Accounting for Future Generations. Does the IFRS Framework Sufficiently Encourage Energy Companies to Reflect on Climate Change in the Valuation of Their Production Assets, Taking into Account the New Initiative of the Task Force on Climate-Related Financial Disclosures? An Exploratory Qualitative Comparative Case Study Approach
Presented at 29th SASE Annual Meeting, Lyon.
35 Pages Posted: 5 Jul 2017 Last revised: 3 Oct 2018
Date Written: June 30, 2017
Since climate change affects all aspects of our economy, our society and our environment, it can be seen as the most significant challenge of current and future generations. In response to this challenge, we have witnessed changes in institutional pressures applying to corporate practices. An interesting relatively new development in this field is the Task force on Climate-related Financial Disclosures (TCFD). The TCFD aims to help identify the information needed by financial stakeholders to appropriately assess and price climate change related risks and opportunities. In its first Report (2016, 2017), the TCFD recommends that companies provide climate change related disclosures specifying the impact thereof on their financial performance through mainstream (i.e. public) financial filings.
In this paper, we look at the financial accounting standards as an institutional framework, and in particular pose the question to what extent this framework supports companies in truthfully disclosing how climate change impacts their operations and the value of their production assets. To test to what extent companies make disclosures in relation to climate change, we selected four energy companies and conducted a comparative case study analysis. Two of the selected companies produce non-renewable energy and the other two are in the business of renewable energy generation. In the case study approach, we followed the normative framework proposed by Evangelinos et al. (2015), supplemented with the TCFD’s recommendations, in order to examine in which way the selected companies include climate change issues in (1) their Balance Sheet, (2) their Profit and Loss Statement and/or (3) their Balance Sheet Notes (Annex). Our focus is on the valuation of production assets, more specifically, drilling platforms, windmill platforms, heavy equipment and transport means used to support the production, pipes and cables to transport the energy units produced. Additionally, we looked into the reasoning offered by the companies for the ways in which they valued their production assets and whether they applied impairment, and to what extent climate change played a role in their reasoning for valuation and for applying impairment or not. As we decided to examine the reasoning provided by companies for explaining their choices, we pursued a qualitative methodology of exploratory case study research. We assessed the case study companies’ financial statements, published in 2017.
The case studies showed that the application of the financial accounting standards is executed in a similar way by the non-renewable and renewable energy companies. Interesting findings were: (i) in all four cases, potential future changes (caused by climate change) concerning the valuation of the production assets are not (yet) accounted for in their Balance Sheet Notes (Annex). This is remarkable because climate change is likely to have an effect on the future value of the production assets employed in the two types of industries, inter alia caused by the development that renewable energy demand increases at the expense of non-renewable energy demand (ii) the case studies reveal that the current financial reporting system does not facilitate renewable energy companies to provide financial stakeholders with meaningful and quantitative insights in expected increases of their future cash inflows and their financial and innovation potential. This impedes financiers and investors in accurately and meaningfully assessing the value of a renewable energy company’s business compared with a non-renewable company’s business.
Keywords: Accounting Policies, Valuation Production Assets, Climate Change, Stewardship, Task force on Climate-related Financial Disclosures.
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