Andreas Barckow delivers keynote speech at ICGN 2022 conference

Andreas Barckow, Chair of the International Accounting Standards Board, delivered the keynote speech at the International Corporate Governance Network’s (ICGN) Global Sustainability Standards: Convergence and the Future event on 16 March 2022. He discussed what the IASB already has in place on accounting for sustainability-related matters in the financial statements and where the IASB may go in the future.

Good morning and thank you, George [Dallas], for the kind introduction. It is a pleasure to be at this forum to discuss the important topic of sustainability. As I’m sure you know, the International Accounting Standards Board (IASB) sets the accounting standards used in the financial statements of companies in over 140 jurisdictions in the world. Today, I’d like to share with you what the IASB already has in place on accounting for sustainability-related matters in the financial statements and where we may go in the future.

Starting with where we are today

If you do a word search for ‘sustainable’ or ‘climate’ in IFRS Accounting Standards, you may, at first blush, be disappointed. You’ll come across our standard on agriculture and a passing reference in our management commentary guidance.

But this important topic is within the scope of many of our current standards, even if it is not mentioned by name. IFRS Accounting Standards are principle based, setting out requirements for the recognition, measurement and disclosure of assets and liabilities in the financial statements as a general matter, rather than specifying every possible transaction or event that could trigger depiction in the financial statements.

This principle-based approach has been the IASB’s modus operandi since inception. In today’s ever-changing and highly uncertain world, it is even more important. The IASB does not set Standards for every emerging risk—whether it is climate change, biodiversity, pandemics or geo-political conflicts. Rather, our principle-based Standards already set out requirements that may be applicable.

And that’s what the educational material we issued in November 2020 illustrated. This educational material builds on an earlier article by Nick Anderson, one of our IASB members and a speaker on your next panel. Both documents set out specific examples of when IFRS Accounting Standards require companies to consider the effects of climate-related matters in preparing their financial statements. This consideration involves deciding how climate-related issues may affect the measurement of assets and liabilities. The articles also highlight some disclosure considerations and highlight an overall requirement for a company to consider whether specific requirements are insufficient to enable users to understand the effect of some events and conditions on the company’s financial statements.

Examples in these documents include the recognition and measurement of impairment losses on tangible and intangible assets; the recognition and measurement of provisions for government levies, remediation of environmental damage and onerous contracts; and the measurement of loan contracts with climate-related targets.

These documents also highlight disclosure requirements in IFRS Accounting Standards, including specific requirements on:

• the disclosure of events and circumstances that led to the recognition of an impairment loss; and
• disclosure of the key assumptions and the amount by which the key assumption must change to result in an impairment loss if no impairment loss is recognised, where goodwill is present and a reasonably possible change in key assumptions would result in an impairment loss.

IFRS Accounting Standards also have more general ‘catch-all’ disclosure requirements about, for example:

• management’s judgments that have the most significant effect on amounts recognised in the financial statements.
• assumptions that have a significant risk of resulting in a material adjustment to the amounts of assets and liabilities within the next financial year. For instance, users are increasingly interested in understanding whether the recoverability of the cost of a well is based on assumptions of pumping oil at $50, 80 or 150 per barrel. These disclosures must discuss the nature of the assumption and, depending on the nature of the assumptions, may include sensitivity analyses and other information.

We have heard, however, of widespread demand for more disclosure on sustainability—through our regular engagement with stakeholders and through our five-yearly Agenda Consultation, which helps the IASB set its priorities for the next five-year period, in this case, from 2022 to 2026.

Looking to the future

At its March and April meetings, the IASB will continue deliberating feedback on its Agenda Consultation to decide whether and, if so, what more it could do about the accounting for climate-related risks in the financial statements.

As a starting point, we would need to first consider developments in the financial statements now that we have had another year for our climate educational documents to bed down in practice. As I’ve said, IFRS Accounting Standards already have requirements covering the implications of sustainability matters in the financial statements. However, there may still be a case to do more.

In that regard, we will work closely with our colleagues on the International Sustainability Standards Board (ISSB). As I mentioned at the beginning, the IASB focuses on the financial statements, which reflect transactions and events that have taken place up until the reporting date. Of course, financial statements do incorporate assumptions about the future to the extent that they relate to assets and liabilities recognised, but these are typically based on a particular level of certainty (such as ‘more likely than not’). For example, we may all feel quite strongly that more regulation will be needed to impose a monetary cost on negative climate actions. But, will that be? Through higher tax, prohibited activities or some other means? And when? It may be too uncertain today to anticipate specific possible future actions in the financial statements.

And this is where the IFRS Foundation’s newly created ISSB comes in—and where we see the power of having the two investor-focused standard-setting bodies housed within the IFRS Foundation, building on each other’s work in a virtuous cycle.

IFRS Accounting Standards, produced by the IASB, provide the ‘monetary’ (financial) backdrop, if you will, for investors’ analysis of sustainability-related risks and opportunities and associated future uncertainties. In this regard, IFRS Sustainability Disclosure Standards, produced by the ISSB, will require disclosure of information about the sustainability-related risks and opportunities that affect the company’s future cashflows and business model and, thus, its enterprise value—matters that affect future financial statements (hence, creating the virtuous cycle). Together, the two boards can help investors connect these two complementary information sets into a single, holistic package to foster transparency, accountability and efficiency in global capital markets.

Let me close by reminding everyone where I have started my remarks, namely: how existing IFRS Accounting Standards apply to climate matters. We all have part to play—companies, auditors, regulators, users, and standard setters. Let’s all do our part to make sure that they are used for this purpose.

I look forward to working with you further over the coming months and years. Thank you for your time and stay tuned for further developments.