IASB decides how climate pledges should figure in financial accounts
Influential body gives its final verdict on whether net zero plans can be interpreted as provisions under existing rules
The International Accounting Standards Board (IASB) has reached a verdict on how companies should treat the money they spend on their decarbonisation plans in financial reports.
The influential body, whose standards underpin accounting laws in 140+ jurisdictions around the world, approved a new, climate-based interpretation of one of its rules this morning.
The rule, known as IAS 37, relates to provisions, contingent liabilities and contingent assets.
The interpretation sought to clarify that, under IASB standards, if a company is obliged to put money aside to cover a particular commitment to its shareholders (or broader stakeholders), it may have to account differently for that money than it would for general spending. It focused specifically on what that means for the growing number of firms with climate commitments and transition plans.
Rethinking Capital, the British think-tank that asked IASB to clarify how climate plans should be treated under the standard, wants accounting rules to be harnessed to capture the value created by spending on decarbonisation, rather than companies having to write-off the costs as expenses.
Some companies – particularly European oil majors – have faced pressure from shareholders over their climate pledges, amid concerns that the short-term cost of pursuing net zero has put them at a competitive disadvantage.
The decision from IASB today does not create a clear path to changing how companies can account for their climate spending: essentially, IASB has just pointed out that, under IAS 37, if company management feels a legitimate public expectation exists – in this instance, that it will decarbonise – and its cost can be estimated, then it could qualify as a provision under accounting rules, meaning the cost would be recorded as an asset, not an expense.
The main stumbling block for companies wanting to treat their climate spending in this way will be the fact that they need to tie it to a ‘past event’ in order to qualify. That past event must be a business activity that, once it occurs, directly triggers a duty to spend money.
The hypothetical example that IASB’s Interpretation Committee used in its decision was carbon offsets: if a company has told its stakeholders it will offset its emissions from a certain date, then as soon as it hits that date and produces a tonne of emissions, it has very little wiggle room – it is obliged to buy an offset in order to fulfil its commitment.
Spending on broader climate plans is likely to be trickier to link to such a process.
While IASB’s rules haven’t changed as a result of today’s decision – it was made by the interpretation committee, which is banned from altering the content of the standards – the verdict may mean that companies will revisit the business activities they’ve committed to as part of their transition plans and decide whether they are being treated appropriately in their financial reports.
“The decision is far from perfect, but it does begin the process,” said Andrew Watson, co-founder of Rethinking Capital. “From here, it really depends on what people do, in particular pension funds and non-executive directors. I’m excited to see how this plays out.”
Second IASB vote
The announcement comes hot on the heels of another vote by IASB, this time related to how climate risk should show up in financial statements.
After a year of discussions, the board unanimously agreed on Monday that it would provide eight illustrative examples of how companies should address the climate risks they identify in other key documents, such as sustainability reports or regulatory submissions, in their accounts.
IASB will focus on helping companies understand when something is material enough to be covered in financial statements, how to approach the impact of climate on the valuation of assets and liabilities, and whether they should provide dedicated climate-related information.
