Get ready for IFRS18

A new accounting standard, IFRS 18 Presentation and Disclosure in Financial Statements, was issued by the International Accounting Standards Board (IASB) on 9 April 2024. It applies to annual reporting periods beginning on or after 1 January 2027. The aim is to improve the quality of reporting, transparency, disclosure and comparability of financial statements, with end users’ needs in mind. In this article, we will run through the highlights of the new standard and raise the key questions for your organisation to consider.

Key points
 

The introduction of IFRS 18 is the most significant change to reporting standards in over 20 years. As the IASB put it: “The new standard aims to improve how companies communicate in their financial statements. The standard will increase transparency for investors, and provide more comparable information about company’s financial performance to enhance investment decisions.”

IFRS 18 supersedes IAS1, and marks a major shift in several areas – most notably how the income statement is presented, how management-defined performance measures are disclosed, and some additional requirements for grouping line items. We’ll deal with each of these in turn.
 

Income statement
 

• First, presentation. As shown in Figure 1, Income and Expenses will need to be categorised as Operating, Investing and Financing within the statement of profit or loss (SoPL), followed by the categories of Income taxes and Discontinued operations.
• Second, the income statement must present two new defined subtotals: 1) Operating profit; and 2) Profit before financing and income taxes.

Source: IFRS 18 — Presentation and Disclosure in Financial Statements

Disclosure of management-defined performance measures (MPMs)

IFRS 18 requires companies to disclose the Income Statement related MPMs reported externally. The performance metrics are not defined by the standard. The table (Figure 2) explains the requirements regarding the MPMs to be stated as management’s view of an aspect of performance that may not be comparable to other entities, detail of the MPM and its calculation, plus any changes required for understanding.

Enhanced requirements for grouping (aggregation and disaggregation)
 

The new standard requires financial statements to aggregate items that share characteristics, and disaggregate items that have differing characteristics. This is to ensure that information is not obscured in groupings.
The more detailed requirements for each of these three key changes can be found in this IFRS summary.

The impact on your organisation
 

The introduction of IFRS 18 represents a fundamental change to the disclosure requirements within financial statements. Inevitably, the impact of that change will go beyond the confines of the finance team, and may affect how the business manages its strategic communications, roles and responsibilities, core business processes, and data management. Considering the prompts below may prove useful when developing an impact assessment for complying with IFRS 18.

• Strategic:
  • How does IFRS 18 affect business communications with your investors and external stakeholders?
  • How does the introduction of the standard influence how the organisation measures and reports performance and its definition of key MPMs?
  • Are the required changes to the income statement and MPMs reporting likely to change the way the market views the business? Are there industry benchmarks for performance that may be used for comparison purposes?
• People:
  • Who within the organisation needs to be involved and engaged in activities to meet compliance requirements?
  • Which roles will be affected by the need to comply with IFRS 18?
• Process:
  • What will be the impact on policies, governance, controls and processes?
  • How will the leadership team direct the internal changes required?
  • What is the impact on the current performance management process?
• Data:
  • What changes are required to the Chart of Accounts to comply to IFRS 18?
  • Can the accounting structure deal with the required recategorisation?
  • Does the business currently report operating profit as defined by the standard?
  • What changes to the finance information model are required for compliance?
  • Does the standard require increased data granularity, to support disclosure transparency and auditability?
• System:
  • What changes to the underlying IT architecture would be required to support data management, reporting and audit requirements?
  • Can the introduction of IFRS18 be used as a catalyst to further standardise information management, and automate data processes?
    
    

When to start?
 

IFRS 18 applies to annual reporting periods beginning on or after 1 January 2027, but early adoption is both allowed and encouraged – not least to ensure that previous-period comparative information is available and reliable.

There are many ways we help depending on your needs. Our full-day IFRS18 Assessment Lab provides a great opportunity to help you understand the impact of IFRS 18 on your organisation and prepare an actionable plan.