Clear, transparent and connected disclosures about the impact of climate-related matters on impairment testing are key to meeting the expectations of users of the financial statements. In evaluating whether disclosures on climate-related matters are appropriate, a company considers the relevance of the information to the users of its financial statements. For impairment, users want to understand whether and how climate-related matters are reflected in the calculation of the recoverable amount.
IFRS® Accounting Standards do not refer explicitly to climate-related matters, but they implicitly require relevant disclosures in the financial statements when climate-related matters that have been considered in preparing the financial statements are material. Therefore, companies need to consider materiality carefully when deciding what information to provide.
To meet users’ expectations, companies need to consider the specific disclosure requirements in individual standards (e.g. IAS 36 Impairment of Assets) as well as the relevant disclosure requirements in IAS 1 Presentation of Financial Statements.
Your questions answered
A company may need to disclose the following climate-related information under IAS 36.
The events and circumstances that led to the recognition of the impairment loss | For example, a company would need to disclose that the introduction of climate-related legislation that it expects to significantly increase its manufacturing costs, is one of the main reasons for recognising an impairment loss. [IAS 36.130(a), 131(b)] |
| Key assumptions | In the context of impairment testing of cash-generating unit (CGUs) containing significant goodwill or intangible assets with an indefinite useful life1, a company is required to disclose the key assumptions used in calculating the recoverable amount. This requirement applies also to assumptions that are climate-related, such as future oil prices or greenhouse gas (GHG) emission costs, when climate-related matters may significantly impact the company’s operations. A company also needs to disclose its approach to determining the values assigned to the key assumptions. For example, if future prices of GHG emissions are a key assumption, then the company needs to disclose whether the prices reflect past experience, are consistent with external sources of information, and, if not, how and why they differ from past experience or external sources of information. [IAS 36.134(d)(i)–(ii), (e)(i)–(ii)] 1 For disclosure about key assumptions related to impairment of other non-current assets, see Question 2. |
| Sensitivity disclosures | In the context of impairment testing of goodwill and intangible assets with an indefinite useful life, a company is required to provide sensitivity disclosures when a reasonably possible change in a key assumption would cause the carrying amount of the CGU (or group of CGUs) to exceed its recoverable amount. [IAS 36.134(f)] |
A company may need to disclose the following climate-related information under IAS 1.
Key accounting judgements | A company is required to disclose key judgements (apart from those involving estimation) it has made in applying accounting policies that can significantly affect the amounts that it recognises in the financial statements. [IAS 1.122–123] Examples of such key judgements are those made in assessing whether significant capital expenditure to be incurred due to climate-related matters is more akin to maintenance expenditure or capital improvements for the value in use (VIU) calculation. |
Key assumptions and major sources of estimation uncertainty | A company is required to disclose the key assumptions used in estimating the recoverable amount that have a significant risk of resulting in a material adjustment to the carrying amount of assets (or CGUs) within the next financial year. When there is a high level of estimation uncertainty, a company may also consider providing information related to reasonably possible changes to those assumptions (e.g. sensitivity disclosures). [IAS 1.125, 129] For example, it may be important to provide these disclosures when the potential impact on the cash flow projections of costs of GHG emissions, or changes resulting from climate-related legislation, is uncertain and could result in a material change to the recoverable amount and carrying amount of the company’s assets (or CGUs) within the next financial year. |
Additional disclosure to enable users to understand the climate-related impacts | In certain circumstances, a company may need to include additional disclosures to enable users to understand the impact of climate-related matters on its financial position and financial performance. IAS 1 requires disclosure of information that is relevant to an understanding of the financial statements but is not specifically required by IFRS Accounting Standards or presented elsewhere in the financial statements. [IAS 1.112] |
Companies need to make materiality judgements when deciding what information to disclose in the financial statements about climate-related matters.
Materiality assessment involves both quantitative and qualitative considerations. For some companies, such as those in higher risk industries, the impacts may be quantitatively material. For other companies with no significant quantitative impact in the current reporting period, management may need to provide disclosures because these would be qualitatively material to users.
Examples of qualitative considerations include the following.
The level of exposure to climate-related risks | Key factors to consider in assessing the level of exposure include:
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The extent of apparent inconsistencies in disclosures between the financial statements and the front part of the annual report | When any key assumptions used in estimating the recoverable amount differ from those disclosed outside the financial statements (e.g. in the front part of the annual report), users would expect an explanation. |
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