How can accounting relate to climate change?

Anna Maria Rubi B. Diaz

There has been an increased public focus on the harmful effects of climate change, with practices and reforms continuously being developed and implemented globally to reduce its negative impact. Because of this, some industry players are taking steps to address climate change, such as utility companies focusing on renewable energy investment, financial institutions expanding their portfolios to include green bonds, and private entities investing in technologies to conserve resources.

Regulators have also been taking steps to address climate change. For instance, the Philippine Securities and Exchange Commission (SEC) issued Sustainability Reporting Guidelines for Publicly Listed Companies (PLCs) in 2019 to help PLCs better assess and manage their non-financial performance across the economic, environmental, social and governance (ESG) aspects of their organizations. Similarly, the International Financial Reporting Standards (IFRS) Foundation also established the International Sustainability Standards Board (ISSB) to develop sustainability reporting standards that will provide a high-quality, comprehensive baseline of ESG information.

It is to be expected that in the years to come, climate change will have an even more significant impact on the way entities do business. Because of the potential impact of climate change and the continuing drive to manage it, various entities are facing the challenge of adopting these new practices and reforms in anticipation of how they will eventually impact their financial statements.


Currently, there is no specific accounting standard or guidance in the Philippines that deals directly with climate change matters. However, entities are still expected by regulators and stakeholders to explain how climate change is considered in their financial statements in a way where its impact is material or significant from a qualitative perspective. They need to disclose how climate change may impact the significant assumptions, judgments and estimates used in preparing their financial statements. Entities also need to ensure that the information from the financial statements agrees with the information provided to the stakeholders and general public through publications and press releases.

Given these, we cite some accounting standards that entities may revisit in preparing their financial statement in consideration of the impact of climate change.


The Philippine Accounting Standard (PAS) 1, Presentation of Financial Statements, provides that an entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity, to cease trading or has no realistic alternative but to do so. When management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the entity is required to disclose those uncertainties.

Risks coming from climate change may be a source of material uncertainty to some entities due to its potential impact on their future business activities, such as bank financing restrictions. Accordingly, entities need to revisit the impact of climate change on their financial statements particularly on their judgment to continue as a going concern and related disclosures pertaining to material uncertainties.

Furthermore, entities will need to consider how natural resources issues that are necessary for their operations, such as waste management, water, and energy, will affect their ability to continue as a going concern.


According to PAS 2, Inventories, inventory shall be measured at the lower of cost and net realizable value. Given the developments brought by climate change, entities need to assess whether inventory has become less profitable or obsolete as the cost may not be recoverable if the inventory is damaged by climate disturbances, if it has become wholly or partially obsolete, or if selling prices have declined.


PAS 16, Property, Plant and Equipment discusses how entities should measure, recognize and disclose information on property plant and equipment. Changes in the economic and legal environment coming from the societal pressures and legislation may affect how entities measure, recognize and disclose information on property plant and equipment. This is due to the potential impacts on the useful life, residual value, designs, technology and decommissioning of property, plant and equipment.

Given the uncertainty, entities need to consider how the measurement and recognition principles in accounting for the entities’ transactions, events and conditions will be impacted by these changes and how disclosures can be enhanced to allow the users of financial statements to better understand the judgments made by entities on their property, plant and equipment.


PAS 36, Impairment of Assets requires an entity to assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity is required to estimate the recoverable amount of the asset. Action from governments and public awareness on climate change may drive impairment indicators.

For example, a government may require entities to focus on new products and technologies that will conserve resources, potentially resulting in a significant decline in the value of the entity’s existing assets. If the public has already been consciously investing in entities with climate change initiatives, investors may withdraw their support from entities who are not concerned with such initiatives. It can also result in adverse changes to the technological environment of an entity, which may result in the obsolescence of its assets. These may also affect forward-looking information, such as cash flow projections in estimating the recoverable amount of an entity’s assets.

Due to this, entities may need to consider how the impairment indicators will affect the measurement of their assets, including relevant disclosures on assumptions, judgments and estimates.


PAS 37, Provisions, Contingent Liabilities and Contingent Assets requires that provisions need to be recognized when: (1) an entity has a present obligation (legal or constructive) as a result of a past event; (2) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (3) a reliable estimate can be made of the obligation.

New legal requirements and laws, decommissioning and asset retirement obligations and legal claims in response to climate change may give rise to new obligations that may lead to a potential significant impact on the recognition and measurement of provisions. Due to the significant uncertainty, entities need to consider the adequacy of the disclosures in how they incorporate climate change risks in recognizing and measuring their provisions.


The items cited in the foregoing are based on general accounting considerations and are not inclusive of everything that entities should consider. Since each entity’s business, operations and situation are unique, each entity will need to apply significant judgment and analysis of relevant facts and circumstances to reasonably assess the impact of climate change.

As the global conversation between and among businesses, consumers and regulators grows increasingly dynamic, entities will need to proactively consider how the risks from climate change may affect not only their operations but also their financial statements. More importantly, they will also need to consider potential solutions to the climate change disruptions that are happening now and those that are emerging — before it’s too late.


This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Anna Maria Rubi B. Diaz is a senior director from the Financial Accounting Advisory Services (FAAS) service line of SGV & Co

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