If your organisation reports under IFRS, now is the time to understand the impact of IFRS 18. Its implications extend well beyond financial statements. It now influences board and group reporting, investor communications, lender reporting, remuneration metrics and internal KPIs.
IFRS 18 introduces a new framework for presenting financial performance in the financial statements. The most visible changes will be in the statement of profit or loss, where income and expenses must be classified into prescribed categories. This includes operating, investing, financing, income taxes and discontinued operations.
The standard also introduces mandatory subtotals that include operating profit or loss and profit or loss before financing and income tax. As a result, organisations may see changes to commonly used profit measures, even where the labels themselves remain unchanged.
In particular, items such as investment income, financing costs, foreign exchange differences and the results of equity-accounted investments may be presented differently under IFRS 18. Foreign exchange differences are proving especially challenging for some organisations as determining the appropriate classification may require a more detailed assessment of the underlying transaction or balance, potentially leading to changes in how financial performance is reported and interpreted.
Key challenge area
The key challenge will be delivery. In practice, implementing IFRS 18 will require the same discipline as other finance change projects: clear ownership, early scoping, data mapping, systems assessment, control design, dry runs and stakeholder management. Organisations need to understand where information currently comes from, whether the chart of accounts supports the new categories, and whether consolidation and reporting packs can capture the required data consistently across the group.
For group controllers, IFRS 18 should be viewed as a finance reporting transformation project rather than simply a year-end financial statement disclosure exercise. The standard has implications for systems, processes, controls and reporting across the organisation.
Many listed companies have historically used alternative performance measures (APMs) to explain financial performance. Under IFRS 18, these measures are referred to as management-defined performance measures (MPMs) and will require careful consideration.
MPMs used in annual reports, investor presentations, results announcements and other public communications may need to be disclosed within the financial statements and reconciled to IFRS-defined measures. MPM used in public communications may therefore need to be brought into the audited reporting framework through formal disclosure and reconciliation requirements. This is expected to bring greater transparency, consistency and audit scrutiny to measures that have traditionally been reported outside the audited financial statements.
Organisations applying FRS 101 and adapted statutory account formats should also assess the implications of IFRS 18 for both statutory reporting and wider group reporting requirements.
Actions to manage challenges and complexities
- Start with an early impact assessment comparing the current statement of profit or loss with the IFRS 18 structure
- Review whether systems, consolidation tools and reporting packs can capture income and expenses using the new IFRS 18 categories
- Consider whether updates are needed to the chart of accounts, controls, FSCP timetable and group reporting instructions
- Run a dry-run conversion of comparative information as IFRS 18 is applied retrospectively
- Plan communication early with audit committees, investors, lenders and management where reported operating profit or other key measures may change
- Identify existing performance measures used in annual reports, board packs, investor materials, lender reporting and remuneration arrangements
- Assess whether those measures may be MPMs under IFRS 18
