Business models and climate-risk disclosure

Accounting Ahead | Original study resource | accountingahead.com.au

Business models and climate-risk

disclosure

MODULE 1 | 1.5.1 | STUDENT COMPANION

Two forces are reshaping the auditor's world. Business models keep evolving, and each new model

moves the places where a material misstatement can hide. Climate change creates physical and transition

risks, disclosure of them is becoming mandatory, and they reach straight into the financial statements

through impairment, useful lives, provisions, fair values, credit losses and going concern.

Why business models matter to the auditor

A business model describes how an organisation creates value, delivers it to customers and captures some of it

as revenue and profit. Models keep changing as technology changes how organisations transact, and most

successful businesses borrow pieces of existing models. Innovations include new forms of outsourcing and

offshoring, free basic services with paid upgrades, crowdsourcing, subscriptions, online marketplaces and

cloud-based services, while mergers and acquisitions can turn a manufacturer into a business that earns most of

its profit from software. Understanding how the entity makes its money is a requirement of the risk assessment

standard, because that is where the risks of material misstatement start.

Business models and the risks they create

Business model Where a material misstatement tends to hide

Subscription Cash arrives in advance: revenue must be deferred until the service is delivered, and

management may want to capitalise the cost of winning customers

Cloud-based, or relying on cloud

providers

Data is processed on someone else's systems, so the auditor needs evidence about controls

the entity doesn't run itself

Outsourcing and offshoring Reliance on controls at third parties, plus foreign currency and transfer pricing issues

Free basic service, paid upgrades How revenue and costs are allocated between paying and non-paying customers

Online marketplace Principal or agent: is it selling goods itself, or arranging for someone else to sell them?

If you don't understand how a business makes money, you can't judge where its numbers might be wrong

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Principal or agent? Lantern and Loom (imagined)

Signs of control include being primarily responsible for delivering the goods, carrying the inventory risk and

setting the price. Reporting $100 when it is only an agent would make revenue more than six times too high, with

no change in profit: very material to investors who focus on revenue growth.

Customer pays $100 for a lamp made and

shipped by an outside brand

If Lantern and Loom is the

principal

If it is an agent

Does it control the lamp before the customer gets it? Yes No: it arranges the sale

Revenue reported $100 $15 (its fee)

Cost of sales $85 Nil

Profit $15 $15

Two kinds of climate-related risk

Physical risks

From the changing climate itself

Transition risks

From the shift to a lower-emissions economy

Acute

Sudden events: floods, bushfires, cyclones

Chronic

Long-term shifts: rising temperatures, changing rainfall, rising

sea levels

Policy and law

New laws and carbon pricing

Technology

Changes in technology

Market

Changes in what customers and investors want

Reputation

Damage to reputation

From voluntary to mandatory disclosure

When What happened

2017 A task force set up by the international Financial Stability Board published a framework for voluntary

climate disclosures, built around governance, strategy, risk management, and metrics and targets

2023 The International Sustainability Standards Board built on that framework in its climate standard, IFRS

S2

2025 on Australia's own version (AASB S2) became mandatory for the largest companies for financial years

starting on or after 1 January 2025, with smaller entities phasing in over the following years

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Where climate reaches the financial statements

Climate-related risks

Physical and transition

Impairment

Are assets still worth their carrying

amount?

Provisions

Size and timing, e.g. rehabilitating a site

Useful lives

How fast assets are depreciated

Credit losses

Loans to carbon-intensive borrowers

Fair values

Prices that reflect climate risk

Going concern

Can the business carry on?

The financial statement auditor considers climate when:

Assessing the risks of material

misstatement

Auditing management's

accounting estimates Evaluating going concern Reading the other information for

consistency

Case note: the Eraring closure date

On 17 February 2022 Origin Energy told the market operator (AEMO) that its Eraring power station in New South

Wales (2,880 MW, the largest coal-fired power station in Australia) could close as early as August 2025, seven

years earlier than its previous plan of 2032. Origin pointed to the rapid growth of cheaper renewable energy,

which was making coal plants less economic to run. Under an agreement with the New South Wales government

signed in May 2024, the closure moved to August 2027, and on 20 January 2026 Origin extended it again, to

April 2029, the latest date that agreement allows. Each time the expected date moves, the estimates below

move with it, so a closure decision changes the numbers as soon as it is made, not when the plant stops.

What an auditor would ask Effect of an earlier closure (a later date reverses each effect)

Depreciation A shorter useful life means faster depreciation of the plant

Rehabilitation provision The work arrives sooner, so the present value of the provision rises

Recoverable amount Must be reassessed, which may mean impairment

Contracts Coal supply and staff contracts may contain onerous terms or redundancy costs

Source: Origin Energy announcements to the ASX (17 February 2022; 23 May 2024; 20 January 2026).

