IFRS 18: improved comparability and transparency
IFRS 18 aims to improve the comparability of financial performance between entities, as well as increase transparency. The new standard specifically addresses investors’ concerns on how entities define ‘operating profit’ and furthermore enhances transparency on certain performance measures used by management (so-called management-performance measures).
Initial observations on practical implications
IFRS 18 mainly impacts the statement of profit or loss. When applying the enhanced principles of aggregation and disaggregation, it is expected that entities will need to apply judgement when determining how financial information is grouped (or ungrouped) in both the primary financial statements and the related notes. While IFRS 18 does not provide a step-by-step process, it offers guidance on what to consider. A key principle is that the role of the primary financial statements is to provide a useful structured summary and the disclosure notes should offer more information on material items to help users understand the primary financial statements.
Some initial observations on the implementation of IFRS 18 include determining the presentation category for foreign exchange differences and for the movements in derivatives and determination of MPMs along with their required disclosures.
For foreign exchange differences, IFRS 18 now requires an entity to present the foreign exchange difference in the same category in the statement of profit or loss as the underlying item which resulted in the foreign exchange difference (unless this will result in undue cost or effort). For an entity with transactions in multiple currencies, this will have operational impacts, such as expanding its chart of accounts to include foreign exchange accounts or subaccounts for all required categories and ensuring that the posting of the foreign exchange difference aligns with the underlying item.
IFRS 18 provides specific guidance on the category in which to present the gains or losses on financial instruments used by an entity to manage risks (with several exceptions). In general, if financial instruments (both derivatives and non-derivatives) are designated in a hedging relationship, the gains or losses should be classified in the same category affected by the risk the entity is managing. The same goes for derivatives not designated in a hedging relationship. When a derivative does not qualify for hedge accounting, careful consideration should be given to whether the instrument is ‘managing a risk’ as meant by IFRS 18.
IFRS 18 brings the inclusion of some previously non-GAAP measures as part of the IFRS financial statements (MPMs). IFRS 18 only includes performance measures related to the income statement and to be an MPM, the measure must be a subtotal of income and expenses. Measures related to only income or only expenses, assets or liabilities, and liquidity or non-financial performance (e.g. carbon emissions) are not MPMs. Guidance from regulators like ESMA remains relevant for alternative performance measures (APMs) that do not meet the definition of MPMs under IFRS 18
Transitioning to IFRS 18 will most likely result in several reclassifications in the statement of profit or loss, and therefore entities should start thinking about what the new standard will mean for them. Even though only effective 1 January 2027, comparative information will be required as of 31 December 2026. For entities presenting interim financial statements, the transition date will be earlier, i.e. 2026 of the quarter or half year presented. Upon transition, entities are required to present a reconciliation for each line item in the statement of profit or loss showing the previous IAS 1 presentation to the new IFRS 18 presentation. Early adoption is permitted, but EFRAG (European Financial Reporting Advisory Group) is still in the process of assessing the endorsement criteria for the standard.
Who is impacted?
IFRS 18 applies to all entities reporting under IFRS Accounting Standards. Although the general principles of the standard are aimed at non-financial entities (i.e. corporate entities), it does give some specific principles for those entities that have investing or financing as their main business activities.
Conclusion
IFRS 18 aims to achieve more transparent and comparable financial reporting between similar entities. Although this new standard only relates to presentation and disclosure, it is important that the practical implications are not underestimated by entities when starting the implementation process.
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