The IFRS Foundation published material highlighting the ways in which existing requirements in IFRS standards require companies to consider climate-related matters when their effect is material to the financial statements. The document, which is intended to support consistent application of requirements in IFRS standards, contains a non-exhaustive list of examples of when companies may need to consider climate-related matters in their reporting. The material, however, does not add to or change the requirements in the standards. The material has been produced according to the requirements set out in the revised Due Process Handbook, which was published in August 2020.
IFRS standards do not refer explicitly to climate-related matters. However, companies must consider climate-related matters in applying IFRS standards when the effect of those matters is material in the context of the financial statements taken as a whole. The published material has been developed in response to stakeholder requests for further information on this topic. The material complements an article that IASB member, Nick Anderson, wrote on this topic in November 2019. The material 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:
- IFRS 7 on disclosures related to financial instruments requires disclosure of information about a company’s financial instruments, including information about the nature and extent of risks arising from financial instruments and how the company manages those risks. Climate-related matters may expose a company to risks in relation to financial instruments. For example, for lenders, it may be necessary to provide information about the effect of climate-related matters on the measurement of expected credit losses or on concentrations of credit risk. For holders of equity investments, it may be necessary to provide information about investments by industry or sector, identifying sectors exposed to climate-related risks, when disclosing concentrations of market risk.
- Climate-related matters may affect the accounting for financial instruments in a number of ways. Climate-related matters may also affect a lender’s exposure to credit losses. Additionally, assets could become inaccessible or uninsurable, affecting the value of collateral for lenders. In recognizing and measuring expected credit losses, IFRS 9 on financial instruments requires use of all reasonable and supportable information that is available without undue cost or effort. Climate-related matters may therefore be relevant—for example, they could affect the range of potential future economic scenarios, the lender’s assessment of significant increases in credit risk, whether a financial asset is credit impaired and/ or the measurement of expected credit losses.
- Climate-related matters may increase the frequency or magnitude of insured events or may accelerate the timing of their occurrence. Climate-related matters may, therefore, affect the assumptions used to measure insurance contract liabilities applying IFRS 17. Climate-related matters may also affect required disclosures about the significant judgements and changes in judgements made in applying IFRS 17, and a company’s exposure to risks, concentrations of risk, how it manages risks and sensitivity analysis showing the effect of changes in risk variables.
Keywords: International, Banking, Insurance, IFRS 9, IFRS 7, IFRS 17, Financial Instruments, Disclosures, Insurance Contracts, Climate Change Risk, ESG, IFRS
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
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