In July 2024, the International Accounting Standards Board (IASB) published an Exposure Draft (ED) proposing eight examples illustrating how entities apply the requirements in IFRS Accounting Standards to report the effects of climate-related and other uncertainties in its financial statements. The ED aims to enhance the reporting of these effects and strengthen the connections within an entity’s general purpose financial reports. This article highlights our major comments on the ED. The full response is available on our website.
We agree that providing examples would generally help improve the reporting of the effects of climate-related and other uncertainties in the financial statements. We also support including them as illustrative examples accompanying IFRS Accounting Standards. However, we have significant concerns in the following areas.
Connectivity
One of the objectives of the ED is to strengthen the connection between financial statements disclosures and sustainability disclosures. However, we believe this aim is challenging to achieve due to the lack of strong principles underlying how financial statements and sustainability reports should be connected. Also, the illustrative examples do not clearly demonstrate this connectivity.
To better achieve this objective, we strongly recommend that the IASB collaborate with the International Sustainability Standards Board (ISSB) to develop a more comprehensive plan for their long-term strategy concerning the connectivity between financial statements disclosures and sustainability disclosures. This plan could include the development of a framework that sets out the principles of connectivity and how it can be achieved. Such a project could be conducted as a separate workstream to avoid delaying the publication of the illustrative examples.
As an interim measure, we recommend that the IASB enhance the illustrative examples to demonstrate how connectivity can be attained. We also recommend the IASB collaborate with the ISSB on developing the article as mentioned in the April 2024 IASB staff paper regarding the role of financial statements and the interaction between IFRS Accounting Standards and IFRS Sustainability Disclosure Standards. If feasible, this article should be published alongside the enhanced illustrative examples to promote clarity about connectivity.
Requirements in other IFRS Accounting Standards and non-climate related uncertainties
Understandably, the proposed examples illustrate only certain disclosure requirements in a few IFRS Accounting Standards regarding the effects of climate-related and other uncertainties in the financial statements. Furthermore, the ED focuses primarily on climate-related risks and uncertainties, with only one out of the eight examples illustrating other types of risks and uncertainties. We are concerned that this is insufficient to raise awareness and assist preparers in considering other applicable disclosure requirements in IFRS Accounting Standards and in reporting the effects of non-climate related uncertainties. Accordingly, we recommend the IASB enhance its existing educational material – Effects of climate-related matters on financial statements or publish similar guidance to cover other applicable IFRS Accounting Standards and other types of uncertainties that are contentious or prevalent among entities. If possible, this enhanced material should be published together with the illustrative examples and the article on the role of financial statements as a single package to provide comprehensive guidance.
Negative statement in Example 1
We have significant concerns that the disclosures stating that a specific risk had no impact on the financial statements, as illustrated in Example 1 in the ED, could set a new precedent for mandating a negative statement in financial statements. We believe this is not the intended purpose of paragraph 31 of International Accounting Standard (IAS) 1 Presentation of Financial Statements. We are also concerned that such negative statements may extend beyond climate and sustainability risks and uncertainties to encompass a broader range of other risks and uncertainties, potentially creating a significant burden for preparers in conducting the assessments and leading to boilerplate disclosures or information overload, which would not be useful for users.
Accordingly, we strongly recommend the IASB clarify whether the “no impact” disclosure signifies a new requirement. If it does, this new requirement should be considered through a separate standard-setting project. If it does not constitute a new requirement, the IASB should clearly explain its conclusion and rationale in the Basis for Conclusions. We also recommend the IASB enhance Examples 1 and 2 to illustrate the principles and thought process of when and how to apply paragraph 31 of IAS 1 and determining whether to disclose additional information based on user expectations for items that have no effect on the entities’ financial position or financial performance.
This article was contributed by Shiro Lam Associate Director of the Institute’s Standard Setting Department.
