In March 2025, the UK's Financial Reporting Council (FRC) published Factsheet 8 to aid entities applying FRS 102 the Financial Reporting Standard for entities in the UK and Ireland in recognising, measuring and disclosing climate‑related matters in both financial and narrative reporting.

Financial reporting: embedding climate risks in core accounting

Although FRS 102 lacks explicit climate‑related provisions, preparers must factor climate‑related risks and opportunities – such as investments in low-carbon technologies or physical and regulatory impacts of climate change - into recognition, measurement and disclosure decisions.

Presentation and going concern

Presentation: if the standard disclosures fail to explain materially climate‑driven impacts such as environmental fines, or performance penalties, then additional explanations and notes must be provided to ensure a true and fair view.

Going concern: climate risk often extends beyond the typical 12‑month horizon and must be considered when assessing whether management reasonably expects the entity to continue operating. Significant climate‑related uncertainty or required judgement must be disclosed.

Judgements and estimation uncertainty

Climate issues can influence critical accounting estimates such as asset impairment or residual value and preparers must identify, justify and discuss key assumptions and estimation uncertainties.

Specific asset and liability categories

Financial instruments

Climate targets may alter interest rates or credit classifications. Climate‑driven credit losses or fluctuations in fair value (such as commodity price changes) require vigilant monitoring and disclosure, especially regarding valuation bases and risk exposures.

No tailored accounting exists for ‘green bonds’; they must be treated like any other debt instrument under existing sections.

Inventories

Climate-driven cost increases or falling demand such as for legacy vehicle spare parts can push inventories toward being impaired. This requires re-measurement at net realisable value and disclosure where estimation uncertainty is material.

Property, plant and equipment

New expenditures eg altering machinery for energy efficiency may be capitalised or expensed depending on criteria.
Useful lives and residual values may shift due to climate risks - for example, flood-prone properties or outdated fossil-fuel equipment - and these factors must prompt annual reassessments and potential impairments.

Intangible assets and goodwill

Changing consumer sentiment, legal environments, or obsolete technologies may shorten useful lives or reduce values of brands, patents, software, or goodwill. Accounting judgements on amortisation and revaluation must reflect these climate-induced changes.

R&D expenditure

Climate innovation often leads to investment in new technologies. While research must be expensed, development may be capitalised if criteria are met and both must be tracked consistently and disclosed.

Provisions and contingencies

New climate regulations may create obligations requiring provisions or contingent liability disclosures. Measurement uncertainties must be assessed, especially for decommissioning costs in greener regimes.

Government grants

Green incentives like tax credits or grants for sustainable projects should be examined to determine if they qualify under section 24 or fall under public benefit entity rules. Accounting policy choices: accrual or performance model apply as usual.

Share‑based payments and employee benefits

Climate‑linked performance targets (eg emissions reductions) attached to executive pay inflate complexity. Those targets must be measurable and verifiable to determine whether a liability must be recognised. Uncertain outcomes may defer recognition until reliably estimable.

Impairment

Asset values may be impaired due to climate-induced regulatory, market or physical changes. Recoverable amounts should consider how climate affects cash flow projections, growth rates, disposal proceeds and fair value assumptions.

Income tax

Climate may bias taxable profit forecasts, deferred tax recovery, and eligibility for green tax incentives or penalties. Some climate charges if not based on profits may fall outside income tax scope and instead be accounted for under provisions or grants.

Other instruments: carbon offsets and emissions trading

Purchases of carbon credits or offset projects may be expense, asset or liability depending on obligations and benefits. Emission allowances may be treated as inventory or intangible assets; entities must design and disclose their accounting policy clearly.

The factsheet stresses the coherence between financial statements and narrative disclosures ensuring climate themes in narrative reports align with financial metrics and vice versa.

Key narrative requirements in the UK (effective 6 April 2025)

Directors’ Report: required for non-micro entities; must include SECR (Streamlined Energy and Carbon Reporting) disclosures on emissions and energy usage where relevant. SECR disclosures are generally required of companies meeting the large size criteria (unless energy usage is less than 40,000 kWh per year).

Strategic Report: required for medium and large companies; climate-related risks should be presented alongside principal risks and uncertainties. Large companies must include a section 172 statement that reflects environmental and community impacts.

Non‑Financial & Sustainability Information (NFSI): Public Interest Entities (PIEs), AIM-listed firms, or entities with turnover > £500 m and > 500 employees must submit NFSI, including TCFD-aligned disclosures and environmental info.

Energy & Carbon Reports: for large LLPs – it’s mandated and must include SECR and climate disclosure if applicable thresholds are met.

Forward‑looking developments

The UK government has launched the development of UK Sustainability Reporting Standards (SRS), potentially adapting IFRS S1 and S2 into UK law via FCA rules or legislation. The UK government is now consulting on the exposure drafts of the UK versions of IFRS S1 and IFRS S2 – respectively called UK SRS S1 and UK SRS S2.

The consultation is open until 17 September 2025, alongside a consultation on the development of an oversight regime for assurance of sustainability-related financial disclosures.