IASB Consults on Climate Reporting
Board looks to answer investor demand for enhanced information and greater consistency in financial statements, aiming to bolster confidence.
The International Accounting Standards Board (IASB) has issued a consultation document, proposing eight examples to illustrate how companies should apply IFRS Accounting Standards when reporting the effects of climate-related and other uncertainties in their financial statements.
The IASB’s proposed examples aim to promote improved transparency of information and establish clearer connections between financial statements and other parts of a companies’ reporting, such as sustainability disclosures.
“The IASB is responding to feedback that it heard from its stakeholders, principally investors, that they found information in financial statements around climate-related risk was insufficient, and sometimes inconsistent with other information,” Nick Anderson, Board Member at the IASB, told ESG Investor.
“Over the last five years, there has been improvement in climate-related disclosures in financial statements, but they are often still qualitative,” he added. “They don’t have numbers attached to them and are sometimes perceived as ‘boilerplate’. [This consultation] is trying to provide some illustrative examples to demonstrate how we think our standards should be applied.”
The eight illustrative examples focus on areas such as materiality judgements, disclosures about assumptions, estimation uncertainties, and disaggregation of information. They do not add to or change the requirements of the IFRS Accounting Standards – but instead offer guidance on how they should be applied to provide investors with better information.
The consultation will remain open until 28 November.
“Investors have clearly communicated that they factor climate-related risks into their decision-making process,” said Andreas Barckow, Chair of the IASB. “Although our accounting standards already address such risks, we have identified a need to improve their application. Our proposed examples aim to provide clarity, helping companies better communicate in their statements how climate-related and other uncertainties affect their financial position and performance.”
Climate risks and beyond
In March last year, the IASB added the ‘Climate-related Risks in the Financial Statements’ project to its work plan. In September, the board determined that possible actions would include the development of educational materials, illustrative examples, and targeted amendments to the IFRS Accounting Standards to improve the application of existing requirements.
Other actions undertaken by the IASB include exploring issues around the value of assets with its interpretations committee – made up of external parties and company auditors – and the translation of existing educational material into other languages. This, Anderson explained, is necessary due to the standards’ coverage of more than 140 different countries.
“Investors seek companies that portray a coherent message with consistency through the information they provide to help build trust in management, as well as their own investment case,” said Anderson. “This is about empowering [them] with better information about companies’ exposure in this area, which can help them make improved decisions and form the basis of conversations between companies and investment community.”
The IASB and the International Sustainability Standards Board (ISSB) both sit under the IFRS Foundation, and closely collaborate to ensure connections between the IFRS Accounting Standards and IFRS Sustainability Disclosure Standards.
The ISSB focuses on sustainability-related financial disclosures. Its IFRS Standard 2 set out rules for entities to report exposures to climate-related risks and opportunities – but climate is also relevant to financial statements, Anderson stressed.
Both boards have 14 members drawn from a variety of backgrounds – investors, companies, auditors, regulators, academics.
“There is strong engagement between technical teams of the two boards to ensure that their products and requirements are compatible and consistent,” Anderson added.
Last month, as part of a continued push for cohesion across the sustainability reporting space it was confirmed the IFRS Foundation was taking over responsibility for transition plan disclosure resources originally developed by the UK’s Transition Plan Taskforce.
Within two or three months of the consultation closing, the team behind the project will present a paper to the IASB to summarise the feedback that has been received. It will then create a project plan outlining what else they need to do – if anything – before the IASB can proceed to finalise the examples.
“It’s only then when we see that feedback that we’ll have a sense of the timeline,” said Anderson.
The IASB’s requirements can be applied beyond climate-related risks given they are written in a principles-based manner, he explained. This means the requirements can extend to events, transactions, and other circumstances such as cybersecurity, pandemics or international disputes.
“The requirements are meant for all seasons,” Anderson added. “I’m very aware of the importance of climate, which is clearly our focus – but the requirements are meant to be long-lasting and durable.”
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