28 November 2019

IASB: IFRS Standards and climate-related disclosures

Nick Anderson, member of the IASB, explains how existing requirements within IFRS Standards relate to climate change risks and other emerging risks. The article shows how the principle-based approach of IFRS Standards means that climate change and other emerging risks are addressed by existing requirements, even though such risks are not explicitly referenced.

The IASB is often asked why IFRS Standards don’t mention climate change. While the phrase ‘climate‑change’ does not feature in its requirements, IFRS Standards do address issues that relate to climate‑change risks and other emerging risks. The IASB is also updating its non-mandatory guidance on management commentary, where it would expect companies to address material environmental and societal issues, complementing the information in financial statements.

Primary users need companies to make materiality judgements when they prepare their financial statements. IFRS Standards require companies to make materiality judgements in decisions about recognition, measurement, presentation and disclosure. However, rather than using judgement to decide what information to provide in financial statements, sometimes the disclosure requirements in IFRS Standards are used as if they were items on a checklist. Using the requirements in this way contributes to what many have described as a disclosure problem—namely, too much irrelevant information and not enough relevant information in financial statements. The publication IFRS Practice Statement 2 Making Materiality Judgements illustrates how companies can use the Practice Statement when they make materiality judgements relating to disclosures about climate-related and other emerging risks.

Climate-related risks and other emerging risks are predominantly discussed outside the financial statements. However, as set out in Making Materiality Judgements, qualitative external factors, such as the industry in which the company operates, and investor expectations may make some risks ‘material’ and may warrant disclosures in financial statements, regardless of their numerical impact.

Companies applying IFRS Standards when preparing financial statements would consider:

• whether investors could reasonably expect that emerging risks, including climate-related risks, could affect the amounts and disclosures reported in the financial statements. Investors have indicated the importance of information about such risks to their decision‑making; and
• what information about the effect of emerging risks, including climate-related risks, on the assumptions made in preparing the financial statements is material, and thus should be disclosed.

Full press release on IASB

Full article on IASB

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