Materiality and Climate-related Disclosures: How to Apply IAS 1 and IFRS 18 Effectively

As climate-related risks become increasingly prominent in global business operations, the need for transparency in financial reporting has never been greater. The International Accounting Standards Board (IASB) has introduced near-final illustrative examples to help entities improve their reporting of uncertainties, particularly around climate-related issues. These examples highlight the importance of materiality judgments in ensuring users of financial statements understand the impact—or lack thereof—of strategic initiatives such as climate transition plans.

At Dawgen Global, we recognize that enhanced disclosures not only fulfill compliance obligations but also strengthen stakeholder trust and support informed decision-making. This article explores how businesses can apply IAS 1 Presentation of Financial Statements and IFRS 18 Presentation and Disclosure in Financial Statements to effectively disclose material information.

Understanding Materiality Judgments under IAS 1 and IFRS 18

Materiality lies at the heart of transparent financial reporting. Paragraph 31 of IAS 1 (and Paragraph 20 of IFRS 18) requires companies to provide additional disclosures when compliance with specific standards is insufficient for users to understand the entity’s financial position and performance.

Key Principle:
If omitting information could reasonably influence the economic decisions of primary users, the information is material and must be disclosed—even if the accounting standards do not explicitly mandate it.

Practical Application: Lessons from the IASB Example

The IASB’s example on materiality judgments presents two contrasting scenarios:

• Scenario 1: A manufacturer with a strategic climate transition plan faces significant exposure to transition risks. While the plan has no immediate impact on current financial statements, its long-term implications are substantial. Additional disclosure is required to avoid inconsistencies between financial statements and other corporate reports.

• Scenario 2: A service provider with minimal climate-related exposure and low greenhouse gas emissions determines that additional disclosures would not be material. No further information is provided in the financial statements.

Takeaway:
Materiality is not only quantitative—it is qualitative. Companies must consider:

• Strategic importance of the initiative.

• Industry context and external factors.

• Possible misinterpretation if disclosures are absent.

Best Practices for Companies

To comply with IAS 1 and IFRS 18 requirements:

1. Perform a Step-Back Review: Evaluate whether disclosures align with broader corporate reporting and avoid inconsistencies.

2. Assess Qualitative Factors: Consider strategic importance, regulatory environment, and market sensitivity.

3. Document Judgments: Keep internal documentation supporting why disclosures were added—or omitted.

4. Communicate Clearly: Use plain language to explain why certain risks have no immediate financial impact.

Why This Matters for Your Business

In today’s environment, regulators, investors, and other stakeholders expect clear, consistent, and comparable information about uncertainties. Proactively disclosing material information—even when standards do not explicitly require it—can enhance credibility and mitigate litigation or reputational risks.

Dawgen Global’s team of experts can help you:

• Determine materiality thresholds.

• Align disclosures with IFRS and ISSB requirements.

• Develop reporting frameworks that balance transparency with clarity.

Conclusion

The near-final IASB examples serve as a timely reminder: financial statements are not just a compliance tool—they are a communication platform. Effective disclosure of uncertainties under IAS 1 and IFRS 18 builds trust and demonstrates sound governance.

Next Step!