IASB Exposure Draft Climate-related and Other Uncertainties in the Financial Statements

Page 1 of 10Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)

27 November 2024Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Exposure DraftClimate-related and Other Uncertainties in the Financial StatementsThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditing,ethics and sustainability disclosures for professional accountants in Hong Kong. We aregrateful for the opportunity to provide you with our comments on this Exposure Draft(ED).The HKICPA appreciates the IASB’s endeavours to address stakeholders’ concernsregarding insufficient disclosures of the effects of climate-related risks in the financialstatements and inconsistencies between that information disclosed in the financialstatements and the information provided in other general purpose financial reports. Weagree that providing examples would generally help improve the reporting of the effectsof climate-related and other uncertainties in the financial statements. We also supportincluding them as illustrative examples accompanying IFRS Accounting Standards.However, we have significant concerns about certain aspects of the proposals. Weprovide detailed comments in the Appendix and summarise our primary concerns andrecommendations below.ConnectivityOne of the objectives of the ED is to strengthen the connection between financialstatements disclosures and sustainability disclosures. However, we believe this aim ischallenging to achieve due to the lack of strong principles underlying how financialstatements and sustainability reports should be connected. Also, the illustrativeexamples do not clearly demonstrate this connectivity.To better achieve this objective, we strongly recommend that the IASB collaborate withthe ISSB to develop a more comprehensive plan for their long-term strategy concerningthe connectivity between financial statements disclosures and sustainability disclosures.This plan could include the development of a framework that sets out the principles ofconnectivity and how it can be achieved. Such a project could be conducted as aseparate workstream to avoid delaying the publication of the illustrative examples.As an interim measure, we recommend that the IASB enhance the illustrative examplesto demonstrate how connectivity can be attained. We also recommend the IASBcollaborate with the ISSB on developing the article as mentioned in the April 2024 IASBPage 2 of 10staff paper regarding the role of financial statements and the interaction between IFRSAccounting Standards and IFRS SDS. If feasible, this article should be publishedalongside the enhanced illustrative examples to promote clarity about connectivity.Requirements in other IFRS Accounting Standards and non-climate related uncertaintiesUnderstandably, the proposed examples illustrate only certain disclosure requirementsin a few IFRS Accounting Standards regarding the effects of climate-related and otheruncertainties in the financial statements. Furthermore, the ED focuses primarily onclimate-related risks and uncertainties, with only one out of the eight examplesillustrating other types of risks and uncertainties. We are concerned that this isinsufficient to raise awareness and assist preparers in considering other applicabledisclosure requirements in IFRS Accounting Standards and in reporting the effects ofnon-climate related uncertainties. Accordingly, we recommend the IASB enhance itsexisting educational material – Effects of climate-related matters on financial statementsor publish similar guidance to cover other applicable IFRS Accounting Standards andother types of uncertainties that are contentious or prevalent among entities. If possible,this enhanced material should be published together with the illustrative examples andthe article on the role of financial statements as a single package to providecomprehensive guidance.Negative statement in Example 1We have significant concerns that the disclosures stating that a specific risk had noimpact on the financial statements, as illustrated in Example 1, could set a newprecedent for mandating a negative statement in financial statements. We believe thisis not the intended purpose of paragraph 31 of IAS 1 Presentation of FinancialStatements. We are also concerned that such negative statements may extend beyondclimate and sustainability risks and uncertainties to encompass a broader range of otherrisks and uncertainties, potentially creating a significant burden for preparers inconducting the assessments and leading to boilerplate disclosures or informationoverload, which would not be useful for users.Accordingly, we strongly recommend the IASB clarify whether the ‘no impact’ disclosuresignifies a new requirement. If it does, this new requirement should be consideredthrough a separate standard-setting project. If it does not constitute a new requirement,the IASB should clearly explain its conclusion and rationale in the Basis for Conclusions.We also recommend the IASB enhance Examples 1 and 2 to illustrate the principles andthought process of when and how to apply paragraph 31 of IAS 1 and determiningwhether to disclose additional information based on user expectations for items that haveno effect on the entities’ financial position or financial performance.If you have any questions regarding the matters raised in this letter, please contact ShiroLam (shirolam@hkicpa.org.hk) or Kennis Lee (kennislee@hkicpa.org.hk), AssociateDirectors of the Standard Setting Department.Sincerely,Cecilia KweiDirector of Standard SettingPage 3 of 10Work undertaken by the HKICPA in forming its views:

