Current Development in Accounting Thought

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Current Development in Accounting Thought

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Solution to Question 1:
Introduction
This section of the report is developed for undertaking an analysis of a selected article in
relation to the accounting news that is having an impact on the financial reporting system of
business corporations. The overall analysis is done for providing insights into the key accounting
issues discussed within the selected article with the use of relevant theoretical framework. The
article selected for the analysis purpose is ‘Climate Risk Disclosure can no longer be avoided’
published in Australian Financial Review (AFR) in the year 2019.
Description of Major Accounting Issues in Article
The selected news article has presented discussion about the need of including climate
risks disclosures within the financial reports. As per the article, climate risk is not only a
sustainability issue but it also requires a disclosure within the financial reports of it meets the
definition of ‘materiality’. The Australian Accounting Standards Board (AASB) and the
Auditing and Assurance Standards Board (AUASB) are jointly involved in developing the best
practices in application of mandatory definition of materiality in relation to the climate risks. The
main objective of the proposed changes it to limit the ability of the companies to avid voluntary
disclosure regarding their climate risk that could have a significant impact on their operational
activities (Poljak, 2019).
This type of risk is difficult to quantity in terms of their financial impact but need to be
disclosed within the financial reports because of its impact on the expected returns of an
investor. The climate risk such as occurrence of a natural disaster, changes in technology,
markets, rules and regulations can have a large impact on the future financial performance of a
company. Also, in the case when the business operations are not exposed to any risk and as such
there is no impact on the materiality of the financial information disclosed then it is necessary or
disclosing the assumptions that are being used in measuring the impact of the climate risk son
the future performance of an entity. These types of disclosures would have a large impact on
enriching the quality of financial information in terms of its fair value, impairments, provisions
for restoration and estimates and judgments used (Ellison, 2019).
The changes are being made for protecting the interests of the investors after they have
stated regarding the impact of climate-related risks on the investment decisions. The inability of
the financial reports to address this risk is having a negative impact on their mind regarding the
accountability and integrity of the business operations. The issue has become largely important
after the emergence of legal claim against Commonwealth Bank of Australia (CBA) by
Environmental Justice Australia. The claim is on the basis of inadequate disclosure by the bank
in relation to its climate risk that had a significant material impact on its financial performance.
As such, it ahs breached the Corporations Act 2001 by not providing a true and fair view of its
financial position to its customers. CBA in response has included a detailed discussion related to

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its climate risk within its annual report for withdrawal of the case. As stated in the given article,
the AASB and AUASB have jointly developed a bulletin for guiding the preparers and directors
regarding the ways of providing disclosures regarding their climate-related risks. The Bulletin,
that is, Assessing financial statements materiality using AASB practice statement 2, has
presented the materiality definition of climate-related risks. The statement has required that
businesses cannot only consider the climate risks only an issue related to their CSR (Corporate
Social Responsibility) but as a significant risk impacting the materiality of their financial
statements. According to this standard, the businesses are required to provide sufficient
information bout the clime risks for determining whether could have an impact on its future
performance and thus guiding the investor’s decisions (Poljak, 2019).
As stated in the given article, the Australian bodies are regarded as having the
primary regulator bodies to link the mandatory definition of materiality on the basis of
international standards and its subsequent interpretations as per the practice statement 2. The
statement has been developed mainly for providing assistance to the developers about applying
materiality judgments and ensuring that the disclosure of climate related information would have
an impact on the decisions of primary users. In addition to this, the international guidelines has
also been released by the Australian Securities Exchange (ASX) governance council as per the
Taskforce Climate related financial disclosures (TCFD) for guiding the listed companies on ASX
in relation to climate related risks. The Reserve Bank of Australia (RBA) has also stated the
Australian companies to disclose the associated economic and financial risks associated with
their climate risks Climate Disclosure Standards Board, 2018).
Linkage of major issues in article to the Accounting Topics or Theories
The selected article has presented the major issue of need of including the information
about climate related risks in the annual reports of Australian companies for protecting the
interests of investors. The changes within the financial reporting system of companies by
including the disclosures about the climate related risks are intended to improve the governance,
risk management and financial reporting. As featured in the Australian Financial Review, The
AASB and AuASB have issued a joint statement regarding the implementation of climate-related
risks within the financial statements. The main aim of developing such statements is to improve
the quality of financial reporting by ensuring that all type of materialistic information is
disclosed within the annual reports of a corporation. The inclusion of climate related risks will
help the businesses to effectively comply with the conceptual accounting framework principles.
The conceptual accounting framework has presented qualitative principles that need to be
followed by ASX listed entities to disclose all required and materialistic financial information to
the end-users (Zabeti, 2019).
The conceptual accounting framework has provided the following qualitative principle
that need to be followed by developers for ensuring that they provide quality financial
information within the financial reports. The two major fundamental qualitative principles

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include relevancy and faithful presentation while the remaining four enhancing theoretical
principles provided by the conceptual framework are understandability, comparability,
verifiability and timeliness. The implementation of all these qualitative characteristics in the
financial reports is required by the companies as per the international standards of IASB. The
compliance of all these qualitative principles is required to meet the objective of general purpose
financial reporting that is guiding the economic decisions of the investors by providing them
accurate financial information. In this context, the inclusion of climate-related risk would
enhance the quality and integrity within the annual reports by disclosing the impact that such risk
could have on their future performance. This is because climate-related risk could have an
impact on the asset impairment, change in the useful life on asset, impacting the fair valuation of
assets, future provisions and contingent liabilities due to fines. Therefore, it is necessary to
include the information about the risks related to climate for providing true and fair view of the
financial position of a firm to its investors (Uyeda, 2010, p.491).
The narrative is required mainly in the operating and financial review of the company so
that investors can gain an insight into the climate related risk that is relevant to estimating
accounting materiality assessments. In context of the qualitative principles provided by the
conceptual accounting framework, the inclusion of such type of information would improve the
decision usefulness of the annual reports. The development of materiality definition in context o
climate related risks is designed for guiding the application of professional judgment for
determining the acceptable levels of information disclosure within the annual reports of business
entities (Professional, 2017, pp.1-13). Thus, the inclusion of subject of materiality within the
climate risk reporting would facilitate the investors to understand the impact of such risks on the
future performance of firms. The information provided in reference to the climate risks and
opportunities could impact the investment decisions of the current and potential investors. As
such, it would help in achieving the major objective of developing the financial reports by
business entities as per the IASB standards. Also, in accordance with the qualitative principles of
conceptual accounting framework the inclusion of such information would help in improving the
relevancy and faithfulness of the information provided within the annual report. Also, the
adoption of international guidelines as per the TCFD framework and joint statement of the
AASB and AuASB would help in enhancing the understandability and verifiability of the
information disclosed in relation to climate related risks (Climate Disclosure Standards Board,
2018).
Conclusion
The overall discussion ahs inferred that there is increasing pressure on companies for
disclosing their financial risk from climate changes and stating the impact of the issue on
businesses. The inclusion of information related to climate risk is required to provide true and
fair view of the expected performance of a firm to the end-users such as investors or creditors.