Climate-related and Other Uncertainties in the Financial Statements- IASB maintenance project

Active
Exposure draft consultation
Vincent Papa
Sapna Heeralall


In response to the 2021 IASB Third Agenda Consultation, stakeholders expressed concerns about the inadequate reporting of climate-related risks in the financial statements. Based on the feedback received, in April 2022, the IASB decided to add to its work plan a project on climate-related risks in the financial statements. In March 2023, the IASB activated this project in its maintenance work plan. The purpose of the IASB project is to explore whether and how financial statements can better communicate information about climate-related and other uncertainties.

After initiating the project, from March to September 2023, the IASB staff conducted outreach to identify the nature of concerns related to the perceived inadequate reporting of climate-related risks, the causes and possible solutions to these concerns. In September 2023, following the outreach, the IASB decided to respond to stakeholder feedback by:

  • exploring the development of educational materials and articles (see supporting material) in addition to existing educational material (e.g., the articles on effects of climate-related matters on financial statements) ;
  • referring to the IFRS Interpretations Committee stakeholder questions on the recognition climate-related commitments in the financial statements (i.e., whether a provision is recognised) and interpretations of the impairment test ;
  • exploring possible illustrative examples; and
  • exploring possible narrow-scope standard-setting in relation to disclosures about estimates.

The IASB also renamed the project climate-related and other uncertainties in the financial statements to reflect the decision for a broader scope than climate-related risks.

This project and the work of the International Sustainability Standards Board (ISSB) complement each other in facilitating connectivity in general purpose financial reports.

EFRAG activities

After the IASB initiated the project in March 2023 and started its outreach, EFRAG concurrently conducted similar outreach on the nature and causes of concerns and possible solutions for the perceived inadequate reporting. EFRAG's outreach and analysis of multiple thematic reviews of EU companies' reporting practices led to the publication of an EFRAG Secretariat Briefing on climate-related risks in the financial statements.


Current project status

On 31 July 2024, the IASB published the Exposure Draft (the 'ED') Climate-related and Other Uncertainties in the Financial Statements - Proposed illustrative examples.

In the ED, the IASB is proposing to provide eight examples illustrating how an entity applies the requirements in IFRS Accounting Standards to report the effects of climate-related and other uncertainties in its financial statements. The IASB expects the examples will help to improve the reporting of these effects in the financial statements, including by helping to strengthen connections between an entity's general purpose financial reports.

EFRAG's Draft Comment Letter

On 20 September 2024, EFRAG issued its Draft Comment Letter (DCL) on the ED.

EFRAG's draft comment letter can be found here. The deadline for submitting comments on EFRAG's DCL was 15 November 2024.

In its DCL, EFRAG considers the ED's examples to be a helpful guide for the application of IFRS Accounting Standards in addition to existing IASB educational material. However, EFRAG consider that these examples should only be seen as an initial step in addressing stakeholders' expectations and we suggest the IASB consider developing other examples and undertaking standard-setting activity where justified. EFRAG supports the suggested vehicle for the examples (i.e., as illustrative examples accompanying IFRS Accounting Standards)

The letter also reiterates the importance of a focus on connectivity and for work to be done to clarify the boundaries between the information within and outside the financial statements and other Annual Reports. This could be done by including illustrative examples that better show the connectivity of information, by developing a Sustainability Reporting Conceptual Framework, and updating the Conceptual Framework for Financial Reporting to encompass connectivity.

EFRAG's Final Comment Letter

On 28 November 2024, EFRAG issued its Final Comment Letter on the ED.

In its Final Comment Letter, EFRAG considers the ED’s proposed examples will complement existing IASB educational material in helping to improve the reporting, auditing, supervision and enforcement of climate-related and other uncertainties in the financial statements. EFRAG also supports these examples being included as illustrative examples accompanying IFRS Accounting Standards.

Overall, EFRAG considers the ED to be a pragmatic initial step towards addressing stakeholder expectations and we suggest the IASB finalise and issue the ED’s examples as soon as possible after taking into account our suggested targeted improvements and clarifying the interpretation of paragraph 125 of IAS 1 through standard setting. As a further step after issuing the ED’s examples, we suggest the IASB consider undertaking standard-setting activity under limited circumstances wherever justified. The IASB should also consider developing other examples including those related to non-climate-related uncertainties as well as recognition, measurement and presentation examples.

We also suggest further steps to foster the connectivity of reported information and clarify the boundaries between the information within and outside the financial statements, i.e., within the Annual Report. Among other things, this could be done by the IASB-ISSB jointly developing connectivity-related illustrative examples.