Companies' Reporting of Climate Risks and Accounting Policies and Estimates

This article discusses the reduction in overall disclosures of climate risks by companies and the importance of reporting on environmental risks. It also analyzes the exposure draft on accounting policies and estimates and the comments made by the public. The Australian Securities and Investments Commission (ASIC) has urged companies to adopt a proactive approach to combat emerging risks, including climate risks. The article also highlights the importance of distinguishing between accounting estimates and accounting policies.

Audit Assignment

1
By student name
Professor
University
Date: 20th Sep 2018.
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Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................6
References........................................................................................................................................4
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Question 1
Introduction
In the given part, the article titled “'Worrying': Companies' reporting of climate risks goes
'backwards' which refers to the fact that many companies have stopped disclosing the overall
impact of the environmental risks that is caused, and that is material and that impacts the
company. As per the article the overall disclosures have reduced a lot since 2011, and most of
the disclosures are very fragmented and not clear.
Analysis
The Australian Securities and Investments Commission, have examined the annual reports of 60
companies and of that 17 percent of the total companies have disclosed the climate change as
climate risk. Also in case of 200 companies the overall climate change was ‘very limited’. The
ASIC has examined the annual report of 1500 ASX- Limited Companies, for the past six years
and that can be seen that the climate risk and climate-change related controls have reduced from
22 percent in 2011 to 14 percent. This was due to the existence and then the repeal of the Gillard-
era emissions trading scheme legislation. In the following cases, the overall climate disclosures
are found to be very general and there is very limited use to the investors. The majorly 100
companies have provided the information that was very fragmented and not clear (Ruth, 2018).
The ASIC urged the companies to adopt a proactive approach to combat the emerging risks,
including the climate risks. There is a lot of pressure from the investors to make a disclosure on
how the changes might impact a business. This ramped up the guidelines that were issued by the
G20 taskforce, known as TCFD, that was anchored on the fact that the Paris agreement had
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pledged to keep the global warming below 2 degrees. The ASIC also stated in the fact, that
companies that represent Australian and New Zealand investors, have more than $2 trillion funds
for management, should take risk disclosure seriously as that might affect the capital credibility
of the company. The overall reporting of the company had gone “backwards”. The main point
that is being highlighted that many companies should highlight the climate risk as rigorously as
any other financial risk that the company is facing. The ASIC has also stated that company
directors should take serious warnings else legal actions would be initiated against them. It is
very important that climate reporting should be taken seriously and there should not be any
loophole in that. If the company fails there is very difficult for the investors to form an opinion
on the company.
Reporting on climate risk is an important point that has been highlighted by the accounting
standards and accounting regulations. The AASB has set certain standards that the company
needs to meet, and that is a material risk that the company can face. It is important that if the
companies cross these materiality level, they need to make it clear in their audit report and steps
that they have taken on their part to reduce the environmental risk caused. Environmental risk is
a very crucial matter as a lot of activities of these industries are causing a lot of harm to the
environment. Environmental risk should be reduced and the companies should take the necessary
stand with regards to that. The investors need to understand that environmental risks and as
important as financial risks, and thus their disclosures should be there. There are chances that
this environmental risk might cause huge loss to the investors. The investors are very important
people as they are putting their money in the company and thus it is important that they should
get the required information that they need. In case the company does not give proper disclosures
then there can be penalty and the management can be held liable. It is also against the corporate
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governance policies of the company; corporate governance helps the management in framing
rules and regulations that helps in balancing the interests of all the stakeholders that are related to
the company.
Conclusion
Thus, based on the overall analysis it can be said that companies need to take relevant steps that
can help them in managing the environmental risks and providing relevant disclosures with
respect to that. The ASIC have stated principle and companies needs to abide by that, else there
can be issues with relation to the investors and other related parties.
Question 2
Introduction
There are many exposure drafts that are floating every now and then and these are opened for the
public to comment and state their opinion on that draft agreement. In the given case the draft
exposure with relation to IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors. The main aim of this exposure draft is to make a differentiation between the accounting
estimates and accounting policies. It is an important matter because change in the accounting
estimates can affect the profit and loss account of the company and accounting policies do not
impact the them accordingly (Alexander, 2016).
Analysis
Accounting Policies are the estimates that helps the company in managing their financial
statements and helps in preparation of the same. It includes measure and measurement
procedures that helps in disclosure of relevant facts for the company (Ghofiqi, 2018).
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Accounting estimate is an appropriation of the account that needs to be debited and credited and
affects the financials of the company in some way or the other. They are based on judgement and
knowledge that is derived from relevant sources. There are many changes that are happening in
the accounting estimates now and then. There is a lot of difference between the accounting
estimates and accounting policies, but it often becomes difficult for the management to
understand what is the accounting estimate and what is the accounting policies (Belton, 2017). If
they are not able to understand that the management will not be able to function properly and not
able to prepare their financial statements and there is a lot of judgement involved in that.
Accounting estimates are very important they affect the accounts directly and accounting policies
affects the formulation of the rules and regulations that governs the preparation of the financial
statements. General public are allowed to make a comment on these exposure drafts and the
same has been provided in this case-
Nandi Uchenna, who is from Nigeria has stated that he does not agree to the amendments made
in the estimates. He states the paragraph 32A and 32B are inconsistent. He proposes that
selecting FIFO or weighted average method can be considered as a method of accounting
estimates.
Segun Adebiyi, has stated that he agrees to the amendments made, expect one where he feels that
IAS 2 should form a basis of Accounting Policy, as the inventories are brought in the store and
treated accordingly (Abdullah & Said, 2017).
Mr. Hans Hoogervorst, chairman of the IASB IFRS foundation has stated they have agreed to the
relevant amendments that have been made with respect to the accounting standards and
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accounting policies. It was important that formulas are farmed with respect to the IAS 8 with
relation to specific rule for treatment of interchangeable inventories (Coate & Mitschow, 2017).
The Australian Council of Auditors have stated in their comment sections that they have stated
they are distinguishing the efforts made by the council between the accounting estimates and
accounting policies that are made by the company.
Conclusion
Based on the overall analysis and the relevant comments that are made by the parties is correct
and it is important for the investors and the management needs to understand the difference
between the accounting estimates and accounting policies.
The link to the exposure draft is given below :
https://www.ifrs.org/projects/work-plan/accounting-policies-and-accounting-estimates/comment-
letters-projects/exposure-draft-accounting-policies-and-accounting-estimates/#consultation
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References
Abdullah, W., & Said, R. (2017). Religious, Educational Background and Corporate Crime Tolerance by
Accounting Professionals.
State-of-the-Art Theories and Empirical Evidence, 129-149.
Alexander, F. (2016). The Changing Face of Accountability.
The Journal of Higher Education, 71(4), 411-
431.
Belton, P. (2017).
Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd.
Coate, C., & Mitschow, M. (2017).
Luca Pacioli and the Role of Accounting and Business: Early Lessons in
Social Responsibility.
Ghofiqi, M. (2018). FORMATION OF VIEWS AND INTERESTS TO THE ACCOUNTANTS PROFESSION IN
MASTER OF ACCOUNTING STUDENTS OF JEMBER UNIVERSITY FORCE OF 2016 USING
STRUCTURATION THEORY ANALYSIS.
THE 3RD INTERNATIONAL CONFERENCE ON ECONOMICS,
BUSINESS, AND ACCOUNTING STUDIES.
Ruth, W. (2018, September 20). 'Worrying': Companies' reporting of climate risks goes 'backwards'.
The
Sydney Morning hearld.
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