Climate-related risk and financial statements: implications for regulators, preparers, auditors and users

Interest among investors in understanding climate-related risk from companies’ management has increased in recent years. Despite this, climate-related risks are currently predominantly discussed outside the financial statements, if at all. However, as set out in the Australian Accounting Standards Board (AASB)/International Accounting Standards Board's (IASB) Practice Statement 2 Making Materiality Judgements (APS/PS 2), qualitative external factors such as the industry in which the entity operates and investor expectations may make such risks ‘material’ and warrant disclosures when preparing financial statements, regardless of their numerical impact. The AASB and the AUASB expect that directors, preparers and auditors will be considering APS/PS 2 when preparing and auditing financial statements. This paper provides an outline of the guidance and motivation behind the issuance of the bulletin on climate-related risk disclosures, key takeaways and recommendations, and the AASB's and AUASB's suggestions on the type of evidence that would be useful for standard setters.