Editorial

This month's issue includes two articles covering the latest reports in the Flying Blind series. Readers will be aware that these reports, published by the think tank Carbon Tracker, assess the extent to which companies and their auditors disclose information about climate risk in their financial statements and audit reports. The assessments are based on detailed analyses of the reports of over one hundred companies that are considered to be the most carbon-polluting in the world. These companies are likely to be significantly affected by climate risk since they have committed to have net zero carbon emissions by 2050, which means that they will have to make significant changes to their businesses. Such changes are likely to affect accounting estimates, such as fixed asset lives, and estimates of the cash flows that these assets will generate in the future, which are used in impairment calculations. Future cash flow generation may also be affected by decreases in the price of a product (for example, oil prices) or by decreasing customer demand (for example, for petrol cars or flights). Impairment calculations are also affected by discount rates, and increasing risk is reflected in higher discount rates, which could lead to asset impairments. These points apply to both tangible and intangible assets, but other assets such as inventories, financial assets and deferred tax assets may also be at risk of impairment. Companies may also need to consider whether they need to create provisions for decommissioning costs or for their carbon mitigation strategies. Given how many different items in the financial statements could be affected by climate risk, the potential materiality of the items involved and the complexity of the factors involved in making estimates about the future, it would be expected that carbon-intensive companies would refer to them in their financial statements, and auditors include them as "key audit matters" in their reports.