Effects of climate-related matters on financial statements

On 26 June 2023, the International Sustainability Standards Board (ISSB) issued its inaugural sustainability reporting standards - IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures.

Please note, these standards do not replace Aotearoa New Zealand Climate Standards (NZ CS), which remain the standards required to be used by climate reporting entities in New Zealand. The External Reporting Board (XRB) is planning to issue a comparison document between IFRS S2 and NZ CS by September 2023.

In light of these developments, the IFRS Foundation republished its November 2020 educational material to remind preparers and auditors of the long-standing requirements in IFRS to report on the effects of climate-related matters in the financial statements if they are material. The educational material includes a summary table showing which paragraphs in IFRS standards require consideration of climate-related matters.

Areas to consider:

For 30 June 2023, entities should pay particular attention to the requirements in the Accounting Standards listed below to ensure that the material effects of climate-related matters have been appropriately measured and/or disclosed:

Disclosure about sources of estimation uncertainty and judgements, as well as going concern (IAS 1 Presentation of Financial Statements)
Inventory obsolescence and net realisable value (IAS 2 Inventories)
Recognition of deferred tax assets due to reduced profitability (IAS 12 Income Taxes)
Annual assessment of estimated useful lives and residual values (IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets)
Impairment of goodwill, intangibles and other non-current assets – effects of increased costs and reduced demand for products that emit greenhouse gases, regulatory changes relating to climate matters, disclosure about events that led to impairment write-downs, etc. (IAS 36 Impairment of Assets)
Increases in provisions for onerous contracts, restructuring and rehabilitation (IAS 37 Provisions, Contingent Liabilities and Contingent Assets)
Increases in provisions for fines, penalties (IFRIC 21 Levies)
Increases in expected credit losses due to climate events, e.g., bush fires, floods (IFRS 9 Financial Instruments)
Classification of financial instruments by lenders if loan contractual cash flows are linked to the achievement of climate targets, i.e., whether contractual cash flows are solely payments for principal and interest (IFRS 9 Financial Instruments)
Fair value of assets (IFRS 13 Fair Value Measurement)
From the perspective of an issuer of insurance contracts, increased frequency of insurance claims due to climate events, e.g., floods, bushfires (IFRS 17 Insurance Contracts).

More information

Please refer to our previous International Financial Reporting Bulletin for more information.

For more on the above, please contact your local BDO representative

This article is based on an article that originally appeared at www.bdo.com.au/en-au/blogs/corporate-reporting/july-2023/effects-of-climate-related-matters-on-financial-statements