Global market competition doesn’t stand still, but neither do the financial rules. Developed by the International Accounting Standards Board, the International Financial Reporting Standards (IFRS) provide a standard on how companies may present their records regarding expenses and income.
The IFRS serves asan international standard for financial reporting. It is adapted and used in more than 168 jurisdictions. However, this does not mean that all of these jurisdictions fully follow IFRS. Some jurisdictions have modified the standards to fit their own requirements, some permit only certain companies to use them, while others have fully adopted them.
To keep up with the evolving needs of global markets, the IFRS released the IFRS 18 issued by international accounting boards last 9th of April 2024 and will be effective for the financial reports on or after 1st of January 2027. This new standard introduces expanded profit and loss categories as well as the new subtotals of operating profit and profit or loss before financing and income tax.
What are the major updates of IFRS 18?
In summary, the IFRS 18 introduces three major requirements on financial reporting standards to improve how companies may understand their financial positions. These three sets of requirements introduce defined subtotals to create a more structured statement of profit or loss, providing more useful information on the company’s financial performance.
These major requirements include:
- Group Income and Expenses. Statement of profit or loss must include all other income and expenses that are acquired during the reporting period, except in cases where IFRS Standards allow it. These profits or losses shall be classified into five categories: (1) Operating, (2) Investing, (3) Financing, (4) Income taxes, and (5) Discontinued Operations.
- Operating Category – Includes all income or expenses acquired by means of operating the company and/or profit or loss from the company’s business activities.
- Investing Category – Includes all income or expenses acquired from arising assets that generate returns independently, such as dividends, interest, or investment properties.
- Financial Category – Includes all income or expenses acquired on liabilities from financing transactions.
- Income Taxes Category – Includes all income or expenses arising from taxes or any foreign-related exchange.
- Discontinued Operations Category – Includes all income and expenses related to discontinued operations, as recognized under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
- Identify Management-Designed Performance Measures (MPMs). Under IFRS 18, companies must define the subtotals of income and expenses that management uses to provide a view on company’s financial performance called the Management-designed Performance Measures (MPMs). Though not required by the past updates of IFRS, the new update states that companies must provide these measures in a single note with:
- What the measure shows and why it is important
- How it is calculated
- Reconciliation to the IFRS required total or subtotal, together with the effects on income tax and non-controlling interest.
- How the income tax is determined
- Explanation of the changes made to the calculation of Management Designed Performance
- Grouping of Information. Under IFRS 18, items shall be grouped based on shared characteristics and shown separately when they differ, so that the financial statements and notes are clear and useful. Moreover, all items in the financial statements shall be clearly described and labeled in a way that faithfully represents their nature. Most importantly, companies shall not offset assets against liabilities or income against expenses unless IFRS specifically allows it.
Steps for Effective Implementation
Adapting to these changes can be challenging across different jurisdictions; however, some simple steps can help companies prepare for the new IFRS updates. To support this transition, the following six steps outline a practical and straightforward approach to achieving compliance with IFRS 18.
- Impact Evaluation. Check your current financial statement status and identify what will change under IFRS 18, including new profit categories and subtotals. Examine whether your systems can handle the changes.
- Generating Implementation Strategy. Develop a strategic plan for adopting IFRS 18, clearly assign and communicate responsibilities for implementing the changes, and plan for costs related to system enhancements and employee training.
- Adapt your systems and chart accounts. Gradually adjust your system and chart accounts according to the new updates and match them with the new operating, investing, and financing categories.
- Enhance your control. Establish guidance measures on aggregation, disaggregation, and identification of management performance measures so that the reporting will be consistent and reliable.
- Develop retrospective planning for the application. Identify and collect your past data and test the new updates by comparing them to the past years to confirm that reporting systems and processes function effectively under IFRS 18.
- Upskill your team. Gradually train your finance team on the new IFRS 18 requirements and their practical application, and ensure that management and investor communications align with the updated financial statement format.
In conclusion, IFRS 18 presents major changes aimed at improving the structure, transparency, and consistency of financial reporting. By categorizing income and expenses, defining performance measures, and ensuring proper disclosure, these updates will help companies provide more informative reports to stakeholders. Embracing these changes will enable a company not only to present clear financial statements but also to promote accountability and alignment with global standards.
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Author/s: UCC INTERN Jerald Mapait and Patricia Minimo
About the author(s): Patricia is STLAF's Legal Writer-Researcher. She is a Communication graduate from the University of the Philippines – Baguio with a major in Journalism and a minor in Speech Communication.