The committee responsible for providing guidance on challenging accounting issues has ruled that the International Accounting Standards Board’s (IASB) provisions rulebook already deals adequately with the challenge of accounting for climate-related or net zero commitments.
In a decision published on 7 December, the board’s Interpretations Committee tentatively decided “not to add a standard-setting project to the work plan”.
The decision explains that international standards, in particular International Accounting Standard 37, “provide an adequate basis” for determining:
- when they should recognise a financial provision for the costs of meeting a commitment to reduce or offset their greenhouse gas emissions; and
- whether to record those costs as an expense or an asset when such a provision is recognised.
This decision comes as the dividing line between financial and non-financial reporting grows increasingly blurred.
Pressure is now growing from investors for companies to reflect the cost of transitioning away from a fossil fuel-based economy in hard numbers in their accounts.
These commitments can be substantial and amount to a substantial erosion of shareholder value.
IASB staff member Joan Brown told the meeting that the issue affects “commitments that companies make to reduce or offset their greenhouse gas emissions” or so-called net zero commitments.
She explained that the IASB was aware that “there is some confusion” about “whether companies should recognise liabilities for the cost of fulfilling [these commitments] when applying IAS 37”.
The committee’s chair, Bruce MacKenzie, added that the committee’s role was to probe the “accounting ramifications” of companies’ net zero commitments and their action to address climate change.
He said: “I think what’s important to remember is that we only work with the words that are in the standards, not what we wish was there.”
The IASB held its own discussions on the issue at its September meeting and referred the matter to the Interpretations Committee.
The IASB asked the committee to consider whether the requirements of IAS 37 provides an adequate basis for businesses to account for net zero commitments and, if not, whether some form of standard setting is needed.
Following that discussion, the committee received a separate request to address the issue from an unnamed constituent.
The IASB added a project to consider climate-related uncertainties to its workplan in March 2023. Work was, however, already underway as far back as November 2020 with the release of educational material on the effects of climate-related matters on financial statements.
In a November 2019 opinion piece, IASB member Nick Anderson wrote that although the phrase ‘climate-change’ does not feature in IFRS literature, the standards “do address issues that relate to climate-change risks and other emerging risks”.
Speaking during last week’s December IASB meeting, MacKenzie said the board must only take action where it was likely to be effective rather than rushing to act.
He argued that investors would soon have access to information about sustainability topics through the various reporting initiatives – such as the ISSB’s standards – that were now coming on stream.
The Interpretations Committee’s November agenda decision is open for public comment until February next year.