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IFRS Standards and climate-related disclosures, CRUZ MENDOZA GABRIELA -…
IFRS Standards and climate-related disclosures
Effect on financial reporting arising from climate-related or otheremerging risks
Making materiality judgements
Sometimes the disclosure requirements
in IFRS Standards are used as if they were items
on a checklist. Using the requirements in this
way contributes to what many have described as a
disclosure problem—namely, too much irrelevant
information and not enough relevant information
in financial statements.
IFRS Standards require companies to
make materiality judgements in decisions about
recognition, measurement, presentation and
disclosure.
Applying Making Materiality Judgements to
climate-related risks and other emerging risks
Climate-related risks and other emerging risks are predominantly discussed outside the financial statements. However, as set out in Making Materiality Judgements, qualitative external factors, such as the industry in which the company operates, and investor expectations may make some risks ‘material’ and may warrant disclosures in financial statements, regardless of their numerical impact.
The Practice Statement provides the Board’s guidance on making materiality judgements. Although it is voluntary, investors may have reason to expect that directors, preparers and auditors will consider the Practice Statement when preparing and auditing financial statements.
Financial reporting considerations
• changes in expected credit losses for loans and other financial assets.
• changes in provisions and contingent liabilities arising from fines and penalties; and
• changes in provisions for onerous contracts because of increased costs or reduced demand;
• effects on impairment calculations because of increased costs or reduced demand;
• changes in the fair valuation of assets;
• changes in the useful life of assets;
• asset impairment, including goodwill;
The potential financial implications arising from climate-related and other emerging risks may include, but are not limited to:
Disclosing climate-related and other
emerging risks
Even though the Practice Statement is not mandatory, it provides the Board’s guidance on making the materiality judgements required when applying IFRS Standards to prepare financial statements
The discussion of material information in IAS 1 emphasises that an assessment of materiality must be made on the basis of size (quantitative) and nature (qualitative factors), or a combination of both.
Management commentary—providing context
to the financial statements
The Board is currently updating its Management Commentary Practice Statement to set out a rigorous, principle-based approach for explaining a company’s purpose, business model, strategy and performance, incorporating the long-term drivers of its success.
The need to focus disclosures on material issues and to avoid mere boilerplate is a critical consideration in the preparation of management commentary, just as it is in the financial statements.
The materiality practice statement notes that financial statements do not, and cannot, provide all the information that primary users need.
CRUZ MENDOZA GABRIELA