Disclosures on climate-change related issues will become much more prevalent than currently is the case, and IFRS reporting has an important role to play in improving transparency around sustainability issues, according to International Accounting Standard Board (IASB) chair Hans Hoogervorst
In his keynote address at the IFRS Foundation virtual conference Hoogervorst said in future sustainability issues would be reflected in IFRS financial statements to a much greater extent than ever before.
The IASB chair argued that while IFRS standards currently do not even mention ‘climate change’ or ‘sustainability’, this seeming disconnect between IFRS Standards and sustainability issues is deceptive.
Hoogervorst said: ‘The principle-based approach of IFRS Standards means that issues that relate to, for example, climate change could be captured by our requirements, both in terms of recognition and measurement and disclosure.’
As an example, climate change might lead an oil company to the conclusion that it does not expect to recover the cost of some of its exploration assets. IAS 36 will then require it to impair those assets.
Hoogervorst said: ‘The potential interplay of IFRS requirements with sustainability issues is quite far reaching.
‘The more urgent sustainability issues become and the more stringent public policy towards a zero-emission future becomes, the more financial statements will be affected by these developments.
‘Recently published financial statements by several major oil companies gave a clear indication that this trend is already well under way.
‘In the last couple of months several big oil companies announced major impairments to exploration-related assets.’
However, Hoogervorst said the fact that ‘traditional’ financial reporting can reflect sustainability issues did not rule out the need for separate sustainability reporting.
‘The fact is that the scope of sustainability issues is very broad. It is not just about climate change, it can also be many other issues, such as the investments in a company’s workforce and the durability of its business model.
‘Moreover, many sustainability issues are very uncertain and have a very long-time horizon. This poses tremendous recognition and measurement challenges which often make it impossible to capture them in the financial statements,’ he said.
Frequently this information is included in the management commentary practice statement. IASB is currently updating guidance on this, with Hoogervorst stating intensified interest in sustainability reporting was one of the drivers for this.
Hoogervorst said: ‘While the management commentary is a logical place for sustainability reporting, the existing practice statement is completely silent on the issue.
‘Upcoming revisions to this practice statement will help fill this gap by improving the guidance to prompt companies to identify issues such as climate risk that may be material to their investors.
‘I encourage you all to respond to the exposure draft that is due out in the first half of next year.’
As a separate piece of work, the trustees of the IFRS Foundation are currently considering sustainability reporting, Hoogervorst said. A working group has done research into this area and the trustees plan to build on this by consulting more broadly shortly,
Hoogervorst concluded by saying: ‘My hope is that in the future financial reporting and sustainability reporting will come even closer together.
‘Much of that will depend on governments truly addressing the negative externalities of the most polluting economic activities.
‘Proper pricing of externalities would mean that regular financial reporting would become more reflective of sustainable business activities.
‘An adequate kerosene tax could cause the financial reports of the aviation industry to reflect the true costs of flying. A realistic carbon tax would cause the financial results of smokestack industries to reflect the true costs of their products. Financial reporting would come very close to sustainability reporting…’