment period is open until 28 November 2024, after which the IASB will consider the feedback received and decide whether to proceed with including the examples alongside IFRS Accounting Standards.
This development comes amid growing pressure from investors and regulators for improved climate risk reporting. As companies grapple with the complexities of quantifying and disclosing climate-related risks, these examples could provide valuable guidance, potentially leading to more comprehensive and comparable disclosures across different industries and jurisdictions.