The Impact of Climate-Related Uncertainties on Financial Statements
(November 2024)
While there are currently no specific accounting standards exclusively for climate-related uncertainties, existing frameworks such as the Accounting Standards for Private Enterprises (ASPE) and International Financial Reporting Standards (IFRS) already require companies to assess, recognize, and/or disclose material uncertainties, including those related to climate.
What are climate-related uncertainties?
Climate-related uncertainties stem from two categories of risk:
- Physical Risks: Arise from physical effects of climate change such as damage to physical property due to severe weather events (e.g., storms, floods, heatwaves, wildfires, drought, extreme cold).
- Transition Risks: Are risks that arise from the shift to a low-carbon economy such as:
- Regulatory changes (e.g., green tax policies, energy efficiency standards).
- Market shifts (e.g. changes in consumer preferences towards low-carbon products & services and green investments, companies changing suppliers to reduce their Scope 3 emissions).
- Technological advancements (e.g., adoption of electric vehicles and lower emission machinery as part of a company’s transition plan).
The uncertainties arising from these risks need to be considered in light of accounting standards, as well as general disclosure requirements and fundamental accounting principles. Consideration needs to be given to how material climate-related uncertainties impact the underlying assumptions and estimates made in the financial statements.
Recent Developments
Standard setters are providing more guidance to help preparers improve the reporting of the effects of climate-related risks in the financial statements.
- International Accounting Standards Board (IASB): In July 2024, the IASB published the Exposure Draft Climate-related and Other Uncertainties in the Financial Statements (“Exposure Draft”). The Exposure Draft proposes eight illustrative examples that are designed to help entities apply the requirements in IFRS requirements to report the effects of climate-related and other uncertainties in their financial statements. The Exposure Draft is open for comment until November 28, 2024.
- Canada’s Accounting Standards Board (AcSB): In May 2024, the AcSB released guidance titled What You Need to Know about the Effects of Climate-related Risks and Opportunities on ASPE Financial Statements: Awareness Document. This publication is part of a series of awareness documents aimed at helping entities consider ASPE standards when assessing climate-related matters.
Why This Matters
Climate-related uncertainties, and their impact, are growing. Whether it is severe flooding that disrupts operations or a significant decline in sales due to change in consumer preferences, companies must assess and reflect the material effects climate-related matters in their financial statements to ensure compliance with the relevant accounting framework. For CPAs and financial professionals, understanding the impact of climate-related matters on financial statements is essential.
Moving Forward
As the profession continues to navigate climate-related uncertainties, it’s important to integrate these risks into our financial reporting processes. By building the assessment and disclosure of climate-related uncertainties into the CPA tool kit, we can contribute to a more sustainable and transparent financial ecosystem.
For more resources, visit CPA Ontario’s Sustainability Simplified.