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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: