The International Accounting Standards Board (IASB) has cleared its staff to explore options for a limited-scope project to improve how its accounting standards deal with reporting on the effects of climate-related and “other uncertainties” in financial statements.
The project’s scope goes beyond dealing with climate-related risks in isolation in line with the board’s principled-based approach to standard setting.
IASB staffer Karen Robson said: “We explored this approach because it would align with the IASB’s approach of developing principles-based accounting standards and it would be consistent with the ISSB approach and that the ISSB consider both risks and opportunities.”
According to the board’s official meeting summary, the project will look at “whether and, if so, how targeted actions could improve the reporting of financial information about climate-related and other uncertainties in the financial statements”.
The board added a maintenance project to its workplan in March 2023.
Project name change
At that stage, the workstream was described as the Climate-related Risks in the Financial Statements project.
Staff told the 20 September meeting that the outreach and research has confirmed that International Financial Reporting Standards (IFRSs) “are generally already sufficient in terms of the requirements, but that there are some problems with their application.”
Based on the agenda paper 14C, the staff’s efforts will likely focus on targeted changes covering topics such as estimates, disaggregation and materiality.
It will not, however, tackle reporting on climate-related opportunities. This marks a departure from the focus on both risks and opportunities in sustainability reporting.
Climate, other risks
The proposal to widen the scope of the project from climate-related risks to a broader population of risks and uncertainties faced opposition from some on the board.
IASB member Bruce Mackenzie urged the board to be cautious about covering too much ground too quickly.
He said it was important to let the new field of sustainability reporting develop naturally and warned that expanding the scope of the project too quickly could have several negative consequences.
However, board member Petrina Buchanan argued that a wider project scope was appropriate given the principles-based underpinnings in international standards.
She said: “[I]f we decide to explore changing the standards, then we absolutely must widen the objective because our standards are principles-based.”
“Even though the word ‘climate’ doesn’t appear in the requirements at all, they are generally sufficient for the principle.
“So if we decide to go in and change or amend the standards in any way, I think the scope needs to be wider.”
The decision to take on the project has left the board to balance the need to address climate risk while maintaining a principles-based approach to standard setting.
Demands for more, better disclosure
On the one hand, stakeholders are demanding timely action to address the concerns raised about insufficient information about climate-related risks in the financial statements.
They also want to see more consistent disclosure between the financial statements and other parts of the annual report.
On the other hand, the board is concerned that if they focus too narrowly on climate risk, they will end up in a situation where they are constantly trying to define new climate-specific requirements.
Delicate balancing act
This would also undermine their principles-based approach to standard setting.
At the same time, any decision to expand the scope of the project puts the board’s ability to complete it at risk.
Alongside any eventual changes to the board’s accounting standards, the board might also refer issues to the IFRS Interpretations Committee for input or develop educational materials.
On current thinking, were the board to tackle all of the activities proposed in the staff meeting paper, the project would likely be completed during 2025.