Goodwill – Sustainable in Current Environment? | Financial Reporting Brief July 2020


Climate-related disclosure - doing enough? 

Financial Reporting Brief: October 2020

Climate-related risk - more required than ‘front-end’ disclosure?

With so much being talked about in relation to climate change and its already visible disastrous consequences – ask the people of California, for example – a recently issued open letter from global investor groups managing $103 trillion of assets brings into sharp focus the question of whether organisations are doing enough to keep investors informed of climate-related risks and challenges. 

The investor groups are clearly not happy, and given their scale and status, one can believe that this unhappiness is reflective of worldwide views. The open letter clearly states,


We therefore confirm the investor view that climate-related risks are material factors that should be reflected appropriately in financial statements.


Central to the letter is that materiality of disclosures should be assessed according to investor concerns. They should give due consideration to the IFRS Practice Statement 2 (PS2) ‘Making Materiality Judgements’ and be prepared on a basis consistent with the Paris Agreement on climate change, which was carried through into the recommendations in the report of the Task Force on Climate-Related Disclosure (TFCD) in 2017. There is much unrest that while many companies may provide disclosure in the ‘front-end’ management commentaries and similar reports, there is little evidence of climate-change risks being appropriately considered and evaluated in the financial statements. The open letter also calls on auditors and regulators to be increasingly vigilant in ensuring that material disclosures are appropriately provided in the financial statements.

While the open letter calls on financial statement disclosure, there is also plenty of room for improvement with regard to ‘front-end’ disclosure. A Deloitte report – Annual Report Insights 2019: FTSE Annual Reporting - showed that from a survey of the annual reports of 100 UK listed companies more than half made reference to climate change, but only seven companies included it in principal risks and uncertainties, one in five companies made reference to TFCD but only four companies provided fulsome TFCD disclosures and nine companies included climate change as part of their discussion on strategy but said little on resilience. Admittedly, we are a year further on from that report and perhaps we all shall be pleasantly surprised when the equivalent numbers are reported in the next few weeks. Lest anybody think that this draws unfair attention to UK companies, there is ample evidence that it is no different in other jurisdictions. 

Climate change is a predominant theme for some time and is gaining more traction as a major area both in terms of resilience and response to the challenges presented and ensuring the transparency of reporting. It is not alone and in our September article we drew attention to the growing challenge of other economic, social and governance (ESG) risks. The concerns expressed in the open letter could equally apply across the spectrum of ESG risks. 

The increasing focus on ESG risks, including climate, has led to louder and louder calls for improvement to non-financial reporting and for more robust inter-connectivity between it and financial reporting. This continued in recent weeks with the International Federation of Accountants publishing a report calling on the IFRS Foundation to create a new Sustainability Standards Board to work together with the IASB towards a comprehensive corporate reporting system. This was published at the same time as five internationally significant framework and standard setting bodies, in the areas of sustainability reporting and integrated reporting, published a statement of intent to work together towards the same goal. 

The World Economic Forum has released a set of universal environmental, social and governance (ESG) metrics and disclosures to measure stakeholder capitalism that companies can report on regardless of their industry or region. Organized around the pillars of principles of governance, planet, people and prosperity, the identified metrics and disclosures align existing standards, enabling companies to collectively report non-financial disclosures. Deloitte has, with others, had a continuing engagement with the Forum in developing Uplink, a tool for crowd engagement, providing a means for entrepreneurs, experts and other citizens – including Generation Z and Millennials – who might not typically have access to working closely with the World Economic Forum, to promote sustainable development. 


Financial reporting: Materiality    

PS2 provides companies with guidance on how to make materiality judgements when preparing their general purpose financial statements in accordance with IFRS. This includes external factors such as the industry in which a company operates and investor expectations. These factors may make some risks ‘material’ and may warrant disclosures in the financial statements. 

The open letter underlines the strongly held view that climate risk may need to be taken more fully into account in certain industries. The TFCD report highlighted a number of industry categories including financial services, transport, energy, agriculture/food/forestry and building/materials which may be more likely than others to be exposed to climate risk. 

In forming a judgement of where ‘material risk’ may arise in relation to financial statements, impairment of assets is likely for many to be the first area to be considered. The recoverable amount of a company’s assets could be materially affected by climate change, and other ESG risks, and if so a company needs to form a judgement on whether any estimated loss in value should be measured and recognised in the financial statements or, if it is considered that that there is no material loss measurable, whether the basis for that judgement can be dealt with by disclosure in the financial statements. To be adequate, disclosures must provide ‘material’ information to investors and clearly explain why adjustment is not being made to carrying values, including the underlying assumptions. While asset impairment may potentially be the most obvious risk, other areas may include useful lives of assets, fair value of assets, provisions for onerous contracts, provisions for consequential fines and penalties. 

Many organisations may perceive the implications of climate change to be long-term, not necessarily relevant to decisions made today. The TFCD report clearly highlights that the potential impact does not only manifest itself in the long term. It draws particular attention to the global commitment to reduce greenhouse gas emissions which will accelerate transition to a lower-carbon economy. The deployment of clean and energy-efficient technologies could have significant near-term financial implications for many organisations. 

Investors have made clear the importance of information about climate and other ESG risks to their decision making and allocation of capital resources. Such information should help to ensure that finance flows are consistent with the pathway towards climate resilient development. 


Guidance for consideration 

On foot of PS2, the Australian Accounting Standards Board has published useful guidance – ‘Climate-related and Other Emerging Risk Disclosures: Assessing Financial Statement Materiality using PS2’. The Guidance includes a decision diagram based on the specific question: Could investors reasonably expect that climate-related risks or other emerging risks may potentially have a significant impact on the entity and would that risk have a qualitative influence on investors’ decisions, regardless of the quantitative impact on the financial statements?  Two paths are followed:

  • Have those risks affected any of the amounts recognised or disclosed in the financial statements?
  • Are climate-related risks or other emerging risks likely to have a significant impact on the entity’s particular circumstances? 

In the consideration of what is ‘material’, one should bear in mind that climate-related risks include those from potential acute or chronic natural disasters, change in climate patterns and the related implications for factors including technology, market movement, legal, government policy and potentially others. 

A substanial article written by a member of the IASB Board provides an overview intended to help investors understand what already exists in the current requirements and guidance on the application of materiality, and how it relates to climate and other emerging risks. While climate‑change risks and other emerging risks are not covered explicitly by IFRS Standards, the Standards do address issues that relate to them.  


The FRC’s Financial Reporting Lab (“the Lab”) has published a report – ‘Climate-related Corporate Reporting’ - which aims to reflect the views on existing reporting by companies and to help companies move towards more effective and comprehensive reporting. Structured around the TFCD Framework, the Lab’s report sets out challenging questions for Boards to ask themselves and examples of good practice. 

Our Deloitte publication – A Closer Look: Climate Change - provides an overview of investor and regulatory focus, and explores a framework for companies to use in responding to climate-related matters, including areas in the financial statements and in narrative reporting that might be affected. It also signposts further guidance and resources.



Given the scope and mandatory nature of the IFRS regulatory framework, it is particularly valuable that the reflection of climate-related risks is required under this framework. This includes the appropriate reflection of those risks, and other ESG risks, in financial statements and the transparency of assumptions. 

There is a high level of expectation that directors, preparers and auditors will be considering PS 2, when preparing and auditing financial statements for their next year ends. Even though the guidance is not mandatory, it represents the IASB’s best practice interpretation of materiality.  


Further insight and guidance is provided in Deloitte publications:  


Quarterly Financial Reporting Brief
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