International Accounting Standards Board consults on how to reflect climate change better in financial statements

On 31 July 2024, the International Accounting Standards Board (IASB) published a consultation document, which sets out eight proposed illustrative examples to help companies disclose climate-related risks (and other uncertainties) in their financial statements. 

The IASB is an independent, expert body that develops the IFRS Accounting Standards, which are followed in more than 140 jurisdictions. 

The examples in the IASB consultation, produced in collaboration with the ISSB, are intended to improve the transparency of information in financial statements and strengthen the connection between financial statements and other parts of a company’s reporting, such as sustainability reports. They do not add to or change the requirements in the IFRS Accounting Standards, but rather provide guidance on how these requirements should be applied.

The IASB produced the examples in response to “strong demand” from investors, who have expressed concern that climate-related uncertainties are not sufficiently represented in financial statements. Investors are concerned that information about the effects of climate-related risks in the financial statements are insufficient or appear to be inconsistent with information entities provide outside the financial statements, particularly information reported in other general purpose financial reports. However, the IASB has confirmed in their consultation that the principles demonstrated in the examples also “apply equally to other types of uncertainties beyond climate-related uncertainties”. 

The eight examples cover:

• materiality judgments – e.g. to determine whether information included in a company’s transition plan should be included in its financial statement; 
• disclosing assumptions, estimates and judgments made about the future or about certain assets; 
• when to disclose the effect of climate risk on a company’s credit risk exposure or management practices; 
• disclosure of decommissioning and restoration obligations; and 
• disaggregating information, such as information about a certain class of plant and equipment on the basis of dissimilar risk characteristics.

Despite the IASB’s emphasis on the importance of adequately capturing the impact of climate-related risk on a companies’ financial position and performance, the IASB will not compel companies to include such disclosures, nor prescribe the ways in which they should be presented. This has led some commentators to question why the IASB has chosen simply to issue guidance, rather than updating the IFRS Accounting Standards to integrate climate considerations.

Nick Anderson – a member of the IASB – argued that initial research conducted by the IASB suggested that this was unnecessary: the issue is not the requirements themselves, but their implementation. Nonetheless, Anderson indicated that the IASB would be open to changing its requirements if the consultation responses demonstrate a need to do so.

Next steps 

The consultation is open for feedback until 28 November 2024, after which the IASB will determine whether the examples can be approved to formally accompany the IFRS Accounting Standards. For more information on how to respond to the consultation, click here.