The IASB has issued Climate-related and Other Uncertainties in the Financial Statements, an exposure draft of proposed illustrative examples.

The exposure draft “proposes eight examples illustrating how an entity applies the requirements in IFRS Accounting Standards to report the effects of climate-related and other uncertainties in its financial statements (in the expectation) that these illustrative examples will help to improve the reporting of the effects of climate-related and other uncertainties in the financial statements, including by helping to strengthen connections between an entity’s general purpose financial reports.” The IASB “explored whether to clarify or enhance the requirements in IFRS Accounting Standards regarding the disclosure of information about accounting estimates (but its) research to date did not reveal enough evidence or consensus among stakeholders that amending the Standards is necessary, nor which amendments are necessary and why. Feedback on this Exposure Draft will help the IASB determine whether any other actions, including amending IFRS Accounting Standards, might be necessary.”

Here’s the background to one of the examples:

• The entity is a manufacturer that operates in a capital-intensive industry and is exposed to climate-related transition risks. To manage these risks, the entity has developed a climate-related transition plan. The entity discloses information about the plan in a general purpose financial report outside the financial statements, including detailed information about how it plans to reduce greenhouse gas emissions over the next 10 years. The entity explains that it plans to reduce these emissions by making future investments in more energy-efficient technology and changing its raw materials and manufacturing methods. The entity discloses no other information about climate-related transition risks in its general purpose financial reports.

In this case the entity “concludes that its transition plan has no effect on the recognition or measurement of its assets and liabilities and related income and expenses” and that the requirements of specific standards don’t require that it “disclose information about the effect (or lack of effect) of its transition plan on its financial position and financial performance.” And yet:

• Paragraph 31 of IAS 1 [Paragraph 20 of IFRS 18] requires an entity to consider whether to provide additional disclosures when compliance with the specific requirements in IFRS Accounting Standards is insufficient to enable users of financial statements to understand the effect of transactions and other events and conditions on the entity’s financial position and financial performance.
• In applying paragraph 31 of IAS 1 [paragraph 20 of IFRS 18], the entity determines that additional disclosures to enable users of financial statements to understand the effect (or lack of effect) of its transition plan on its financial position and financial performance would provide material information. That is, omitting this information could reasonably be expected to influence decisions primary users of the entity’s financial statements make on the basis of those financial statements.
• …Therefore…the entity discloses that its transition plan has no effect on its financial position and financial performance and explains why.

This contrasts with a subsequent example of a service provider that operates in an industry that has limited exposure to climate-related transition risks: “The entity discloses in a general purpose financial report outside the financial statements that it has low levels of greenhouse gas emissions, explaining that, where possible, it uses renewable energy and avoids high-emission activities. The entity also explains how it plans to keep emissions low by maintaining its current greenhouse gas emissions policy. The entity discloses no other information about climate-related transition risks in its general purpose financial reports.” In this fact pattern, “the decisions users of the entity’s financial statements make could not reasonably be expected to be influenced by a lack of understanding of how the entity’s greenhouse gas emissions policy has affected the entity’s financial position and financial performance…(Therefore) the entity provides no additional disclosure.”

Leaving aside the uncomfortable choice of wording (“…could not reasonably be expected to be influenced by a lack of understanding…”), and speaking as someone not intuitively averse to expansively interpreting disclosure requirements, I do find it a stretch to argue that IAS 1 inherently requires an entity to disclose information about the “lack of effect” of a climate-related transition plan that has had no impact on anything reported in the statements (it’s certain that for most of its existence, few if any people thought IAS 1 should be read in such a way). A disclosure test applied to a broad-based absence of impact doesn’t seem very workable to me; more specifically in the example given, it would seemingly be clear enough to users that they are (basically) investing at present in a “dirty” company, the merit of its plans to become more virtuous in the future incapable of being reliably assessed at present. Further information on those plans seems much more like the province of MD&A, or of course of sustainability-specific reporting where that’s in place. So it’ll be interesting to see how the world at large reacts to the IASB’s proposal.

More to come on the exposure draft…

The opinions expressed are solely those of the author.