The HKICPA:

(a)

issued an Invitation to Comment on the ED on 1 August 2024 to its members andother stakeholders;

(b)

sought input from its Task Force for the ED; and(c)

developed its views through its Financial Reporting Standards Committee, havingreflected on its respondents’ views. The Committee comprises preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.Detailed comments on the IASB EDQuestion 1: Providing illustrative examples

1.We agree that providing examples would generally help improve the reporting ofthe effects of climate-related and other uncertainties in the financial statements.However, we question whether the proposed examples are sufficient to meet allthe objectives of the ED and adequately address stakeholder needs. We provideour detailed comments below.A.Vehicles for the examples

2.We agree with the IASB’s proposal to include the examples as illustrative examplesaccompanying IFRS Accounting Standards. We believe that this approach strikesan appropriate balance between accessibility, enforceability and flexibility in thecontent and format of the examples.

3.Moreover, we support the IASB’s intention to group the examples and publish them(together with the Basis for Conclusions (BC)) as a single document in addition toincluding the examples as illustrative examples accompanying IFRS AccountingStandards (BC 45 of the ED). We believe the package as a whole would improvethe accessibility and understandability of the examples and offer a suitable platformto convey the following important messages, which are currently located in the BC:

(a)

the principles and requirements illustrated in the examples apply equally tonon-climate related uncertainties;

(b)

the illustrative examples do not cover all requirements in IFRS AccountingStandards that might be applicable to a fact pattern; therefore, it is importantto refer to all the relevant requirements in the Standards when preparingfinancial statements; and(c)

the background of the examples is hypothetical and entities must addressreal-world complexities on a case-by-case basis.

4.However, if the IASB decides to include the examples solely under differentStandards to which they relate (and not in a single document), we recommend theIASB carefully consider where the BC on the examples would be placed, and howthe important messages as set out in paragraph 3(a) to 3(c) above would beeffectively communicated to the preparers.B.Connectivity

5.As stated in BC 21 of the ED, one of the objectives of the ED is to illustrate theprovision of connected information in general purpose financial reports and toreinforce compatibility with IFRS Sustainability Disclosure Standards (IFRS SDS).Our respondents find this aim challenging to attain as there is currently no principleAppendixPage 4 of 10about how financial statements and sustainability reports are expected to beconnected and how they could be connected. In addition, the examples in the EDonly illustrate the application of the existing disclosure requirements in IFRSAccounting Standards; they do not clearly demonstrate the connectivity betweenfinancial statements disclosures and sustainability disclosures.

6.In the absence of any principles about the connection between financial statementsand sustainability reports, we believe the IASB’s goal of strengthening connectivitycould not be fully attained by merely providing preparers with illustrative examplesof existing disclosure requirements in IFRS Accounting Standards. We consider itcrucial for the IASB and the ISSB to explain the different parameters of financialstatements and sustainability reports so that users know how to interpret theunderlying meaning of the disclosures. For example, the basis for estimating theanticipated financial effects under IFRS SDS may differ from that used forestimating the future cash flows in impairment assessments under IAS 36Impairment of Assets due to variations in the time horizons considered insustainability reporting versus financial reporting. Financial statements may notreflect the risks that materialise beyond the time horizon or the future actions thatan entity may be compelled to take to mitigate climate-related risks, which areessential for preparing sustainability-related financial disclosures. Such differencescould affect the extent of financial impacts and related disclosures in the tworeports.

