Climate risk in the financial statements

Why does climate risk affect the financial statements?

IFRS has no climate standard, but its existing principles require companies to reflect all material information when they make estimates and judgements, and climate is increasingly material. Physical risks can damage assets and disrupt operations; transition risks change costs, prices and demand. Sustainability standards, and laws such as California SB 261, now require companies to explain these effects outside the accounts, and IFRS S1 requires the two to be connected, so inconsistencies are visible. See IFRS S1 and IFRS S2.

Which standards are most affected?

• IAS 36 impairment: carbon costs, demand changes and capital needs in cash flow forecasts; climate as an indicator of impairment.
• IAS 16 and IAS 38: shorter useful lives and lower residual values for assets that may be retired early. See climate and the useful lives of assets.
• IAS 37 provisions: obligations from levies, environmental laws, restoration and some commitments.
• IFRS 9: climate effects on borrowers' credit risk and on collateral values in expected credit losses. See climate risk in expected credit losses.
• IFRS 13 and IAS 12: fair values that market participants would adjust for climate, and future taxable profits supporting deferred tax assets.
• Going concern and inventories, for the most exposed businesses.

Climate risk in the financial statements: an impairment test

A cement company tests a plant, a cash-generating unit with a carrying amount of US$ 500 million. Without carbon costs, its value in use is 620 million. The company's transition plan, published in its sustainability report, assumes a carbon price of US$ 50 a tonne on the plant's emissions from next year, and the impairment test must use consistent assumptions. The present value of those carbon costs is 180 million.

Value in use falls to 440 million, below the carrying amount, so the company recognises an impairment loss of 60 million. It cannot add back the benefits of a carbon capture unit it plans but has not committed to, because IAS 36 excludes cash flows from future investment that improves an asset's performance. Each US$ 10 change in the carbon price moves value in use by about 36 million; at US$ 40, the impairment would be 24 million, so the company discloses the key assumption and its sensitivity. The plant's expected closure also moves from 20 to 10 years, so annual depreciation on the reduced carrying amount of 440 million is 44 million, against 22 million over the old life. See value in use and IAS 36 impairment. For scenario-weighted tests, discount rates and disclosures, see climate risk in impairment testing.

Do net zero commitments create provisions?

Usually not on their own. In April 2024, the IFRS Interpretations Committee concluded that a public commitment to reduce or offset emissions may create a constructive obligation, but a provision is recognised only for an obligation arising from a past event. The costs of cutting future emissions relate to future operations, so they are recognised when incurred. A commitment to offset emissions already made can give rise to a provision once those emissions occur. Emissions allowances that must be surrendered for emissions to date are provided for. See IAS 37 provisions and emissions allowances, and for a worked year-end, climate commitments and provisions.

What did the IASB's 2025 examples add?

On 28 November 2025, the IASB published six illustrative examples, as amendments to the examples accompanying IFRS 7, IFRS 18, IAS 1, IAS 8, IAS 36 and IAS 37, using climate-related uncertainties to show how existing requirements apply. They cover materiality judgements that may require disclosure even when no amounts change; the key assumptions in an impairment test, including future emission allowance prices; assumptions and estimation uncertainty more generally; credit risk; decommissioning and restoration provisions; and disaggregating information in the notes. They do not change any requirement, so they have no effective date, and companies are expected to consider them now. See IFRS 18 aggregation and disaggregation.

How does US GAAP deal with climate risk?

US GAAP also has no climate standard: the same questions arise under ASC 360 for impairment of long-lived assets, ASC 410 for asset retirement obligations, ASC 450 for contingencies and ASC 275 for risks and uncertainties. The SEC's 2010 interpretive guidance on climate change disclosure still applies, while its 2024 climate rule, which would have added financial statement notes on severe weather costs, never took effect. Note that US GAAP tests long-lived assets for recoverability on undiscounted cash flows first, so the same carbon assumptions can produce an impairment under IFRS but not under US GAAP. See IAS 36 vs US GAAP impairment.

What should preparers check?

Compare the assumptions in the accounts with the sustainability report, transition plan and investor presentations: carbon prices, asset retirement dates, capital spending and demand. Where they differ, explain why. Disclose significant judgements and sources of estimation uncertainty specifically, not in boilerplate, and give sensitivities where a reasonably possible change would matter. Auditors and regulators such as ESMA and the FRC look for exactly these links. See connected information.

This guide is general information. It is not tax or legal advice for your situation.