Climate change considerations in Financial Reporting Standards

Understanding these considerations is crucial for businesses to maintain accurate and compliant financial reporting while adapting to climate-related challenges. 

Key standards and their climate-related implications 

TFRS 2: Inventory 

Climate-related issues may lead to inventory obsolescence, increased production costs for finished goods, or businesses needing to adjust selling prices. Key considerations include: 

• Inventory valuation: Items should be measured at net realisable value, using reliable and current market evidence. This is particularly important for products that may be affected by changing environmental regulations or consumer preferences. 
• Regulatory compliance: New environmental regulations may require significant business adaptations, especially for products with high carbon footprints. Companies need to factor in potential compliance costs and market viability. 
• Production changes: Many organisations are shifting towards low-carbon raw materials and processes, which may affect both production costs and inventory valuation. This transition often requires a careful cost-benefit analysis. 

TFRS 16: Property, Plant and Equipment; and TFRS 38: Intangible Assets 

Climate-related considerations include: 

• Strategic investments: Expenditures for modifying business activities and R&D must be carefully evaluated for capitalisation criteria, considering their long-term environmental impact.  
• Cost recognition: Clear policies for recognising and capitalising climate-related modifications to assets ensure proper accounting treatment. 
• Development costs: Detailed disclosure of development expenditures helps stakeholders understand the company’s investment in sustainable technologies. 
• The asset review process: Regular reviews of residual values and useful lives should consider climate factors that might accelerate obsolescence. 
• Reporting impact: Current and future reporting periods may be affected by changing climate regulations and market conditions. 
• Asset lifecycle: Disclosure of expected useful lives must reflect potential climate-related effects on asset utilisation. 
• Asset environmental compliance: Evaluation of equipment and process certifications can have an impact on asset valuation, including: 
  • Capitalisation of environmental compliance costs 
  • Assessment of the effect of carbon emission standards on the useful lives of assets 
  • Recognition of certification costs that add future economic value 
  • Consideration of potential asset impairment if equipment fails to meet new environmental standards

TFRS 36: Impairment of Assets 

Key requirements include: 

• Recoverable amount analyses: Regular estimations of recoverable amounts must factor in climate-related risks and opportunities. 
• Impairment indicators: Assessment should include climate-related triggers, such as regulatory changes or market shifts. 
• Evaluations of external factors: Environmental changes and their potential impact on asset values need continuous monitoring. 
• Cash flow projections: Future cash flow estimates should incorporate climate-related costs and benefits. 
• Impairment documentation and assumptions: Documentation requirements for climate-related impairment decisions must include: 
  • Key assumptions used in calculating recoverable amounts, particularly those affected by climate factors 
  • Analysis of material climate events triggering impairment testing  
  • Supporting evidence for significant judgments made about future climate impacts  
  • A sensitivity analysis of climate-related assumptions that could materially affect impairment calculations 

TFRS 37: Provisions, Contingent Liabilities, and Contingent Assets; and TFRIC 21: Levies 

Climate-related impacts on financial statements include: 

• Liability recognition: Clear criteria for recognising climate-related liabilities ensure complete financial reporting. 
• Government compliance: Proper accounting for climate-related government levies and penalties maintains regulatory compliance. 
• Environmental requirements: Recognition of environmental remediation obligations reflects long-term sustainability commitments. 
• Contract review: Assessment of potentially onerous contracts due to climate regulation changes protects against future losses. 
• Provision documentation and disclosure: Financial statements must include: 
  • Quantifiable climate-related provisions with a clear basis for measurement 
  • Key assumptions used in estimating climaterelated obligations 
  • Material uncertainties in timing or amounts of climate-related provisions 
  • The nature and timeframe of anticipated climate-related obligations 
  • A sensitivity analysis of significant climaterelated estimates 
  • Cross-references between provisions and related climate risk disclosures in notes 

Looking ahead 

The landscape of climate-related financial reporting is rapidly evolving. Organisations should actively monitor the following: 

• Thailand’s upcoming Climate Change Act and related regulations, which may affect financial reporting requirements 
• New and updated Thai Financial Reporting Standards that may introduce additional climaterelated reporting obligations 
• International Sustainability Standards Board (ISSB) developments and their potential adoption in Thailand 
• Updates to carbon pricing mechanisms and their accounting implications 

Staying informed of these developments will be crucial for maintaining compliant and effective financial reporting practices. Organisations are encouraged to work closely with their professional advisors to prepare for and implement any new requirements as they emerge. 

Conclusion 

Climate change continues to shape the business landscape, so organisations must proactively integrate these considerations into their financial reporting practices. The proper application of these standards ensures transparent and accurate financial statements that reflect climate-related risks and opportunities. Companies should regularly review and update their reporting practices to comply with evolving climate-related regulations and stakeholder expectations. 

For organisations across all sectors, it is particularly important to maintain detailed documentation of climate-related assumptions and estimates used in financial reporting. Regular reassessment of these factors will help ensure compliance with reporting standards while providing stakeholders with reliable information for decision-making. 

References (in Thai):  

• TFAC Article Issue 112, November 2024. Retrieved from Thailand Federation of Accounting Professions.