The consistency test. If a company's climate report promises to exit a polluting activity by a certain year, but its

impairment model assumes the assets keep earning cash for years after that, one of the two is wrong. The

auditor reads the other information in the annual report, including climate disclosures, for consistency with the

financial statements, and challenges any gap.

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Practice questions

MODULE 1 | 1.5.1 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Find the risk in the business model

For each business, identify a likely risk of material misstatement created by its business model.

Business (all imagined) A likely risk of material misstatement

(a) Beanloop Pty Ltd: a coffee-bean subscription.

Customers pay 12 months in advance for monthly

deliveries of freshly roasted beans, and the company pays

online influencers a fee for each new subscriber.

(b) Tradiehub Pty Ltd: an app linking homeowners with

tradespeople. The homeowner pays the full job price

through the app; Tradiehub keeps 12% and passes the rest

to the tradesperson.

(c) Budgetbird Pty Ltd: a budgeting app that is free for

basic use, with premium features at $8 a month. Free and

paying users share the same servers and support team.

(d) Fernhaven Apparel Ltd: designs clothing in Melbourne.

Its own subsidiary in Vietnam makes the garments and

sells them to the parent in US dollars; a logistics company

runs its warehouse.

(e) Tixly Pty Ltd: an event-ticketing platform run entirely on

a cloud provider's servers. It collects ticket money and pays

event organisers after each event.

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Question 2 - Physical or transition?

Classify each event as a physical risk (acute or chronic) or a transition risk (policy and law, technology, market or

reputation).

Climate-related event Physical or transition?

Which kind?

(a) A flood closes a distribution centre for six weeks

(b) The government introduces a price on emissions from large emitters

(c) Rising average temperatures cut a wheat grower's yields year after year

(d) Drivers switch to electric vehicles, cutting demand at a chain of service stations

(e) Cheaper battery storage makes a gas-fired peaking plant uneconomic

(f) Rising sea levels threaten a council's seawalls and foreshore assets

(g) A cyclone damages a port's loading equipment

(h) An activist campaign damages a coal miner's standing with customers and lenders

Question 3 - Spot the inconsistency

Carrick Basin Coal Ltd (imagined) mines thermal coal. Its climate report, published in its annual report, commits

it to 'exit thermal coal mining by 2032'. In its financial statements, the impairment model for its only mine

assumes coal is produced and sold until 2045, the processing plant is depreciated over a useful life ending in

2045, and the rehabilitation provision assumes the site closes in 2045. Identify the inconsistency and explain

what the auditor should do.

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Worked answers

MODULE 1 | 1.5.1 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Business model risks (suggested)

Business Likely risk of material misstatement

(a) Beanloop Revenue taken when cash arrives instead of as each monthly delivery is made; influencer

fees capitalised as contract costs when they may not qualify, or amortised over the wrong

period

(b) Tradiehub Principal or agent: if it doesn't control the work, its revenue is the 12% fee, so reporting the

full job price would overstate revenue

(c) Budgetbird Allocating shared server and support costs between free and paying users; subscription

revenue in the right period

(d) Fernhaven Apparel Transfer pricing with the subsidiary; translating US dollar balances; inventory held by the

logistics company, relying on a third party's controls

(e) Tixly Evidence about the cloud provider's controls (a service organisation); ticket money owed to

organisers is a liability, not revenue

Question 2 - Classifying the events

Event Classification

(a) Flood Physical: acute

(b) Emissions price Transition: policy and law

(c) Rising temperatures Physical: chronic

(d) Switch to electric vehicles Transition: market

(e) Cheaper batteries Transition: technology

(f) Rising sea levels Physical: chronic

(g) Cyclone Physical: acute

(h) Activist campaign Transition: reputation

Question 3 - Carrick Basin Coal (sample answer)

The inconsistency: the climate report says mining ends by 2032, but the impairment model, useful life and

rehabilitation provision all assume 2045. Either the commitment or the accounting is wrong.

If the commitment stands: thirteen years of cash flows may not exist, so the mine may be impaired; depreciation

should be faster; rehabilitation comes sooner, raising the provision; and onerous contracts or redundancy costs

may arise.

What the auditor does: get evidence on the commitment's status (board minutes, transition plans, contracts),

challenge management's assumptions alert to bias, and raise the gap with both management and those charged

with governance.

Then report: if the statements stay materially misstated, modify the opinion; if the climate report is wrong and isn't

corrected, describe that misstatement of the other information in the auditor's report.

ADVANCED AUDIT AND ASSURANCE | M1 | 1.5.1 | WORKED ANSWERS

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