29 September 2022
Including climate-related matters in financial statements
Tips from our Technical Director of Accounting Standards, Charis Halliday
While accounting standards do not specifically mention climate, in today's world, it is important for both for-profit entities, and public benefit entities to consider the potential impact of climate-related matters in financial statements.
Climate change and the impact on an entity’s cash flows, financial position and performance, is receiving greater attention from investors, auditors, regulators, and other stakeholders. Later this year, we’ll be publishing specific requirements on climate-related risks and opportunities for climate reporting entities, so it is timely for us to clarify the existing requirements for Tier 1 and Tier 2 reporting entities.
What needs to be included?
Consistent with NZ IFRS’s and PBE IPSAS’s principles-based approach, accounting standards already require consideration of climate-related matters, when the effect of those matters is material in the context of the financial statements as a whole.
So, what do we mean by material?
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions made by primary users.
For more details on the application of materiality and how it relates to climate and other emerging risks have a read of this article by the IASB’s Nick Anderson. The IFRS Practice Statement 2 Making Materiality Judgements provides further guidance.
What areas might be impacted by climate risks and climate-related matters?
Climate-related matters could impact many aspects of your financial statements, for example they could be:
- recognised within assets, liabilities, revenue and expenses, or included in cash flows, to the extent they relate to past events or transactions and meet the recognition and measurement criteria.
- incorporated into judgments, estimates and assumptions underpinning the financial statements.
- disclosed in accordance with specific requirements or overarching disclosure objectives in individual accounting standards.
You may need to apply significant judgement to identify considerations that are relevant to your entity.
Potential financial implications arising from climate-related and other emerging risks are also broad and can include, but are not limited to:
- asset impairment (including goodwill);
- changes in the useful life of assets;
- changes in the valuation of assets;
- changes in provisions for onerous contracts because of increased costs or reduced demand;
- changes in provisions and contingent liabilities arising from fines and penalties; and
- changes in expected credit losses for loans and other financial assets.
Find out more
As climate-related matters continue to evolve and entities take additional actions to address climate change, you’ll need to consider whether your financial statements have kept pace with this level of change.
If you work in the for-profit space I’d recommend starting with the IASB document “Effects of climate-related matters on financial statements” published in 2020. It sets out examples illustrating when IFRS Standards may require companies to consider the effects of climate-related matters in applying the principles in a number of standards and the disclosure implications.
Public sector entities can look at the 2020 IPSASB Staff Q&A “Climate Change: relevant IPSASB Guidance”. It highlights the relevant standards and guidance for the public sector. While the full document is not relevant to New Zealand entities, Question 7 is relevant to NZ Tier 1 & 2 public benefit entities as NZ PBE Standards are substantially aligned with the international public sector accounting standards discussed.
Closer to home, to see what Australian and New Zealand companies have recently disclosed on climate-related matters, have a read of these:
- Research by CA ANZ, the University of Melbourne and the University of Queensland which has found that climate-related risks are impacting statutory financial statements, mainly in the areas of impairment of non-current assets, financial risks and to a lesser extent environmental restoration provisions.
- CPA Australia has prepared a high-level guide on the identification, materiality assessment and integration of climate-related financial risks into an entity’s financial statements. While Australian focused, New Zealand entities may find the practical examples and questions helpful.