Impact of Climate Change on IFRS Financial Statements

IFRS financial statements are reports prepared using the International Financial Reporting Standards. These global accounting rules ensure that a company’s finances are clear, consistent and comparable across countries. The main components include the balance sheet, income statement, cash flow statement and notes to the accounts. These statements help investors, regulators and others understand a company’s financial health. Anyone taking an IFRS course must understand which financial statements are prepared under IFRS and how they work.

Why Climate Change Matters for Financial Reporting

Climate change is no longer just about the weather. It affects how businesses work, how they spend money and how they report that money. That’s why the impact of climate change on IFRS financial statements is now a big topic in accounting.

IFRS or International Financial Reporting Standards, help companies tell the truth about their finances. But climate change brings new problems like floods, wildfires and rules about pollution. These changes affect how companies earn, spend and plan. So, it’s very important that financial statements reflect climate-related risks and challenges.

IFRS S2 Requirements for Climate‑Related Disclosures

IFRS S2 talks about what companies must share about climate risks. This is called disclosure. The standard wants companies to tell how climate affects their money now and in the future. It also asks for goals the company has made about the environment, like reducing carbon emissions.

Companies need to explain:

• What climate risks they face.
• How they plan to deal with these risks.
• How much it might cost them.
• What they are doing to reduce harm to the environment.

All this information helps investors know if a business is strong or in danger because of climate change.

Classification & Measurement under IFRS 9: Climate‑Risk Implications

IFRS 9 deals with financial tools like loans and investments. The impact of climate change on IFRS financial statements is big here because it changes how these tools are measured and classified.

For example, if a bank gives a loan to a coal company and new climate rules make coal less popular, the loan becomes risky. The bank may have to mark the loan as a bad investment. This changes how it shows up in the books.

Companies must now look at climate risks when classifying their assets. This is a new challenge for accountants. But it’s also important that financial statements tell the real story.  Understanding which financial statements are prepared under IFRS helps make better decisions.

Asset and Goodwill Impairment in a Changing Climate

Assets like factories or machines can lose value due to climate change. This is called impairment. Imagine a factory in a flood zone. If it floods often, its value drops.

Goodwill is also affected. Goodwill means the extra value a company has when it buys another company. If climate change affects future profits, that goodwill might drop too. The impact of climate change on IFRS financial statements is seen when these values change.

Under IFRS, companies need to test these assets often to see if they are still worth what the books say. If not, they must reduce the value on the balance sheet.  This highlights the growing impact of IFRS in today’s business world.

Fair Value Estimation Amid Climate Uncertainty

Fair value means the price something would get if sold today. Climate change makes this tricky. For example, land near the sea may lose value if sea levels rise. That means fair value must change.

IFRS asks companies to check the fair value of many things. But now they must also think about climate risks when doing it. That includes using new data about weather, insurance costs and market changes.

The impact of climate change on IFRS financial statements makes fair value harder to guess. But it’s important to get it right so investors have the full picture.

Hedge Accounting for Climate‑Related Risks

Some companies use hedging to protect themselves from risks. Hedge accounting means showing those protections in their financial reports.

For example, a farming company might worry about drought. So it buys weather insurance. Under IFRS, this hedge must be shown clearly. Climate-related hedges are growing. These include:

• Carbon credit deals
• Weather insurance
• Renewable energy contracts

The impact of climate change on IFRS financial statements appears when these hedges are shown differently than in the past. IFRS makes sure they are reported correctly.

Governance, Materiality & IFRS S1 Framework

IFRS S1 is about general reporting rules. It covers how companies choose what’s important: this is called materiality, and how leaders oversee reporting. Climate risks are now seen as material because they can change a company’s future.

So, under IFRS S1, companies must:

• Make climate risk part of board meetings
• Tell if leaders are trained in climate topics
• Show how decisions are made with climate in mind

Good governance means companies take climate seriously. And that shows the impact of climate change on IFRS financial statements.

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Practical Challenges & Best Practices for Implementation

Adding climate info into IFRS reports is not easy. Companies face many problems:

• Lack of climate data
• Unsure how to measure risks
• Few trained staff

But there are best practices too:

• Use third-party experts for climate data
• Train accountants on new standards
• Make small updates often instead of big ones once a year

The impact of climate change on IFRS financial statements will grow. So, learning how to manage these changes now helps in the future. The impact of IFRS is seen in how it guides firms through this complexity.

Case Studies: Climate Impact in IFRS‑Compliant Reports

1. Energy Company in Australia A company owned coal plants. New laws raised costs. The company had to reduce the asset value of these plants. This is how climate change led to asset impairment.
2. Food Business in Europe Farming losses due to drought made the company show risks in their reports. They added a hedge using weather contracts. This changed their financial instruments reporting.
3. Real Estate Firm in the US Properties near flood zones dropped in value. The firm updated fair value estimates and explained the risks in notes. This improved their disclosures.

Each story shows a real impact of climate change on IFRS financial statements.

Conclusion: Embedding Climate Risks into Future Financial Reporting

The world is changing fast and so must financial reporting. Climate change is not just about nature. It’s about money, business and survival. Companies that understand this will do better.

IFRS helps make sure reports are honest and complete. But now, these standards must also handle climate risks. From asset impairment to new disclosures, the impact of climate change on IFRS financial statements is everywhere.

Students learning accounting today must know this. If you ever take an IFRS course, pay attention to climate topics. And if you forgot, IFRS full form means International Financial Reporting Standards. The impact of IFRS on modern financial statements is only growing.

Soon, every accountant must know how to report climate risks. It’s the future of finance. Knowing which financial statements are prepared under IFRS is the first step.

FAQs on Impact of Climate Change on IFRS Financial Statements

What are the main disclosure requirements for climate‑related risks and opportunities under IFRS S2? 

Companies must explain risks, strategies, goals and money affected by climate change.

How does climate change impact the impairment testing of assets and goodwill under IFRS?

It lowers value due to risks like floods or market changes, requiring write-downs.

In what ways does IFRS S2 influence the classification and measurement of financial instruments under IFRS 9?

It adds climate risk to the decision of how to measure or classify financial tools.

How can companies employ hedge accounting to mitigate climate‑related financial risks under IFRS standards? 

They use contracts like weather insurance and show them clearly in reports.

Partham Barot is an ACCA-certified professional. showcasing his expertise in finance and accountancy. he’s revolutionising education by focusing on practical, real-world skills. Partham’s achievements underscore his commitment to elevating educational standards and empowering the next generation of professionals.