All companies are facing climate-related risks and opportunities. Some are affected more than others. For some companies, the risks and opportunities are immediate and easily identifiable; for others, they may be less immediate, may exist across their broader value chain and may be less apparent. As the impact of climate change intensifies, investors and regulators are increasingly seeking greater transparency of climate-related information in financial statements.
IFRS Standards do not refer explicitly to climate-related risks or climate-related matters, but they implicitly require relevant disclosures in the financial statements when climate-related matters considered in preparing the financial statements are material. To respond to investors’ and regulators’ expectations, companies may need to go further in view of the overarching requirements in IAS 1 “Presentation of Financial Statements” and get to the specific disclosure requirements in individual standards.
For example, paragraph 112 of IAS 1 requires disclosure of information that is relevant to an understanding of the financial statements but is not specifically required by IFRS Standards or presented elsewhere in the financial statements. Paragraph 17(c) of IAS 1 notes that, in certain circumstances, a company may need to include additional disclosures to achieve a ‘fair presentation’ in the financial statements.
IAS 1 requires specific disclosures on key judgments and estimates made by management in preparing the financial statements, including disclosure of:
judgments that management has made in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements
information about the assumptions that management has made about the future, and other major sources of estimation uncertainty at the reporting date, that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial year.
Many companies face uncertainty when considering the impacts of climate-related risks in recognizing and measuring assets and liabilities. Investors and regulators expect robust disclosures of the most significant assumptions, estimates and judgments made in preparing the financial statements to understand whether and how they are affected by climate-related matters. When there is a high level of uncertainty, companies may also consider providing sensitivity analyses and related disclosures.
Good connectivity between non-financial and financial reporting is key. Although the nature of the information provided in the front part of the annual report and the financial statements may differ, it needs to be consistent when appropriate. If key assumptions underlying the financial statements differ from those disclosed in the front part of the annual report – e.g. a net zero commitment – then companies may need to consider explaining these differences in the annual report.
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