7.To achieve the objective of enhancing connectivity, we recommend the IASBcollaborate with the ISSB to develop a more comprehensive plan for their long-term strategy concerning the connectivity between financial statements disclosuresand sustainability disclosures. This could include the development of a frameworkthat sets out the principles of connectivity and how it can be achieved. Such aproject could be conducted as a separate workstream to avoid delaying thepublication of the illustrative examples.

8.As an interim measure, we recommend the IASB enhance the illustrative examplesin the ED (see Question 2 for our detailed recommendations) and add cross-references to the relevant requirements in IFRS SDS in the illustrative examplesto demonstrate how connectivity could be attained. We understand that somejurisdictions do not apply IFRS SDS; however, adding explicit references to therelevant requirements in IFRS SDS could clearly demonstrate how the accountingdisclosures in the illustrative examples interact with sustainability disclosures.

9.Additionally, we understand from the April 2024 IASB staff paper that the IASB isexploring the development of an article about the objective of financial statements,their audience, their boundaries and how IFRS Accounting Standards and IFRSSDS interact and complement each other. We recommend that the IASB and theISSB work together to develop this article and if feasible, publish it alongside theenhanced illustrative examples to promote clarity about connectivity.C.Requirements in other IFRS Accounting Standards and non-climate relateduncertainties

10.When developing the illustrative examples, the IASB focused on the requirementsin IFRS Accounting Standards that are among the most relevant for disclosing theeffects of climate-related and other uncertainties in financial statements. Therefore,the illustrative examples in the ED only demonstrate the application of certainspecific disclosure requirements in a few IFRS Accounting Standards, such as IAS1, IAS 36, IAS 37 Provisions, Contingent Liabilities and Contingent Assets andPage 5 of 10IFRS 7 Financial Instruments: Disclosures. Without illustrating all relevantdisclosure requirements, some of our respondents are concerned that preparersmay overlook other applicable disclosure requirements within the aforementionedStandards or in other Standards.

11.Similarly, some respondents noted that the examples in the ED heavily focus onreporting the effects of climate-related uncertainties, with only one out of the eightexamples illustrating the effects of other types of uncertainties. These respondentsconsidered this is insufficient to raise awareness and assist preparers in how toreport the effects of non-climate related uncertainties in the financial statements.

12.In view of the above concerns, some of our respondents requested additionalillustrative examples. However, we believe it is impracticable to produce additionalexamples that cover all applicable requirements in IFRS Accounting Standards orall non-climate related uncertainties. Doing so would not effectively address therespondents’ concerns. To alleviate the above issues, we recommend the IASB:

(a) Enhance the IASB’s educational material – Effects of climate-related matterson financial statements or publish similar guidance to cover other applicableIFRS Accounting Standards and types of uncertainties that are contentious orprevalent among entities, such as regulatory changes (e.g. social media usageand carbon levies), nature-related issues (e.g. water stress), businesssustainability, social issues, data security/cyber breaches and geopoliticalinstability. If possible, the enhanced material could be published at the sametime as the illustrative examples and the article on the role of financialstatements referred to in paragraph 9 above as a single package, to providepreparers with comprehensive guidance;

(b) Enhance the examples to improve preparers’ understanding of the thoughtprocess involved in assessing and reporting the impact of various types ofuncertainties in financial statements (see Question 2 for our detailedrecommendations for each example); and(c) Add a caveat in the illustrative examples to remind preparers that there may beother applicable disclosure requirements for them to consider beyond thoseillustrated.Question 2: Approach to developing illustrative examples

13.We considered that the selection of requirements and fact patterns illustrated inmost of the examples in the ED should be enhanced or clarified. Our detailedcomments are as follows.A.Examples 1 and 2 – Materiality judgements leading to/ not leading to additionaldisclosures (IAS 1/ IFRS 18)

(a) Negative statement and practical challenges

14.Example 1 illustrates that when making materiality judgements, an entity mustassess both qualitative and quantitative factors that could reasonably be expectedto influence the decisions of users of financial statements. In the illustratedscenario, the entity is required to disclose information about transition plans evenif those plans have ‘no effect’ on the entity’s financial position or financialperformance. We have significant concerns that this could set a new precedent fordisclosures stating that a specific risk had no impact on the financial statements,which we believe is not the intended purpose of paragraph 31 of IAS 1.Furthermore, we are concerned that such negative statements may extend beyondPage 6 of 10climate and sustainability risks and uncertainties to encompass a broader range ofother risks and uncertainties. This could create a significant burden for preparersin conducting assessments and preparing the disclosures, potentially leading toboilerplate disclosures or information overload, which would not be useful for users.

