ISCA Issues Guidance on how Businesses and Auditors can Address Impact of Climate-Related Risks in Financial Statements

Amid the sustainability push, companies are increasingly expected to disclose information about climate-related matters.  Aimed at enhancing financial reporting quality, this guidance addresses the information gap in climate-change reporting and the auditing of such information in Singapore.  This will facilitate the incorporation of climate-related risks in the preparation and audit of financial statements of Singapore companies.

Via an illustrative example of a hypothetical transportation company,[1] the guidance demonstrates how climate-related risks can impact the application of financial reporting and auditing standards in Singapore. The example illustrates how the company’s financial statements can better reflect the effects of its efforts and commitments in transitioning to cleaner energy vehicles and greening its buildings, in alignment with the targets of the Singapore Green Plan 2030.

Current state of climate-risk reporting

Climate-related risks can have a material impact on a company’s business model, cash flow, financial position and financial performance. Thus, a company’s financial statements is a key source of information for stakeholders to understand the financial impact of climate-related risks on the company. The financial statements also enable stakeholders to assess how the company is managing risks and their impact on the company’s prospects.

However, a 2021 study[2]  found that:

• Companies were not incorporating material climate-related matters into their financial statements, with most climate-related assumptions and estimates not reported
• There was little evidence that auditors considered the effects of material climate-related financial risks or companies’ announced climate strategies
• Most companies did not tell a consistent story across their reporting and auditors rarely commented on discrepancies

ISCA issued the guidance to raise awareness and facilitate the incorporation of climate-related risks in the preparation and audit of financial statements. It highlights how preparers can reflect climate-related risks in financial statements and comply with financial reporting standards. It also provides guidance on what auditors need to consider to comply with auditing standards and evaluate whether the financial statements have appropriately reflected climate-related risks.

Climate-related risk considerations for preparers and auditors of financial statements

When applying the financial reporting standards, preparers of financial statements should consider:

• How climate-related matters can have a material effect on the financial statements, including the adequacy of disclosures in the financial statements
• The financial impact of climate-related commitments that have been publicly announced
• Consistency between information communicated in the financial statements and information communicated to stakeholders in other documents, such as press releases, management commentaries and sustainability reports.

Auditors should consider

• whether management’s assessment of climate-related risks in financial reporting are consistent with those used in sustainability reporting.
• the implications of climate-related risks when obtaining an understanding of the entity and its environment
• how climate-related risks affect the entity’s business model
• whether misstatement or omission of disclosures relating to climate-related risks could be material
• how their audit procedures can be designed to address climate-related risks.

Mr Reinhard Klemmer, Co-Chair of ISCA Auditing and Assurance Standards Committee-Financial Reporting Committee (AASC-FRC) ESG Working Group and Partner at KPMG Singapore, said: “The focus of stakeholders is shifting more towards climate-related issues. Preparers of financial statements as well as their auditors should consider the change in order for the financial statements to remain useful and relevant. It is timely that ISCA is launching the guidance to support preparers and practitioners on that journey.”

Mr Hans Koopmans, Co-Chair of ISCA AASC-FRC ESG Working Group and Partner at PwC Singapore, shared "Risk assessment is an important part of audit. Auditors should not forget about climate-related risks when assessing the significance of risks which could impact the financial statements. The guidance is a good reminder for auditors on what to consider in their audits when it comes to climate-related risks. I believe auditors will find the guidance useful."

The technical guidance can be downloaded here.

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For more information, please contact:
Lin Daoyi
Manager, Communications
Tel: 9850 8979
Email: daoyi.lin@isca.org.sg

Betsy Tan
Head, Communications
Tel: 9641 6920
Email: betsy.tan@isca.org.sg

About the Institute of Singapore Chartered Accountants
The Institute of Singapore Chartered Accountants (ISCA) is the national accountancy body of Singapore. ISCA’s vision is to be a world-class accountancy body of trusted professionals, contributing towards an innovative and sustainable economy. There are over 33,000 ISCA members making their stride in businesses across industries in Singapore and around the world.

Established in 1963, ISCA is an advocate of the interests of the profession. Complementing its global mindset with Asian insights, ISCA leverages its regional expertise, knowledge, and networks with diverse stakeholders to contribute towards the advancement of the accountancy profession.  

ISCA is the Designated Entity to confer the Chartered Accountant of Singapore – CA (Singapore) – designation.

ISCA is a member of Chartered Accountants Worldwide, a global family that brings together the members of leading institutes to create a community of over 1.8 million Chartered Accountants and students in more than 190 countries.

For more information, visit www.isca.org.sg.