How climate risks are reflected in current financial statements

How climate risks are reflected in current financial statements

U.S. GAAP requires management to disclose any risks whose effect might be material for the financial statements. While GAAP doesn’t refer specifically to climate-related risks, these are understood to be included in the risk disclosure requirements. Management responsibilities Specific to climate issues, these risks typically consist of either:

“What we’re trying to achieve with this resource is foster a dialogue on climate-related measures and disclosures among all the stakeholders in the financial reporting ecosystem,” said Dennis McGowan, CPA, vice president, Professional Practice for the CAQ. The Center for Audit Quality (CAQ), which is affiliated with the AICPA, has published a resource that describes management and auditors’ responsibilities related to climate-related risk reporting.

“The goal is to provide investors and other stakeholders with a foundational understanding of how the key elements of the current accounting and auditing requirements in the U.S. today are applied by company management and auditors with respect to climate-related risks and the audited financial statements.” Although it’s impossible to know what new regulations and standards might emerge, users of financial statements need to understand what climate risk information is currently required to be included in company reporting.

“Climate-related risks, like any other risk, will vary from company to company,” McGowan said. “The time horizon and plan for implementing climate-related commitments plays a role in whether or not they’re having a material impact on a company’s financial statements, which we’re trying to demonstrate with the examples,” McGowan said. Auditor responsibilities The timing of low-carbon risks may vary depending on the company and the commitments it is making. For instance, the CAQ’s resource shows an example of a company that has made a net-zero carbon promise by 2030 that has a greater climate-related impact on its current financial statements than another example where the deadline for a similar commitment is 2050.

Risks of a transition to a low-carbon economy, such as regulatory risk or the reduction of the useful life of an asset. Physical risks, such as a factory located in a low-lying coastal area that’s at risk of flooding; or

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