15.Even if the IASB does not consider this a new requirement, the current drafting ofthe examples, which require entities to rely on the expectations of users todetermine whether additional disclosures are needed under paragraph 31 of IAS1, still poses significant challenges for preparers. Preparers may find it unclear asto when they are ‘expected’ to disclose items which have no effect on therecognition or measurement of their assets and liabilities, as well as related incomeand expenses. In addition, we are concerned that simply referencing this ‘catch all’paragraph as the justification for disclosures in the proposed examples, without acomprehensive illustration of the principles and thought process, may lead toconfusion about the logic of applying paragraph 31 of IAS 1 in the examples. Thiscould result in unintended consequences of over-interpretation and misapplicationof the paragraph in other contexts. We consider that neither 1.8 of Example 1 nor

2.8 of Example 2 clearly illustrates the following thought process:

(a) the types of uncertainties that entities disclose are those material uncertaintiesthat affect judgement and estimates made as part of the preparation of financialstatements;

(b) the qualitative factors that the entity has considered in reaching the conclusionthat the additional information that is material to financial statements and islikely to influence user’s decision making; and(c) the judgement that the entity made regarding the extent of disclosures thatneed to be provided in the financial statements, if certain information hasalready been provided in a general purpose financial report outside thefinancial statements.

16.In light of the above concerns, we strongly recommend that the IASB thoroughlyassess and clarify whether the ‘no impact’ disclosure signifies a new requirement.If it does, we believe that the new requirement should not be introduced throughan illustrative example. Instead, it should be properly deliberated through aseparate standard-setting project. On the other hand, if it does not constitute a newrequirement, then the IASB should clearly explain its conclusion and rationale inthe BC. We also recommend the IASB enhance Examples 1 and 2 to clearlyillustrate the principles and thought process of when and how to apply paragraph31 of IAS 1 in order to address the concerns stated in paragraph 15 above.

17.In addition, we note that the illustrative examples have been developed by the IASBto complement the 2019 IASB educational material. Accordingly, we recommendthe IASB enhance the examples by illustrating how entities should apply the four-step process (i.e. identify, assess, organise and review) in IFRS PracticeStatement 2 Making Materiality Judgements, when making materiality judgementsrelating to disclosures about climate-related and other emerging risks, as depictedin the 2019 IASB educational article.(b) Connectivity

18.BC 32 of the ED states that Examples 1 and 2 assume that the entity does notapply IFRS SDS. If those Standards were applied, an entity would need to disclosefurther information in its sustainability-related financial disclosures. Ourrespondents found this paragraph confusing as they are uncertain about whatadditional information is expected to be disclosed if IFRS SDS is adopted, wherethis information should be located and how it should be connected with the financialPage 7 of 10statements disclosures. As mentioned in paragraph 8 above, we consider itessential for the IASB to enhance the illustrative examples as an interim solutionto achieve the objective of improving connectivity. We therefore recommend thatthe IASB demonstrate in these examples how financial and sustainability reportscould be connected when entities adopt both IFRS Accounting Standards andIFRS SDS. For example, it should clarify whether and where the information abouthow the entity is funding the transition plan and how resilient the assets are underthe plausible climate scenarios should be disclosed.(c) Drafting comments

19.We have the following drafting comments to enhance the clarity of the examples:

