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

We previously looked at the following example included in the exposure draft:

• 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, under the IASB’s analysis of IAS 1, “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.” I expressed some skepticism regarding this analysis, suggesting that the underlying analysis of IAS 1 was a stretch, and that the additional disclosure envisaged by the exposure draft seemed more like the province of MD&A, or of sustainability-specific reporting where that’s in place. I wasn’t the only one with such a reaction – this is from the Financial Reporting Technical Committee of the Accounting Standards Committee of Germany:

• Until now, the IFRS concept has provided for only limited information on risks and uncertainties that relate to the business operations in general…In short: risks associated with the reporting entity’s business model are essentially left out of or very limited in the financial statements.
• To address this issue (among other) for many years the EU has required certain entities to prepare a management report. One important section of that report and arguably the section that is of great importance to capital providers is the risk report section. Entities are required to disclose and discuss all material risks and opportunities that the reporting entity is exposed to. This risk report section serves the purpose of compensating the shortfall of information in the financial statements.
• It would appear that the IASB is now aiming at highlighting how risk related disclosures should be subsumed under IFRS…This blurs the currently existing line between the financial statements…and other reporting instruments (mandated) in addition to financial statements.
• The FR TC supports laying out examples on how entities are expected to consider aspects of qualitative materiality. However, the FR TC disagrees with the general notion to have to include a negative confirmation depending on expectations of stakeholders which are based on criteria such as the industry that the entity operates in….

This is from Canada’s Accounting Standards Board:

• ..the examples appear to be stretching IAS 1.31 and the concept of materiality in the Conceptual Framework beyond what they are generally understood to cover. The examples also seem to suggest that IAS 1.31 may apply more frequently in practice than what might be contemplated by IAS 1.17. That paragraph states that in virtually all circumstances, an entity achieves a fair presentation by compliance with applicable IFRSs.
• Similarly, we heard concerns that the examples go beyond the objective of the financial statements in considering possible future exposures that may not necessarily affect recorded assets, liabilities, equity, income or expenses. (The example) effectively creates a burden to prove these possible future exposures have no material effect, and to implement processes and controls to ensure the completeness of this assertion. Such judgments are challenging for both preparers and auditors and may lead to boilerplate disclosures. Risk-based disclosures on possible future exposures are better suited to management commentary than the financial statements…

And for a corporate perspective, here’s Canada’s Pembina Pipeline Corporation:

• The spirit of the analysis appears to be concluding that additional disclosure is mandatory under current IFRS Accounting Standards, if the entity is exposed to a future risk that may impact future financial statements based on the entity’s strategic plans (for example, a transition plan)…While reporting on an entity’s risks is not new in the Canadian context through our regulatory reporting requirements (e.g., Annual Information Form and Management’s Discussion and Analysis attached to the annual financial statements), a reasonable preparer would not draw the conclusion under IAS 1.31 that disclosures on risks should be provided in the financial statements when there is no current financial statement impact, just because a user “might” assume there is an impact due to the “industry” the entity operates in.

To me, the sum total of these and similar objections and concerns should tip the balance against going forward with that aspect of the proposals, however well-intended…

The opinions expressed are solely those of the author.