Climate change and Financial Statements

By preparing now, businesses can ensure a smoother transition when the financial and non-financial aspects of climate change reporting become embedded within corporate reporting systems and processes.

In November 2021, the FRC published a factsheet to support preparers of financial statements with the impact of climate-related matters when preparing accounts under UK Generally Accepted Accounting Principles and Financial Reporting Standard 102 (FRS 102).

So how could the financial statements be impacted?

The first area of concern is Property, Plant and Equipment (PPE) - businesses should consider whether the Useful Economic Life (UEL) has changed because of climate-related decisions. For example, changing to greener assets could mean current PPE has a substantially reduced UEL, or advancing technology or legislation could see businesses have to move on from older PPE sooner than anticipated.

A change in UEL would be considered a change in accounting estimate rather than a change in accounting policy. This change should be applied to PPE and will impact the depreciation expense booked to the profit and loss each year.

Secondly, to encourage businesses to invest in green projects and activities, the Government has made various grants available.  If the business is unfamiliar with the treatment of such grants or is new to undertaking green projects, there is a risk that these will not be accounted for in line with FRS 102.  A key attribute to government grants is whether conditions are likely to be met, where it is unlikely to be met, some grants can become repayable. For example, a grant for a green project could result in an undisclosed liability if the business is unable to deliver its commitments. Businesses should therefore consider whether they can meet the criteria in determining whether to recognise income from such grants.

Another area to watch out for will be climate-related issues involving a high degree of future planning. Businesses may need to consider the impact government action, legislation or even social responsibility would have beyond the 12 months from the date of signing as required for the going concern basis.  Even if it is concluded that the business is a going concern, disclosure of material uncertainties over going concern must be made. Even when not considered a material uncertainty, reaching this conclusion could also require significant judgements to be disclosed. Be mindful that if this is not explicitly reported in financial statements, there is a risk of giving the impression that the impact of climate change on going concern might not have been appropriately or adequately considered. This is an aspect of financial reporting that requires careful drafting to manage expectations.

Businesses of all sizes should prepare to increase their reporting on climate-related matters now as it will take time to fully consider the impact on their financial statements going forward.