•Given that the climate-related transition plan in Example 1 spans the next 10years, we recommend that the IASB specify in 1.3 and 1.9 of the ED that thetransition plan has no effect on assets and liabilities ‘as at year end’, and relatedincome and expenses ‘for the current year’, to avoid any misinterpretationregarding the timing of the effects on financial statements.•Add in 1.4 of the ED that the entity has determined there is no information tobe disclosed in respect of paragraph 125 of IAS 1.•Clarify in 2.2 of the ED that the entity itself (not only the industry) has limitedexposure to climate-related transition risks and that the only impact of thoserisks is through the entity’s greenhouse gas (GHG) emission policy.B.Example 3 – Disclosure of assumptions: specific requirements (IAS 36)

20.Example 3 illustrates the impact of GHG regulation on impairment assessment andfocuses on the costs of future emission allowance. We consider the example couldbe improved by clearly indicating that entities need to consider factors other thancosts, such as revenue, when assessing the potential impact of GHG regulation onimpairment assessment. This clarification is necessary to avoid the misleadingimpression that costs are the sole consideration or that they should outweigh otherfactors. For example, GHG regulation may adversely affect future revenue forcertain industries, such as the manufacturing of plastic bags, resulting in a negativerevenue growth rate and affecting the cash inflows in the cash flow projections.C.Example 4 – Disclosure of assumptions: general requirements (IAS 1/ IAS 8)

21.We recommend the IASB enhance the clarity of this example in the followingaspects:

(a) Explain the impact of climate-related transition risk on the useful lives of theentity’s property, plant and equipment as it is one of the key considerationswhen evaluating the impact of climate risks on these assets;

(b) Specify in 4.3 of the ED the internal and/or external factors that indicate someof the entity’s non-current assets might be impaired during the current reportingperiod; and(c) Replace the terms ‘CGU’s carrying amount’ and ‘carrying amount of the CGU’in 4.6(d) of the ED with ‘CGU’s recoverable amount’ and ‘recoverable amountof the CGU’, as the assumptions impact the calculation of recoverable amountof CGU but not the carrying amount.D.Example 5 – Disclosure of assumptions: additional disclosures (IAS 1/ IFRS 18)

22.5.4 of the ED states that the entity does not have a history of recent losses butpossess unused tax losses. We recommend that the IASB clarify how the entityhas arrived at this tax position to improve the understanding of the example.Page 8 of 10E.Example 6 – Disclosure about credit risk (IFRS 7)

23.We have the following drafting recommendations to improve the clarity of thisexample:

(a) Enhancing the background:

(i)

6.1(a) of the ED: Clarify the specific paragraph in IFRS 7 that requires thedisclosure of information about the effects of particular risks on an entity’scredit risk exposures and credit risk management practices; and(ii)

6.2 of the ED: Delve into the financial institution’s credit risk managementpractices and explain clearly how those practices help the entity identifytwo portfolios of loans for monitoring and taking action to mitigate creditrisks arising from customers’ exposure to climate-related risks.(b) More detailed illustrations:

(i)

6.3(b) of the ED: Include mitigating factors as another factor that entitiesmay need to consider when assessing the significance of the effects ofclimate-related risks on the entity’s exposure to credit risk; and(ii)

6.4(b)(i) of the ED: Specify in the example that the focus of disclosuresshould be on key parameters that are particularly sensitive whendisclosing how climate risks were incorporated in the inputs used tomeasure expected credit losses (ECL).(c) Adding additional relevant disclosure requirements:

(i)

6.4(c) of the ED: Include an explanation of any significant changes in thequality of the collateral or credit enhancements as a result of climate-related risks, as required by paragraph 35K(b)(ii) of IFRS 7; and(ii)

Illustrate the disclosures required under paragraphs 35F-35N of IFRS 7if additional ECL is recognised on the loans to customers who are subjectto climate risks like droughts and flood risk.F.Example 8 – Disclosure of disaggregated information (IFRS 18)

24.Example 8 illustrates the application of the principles of aggregation anddisaggregation in IFRS 18 Presentation and Disclosure in Financial Statements,resulting in the disclosure of two types of property, plant and equipment based ondissimilar climate-related risk characteristics. However, some respondentsquestioned whether this example could be viewed as an interpretation of a classof property, plant and equipment, defined as ‘a grouping of assets of a similarnature and use in an entity’s operations’ under paragraph 37 of IAS 16 Property,Plant and equipment, rather than as an application of the aggregation anddisaggregation principles in IFRS 18. We recommend the IASB clarify this point.

