Climate risk in financial reporting: when business conditions change, accounting assumptions should follow

For many entities, the practical question is not whether climate risk exists in general, but whether recent events or changing conditions have affected the assumptions used in preparing the financial statements. 

A climate-related event may first appear as an operational issue, such as raw material shortages, higher energy costs, delayed deliveries, lower production output or increased insurance premiums. If these issues affect expected selling prices, future cash flows, customer collections or legal obligations, they may also affect accounting areas such as inventory valuation, impairment, provisions, expected credit losses, going concern assessments and disclosures. 

From business signals to accounting judgement 

The accounting impact will differ by business. For an agricultural or food-related entity, changes in crop yields, raw material quality or selling prices may affect inventory valuation. For a manufacturer, water shortages, energy costs or disrupted supply chains may affect production capacity and margins. For a business with significant assets in higher-risk areas, those conditions may indicate impairment. 

These matters do not automatically result in an accounting adjustment, but they should prompt management to test whether existing assumptions remain supportable. 

For example, forecasts used in an impairment test may still assume normal production levels even though the business is experiencing repeated disruption or rising costs. In that case, the forecasts may need to be updated. Slower collections from customers in affected sectors may also require credit risk assumptions to be reconsidered. More broadly, if management reports indicate cost pressure or operational disruption, the same information should be reflected in the financial reporting process. 

Key financial reporting areas to revisit 

Climate-related events may affect several financial reporting areas: 

• Inventory – whether inventories remain recoverable when input costs rise, quality declines or selling prices change; 
• Impairment of assets – whether lower output, reduced demand or disrupted operations indicate that assets may not be recoverable; 
• Provisions and contingencies – whether contractual, restoration, penalty or other obligations have arisen; 
• Expected credit losses – whether customers or sectors affected by climate conditions have higher collection risk; 
• Going concern – whether disruption affects cash flow forecasts, funding, covenant compliance or available liquidity; and 
• Disclosures – whether users need additional information to understand material uncertainties, key assumptions and significant judgements. 

The purpose is not to create a separate “climate accounting” exercise. Rather, management should consider whether climate-related factors have changed the business assumptions already used in financial reporting. 

The challenge is often data and coordination 

One practical difficulty is that climate-related impacts may not be clearly visible in the accounting records. Additional costs may sit within ordinary account captions such as utilities, raw materials, freight, repairs, insurance or subcontracting costs, making it difficult to separate normal cost movements from the effects of unusual weather conditions or supply-chain disruption. Useful information may also sit outside the finance function, including operations, procurement, sales, legal, treasury, risk management or sustainability teams. 

Management should therefore capture relevant data through cost centres, project codes, supplier analysis or operational dashboards, and bring those inputs together before finalising significant accounting judgements. Better data and cross-functional input can support better decisions, stronger estimates and clearer evidence for auditors. 

Closing thought 

Climate risk affects financial reporting when it changes the economics of the business. A high-quality financial reporting process should therefore connect business reality with accounting assumptions. When costs, operations, cash flows or risks change, related estimates and disclosures should be reassessed. 

In an uncertain environment, reliable financial statements are not produced by simply carrying forward last year’s assumptions. They depend on checking whether those assumptions still reflect the business today. 

Reference (in Thai):  

• TFAC Newsletter Issue 119, July–September 2026, article on “Super El Niño: Climate risk that accounting professionals should look beyond the numbers.” Retrieved from The Federation of Accounting Professions.