25.If the IASB clarifies that the disclosures illustrated result from the application ofIFRS 18, we recommend that the IASB include a prominent box at the beginningof Example 8, akin to those in Examples 1, 2, 4 and 5, to prompt readers to considersimilar principles in IAS 1 and assess whether the disaggregated information ismaterial for disclosures in reporting periods before an entity applies IFRS 18, asstated in BC 42 of the ED.Page 9 of 10Question 3: Other commentsA.Application issues

26.In addition to the effects of climate-related matters on the disclosure requirements,our respondents have raised several application issues pertaining to how climate-related matters would affect the application of measurement and recognitionrequirements. These issues include:

(a) IAS 36: When should climate-related issues, as well as legal and regulatorychanges (such as enactments/modifications in tax laws and imposition ofcarbon levies) be taken into account in the impairment assessment? Shouldthey be considered when they are anticipated, upon their announcement orenactment, or upon their effective dates? When should the replacement of oldoperations by new operations (e.g. low carbon operation) impact impairmentassessment of goodwill?(b) IFRS 9: Whether and, if so, how does an entity isolate climate-related risks asa separate driver for inputs used to measure ECL, such as probabilities ofdefault and loss given default? How do climate-related risks translate into ECLto meet the ‘reasonable and supportable information’ in paragraph 5.5.4 ofIFRS 9? How should an entity consider whether an estimation technique usedin measuring ECL needs to be changed in response to climate-related risks asstated in 6.4(b)(iii) of the ED?

27.We recommend the IASB provide further guidance on the above application issuesrelated to the measurement and recognition requirements in the context of climate-related and other uncertainties. We believe that guidance on these practicalmatters would not only enhance the consistent application of the measurement andrecognition requirements but would also improve the clarity of disclosures andminimise the unintended consequence of having boilerplate disclosures.

28.Apart from the issues mentioned above, a few respondents requested guidance oran additional example illustrating how climate-related risks could affect thesignificant judgements made applying IFRS 17 Insurance Contracts. Specifically,they seek clarity on how entities consider climate change in estimating future cashflows, adjusting for non-financial risk and determining discount rate whenmeasuring insurance contracts. We acknowledge that IFRS 17 is a relatively newstandard and many preparers are still in the learning phase of its application,focusing on the fundamental principles and requirements of the new insuranceaccounting model and how to improve on application. Therefore, instead ofproviding additional guidance on climate-related considerations at this stage, wesuggest that the IASB closely monitor the application of IFRS 17, assess anypractical issues after entities have applied the Standard for some time (e.g. in thepost-implementation review of IFRS 17) and consider whether any illustrativeexamples or other educational materials may be necessary.B.Estimation uncertainty disclosure requirements under IAS 1

29.As investors are now placing greater emphasis on sustainability information whichencompasses risks and opportunities that could impact an entity’s financialperformance over the medium to long term, some respondents expressed concernthat the 12-month horizon in relation to estimation uncertainty disclosurerequirements under paragraph 125 of IAS 1 is increasingly being perceived asartificial and a potential barrier to providing comprehensive information onPage 10 of 10significant estimates made in the financial statements. Accordingly, theysuggested that the IASB consider future standard-setting activities to addressmeasurement changes likely to occur after 12 months from the reporting date.

30.While we acknowledge this development, we do not see an urgent need to expandthe existing requirements in IFRS Accounting Standards at this stage. Instead, werecommend the IASB monitor the evolving needs of users regarding the potentialextension of the time horizon beyond 12 months to better address measurementchanges that may occur after 12 months from the reporting date. We also suggestthe IASB engage with stakeholders to gather insights on this issue and considerit in future standard-setting discussions.~ End ~