IFRS 18: Driving consistent financial reporting
QUICK TAKE
- The new IFRS 18 standard on reporting in financial documents has been published and will come into force in January 2027.
- The standard has been created to deliver consistency in financial reporting, primarily for the benefit of investors who will be better able to understand and compare financial performance.
- The new standard has been created with larger organisations and public companies in mind, and standard-setting bodies in Australia and New Zealand are yet to determine how the standards will be applied to smaller businesses and not-for-profits.
Organisations preparing their financial statements have historically had some room to manoeuvre, with the treatment of some items on the P&L statement open to an amount of discretion.
While this has given organisations latitude in reporting their results, it has led to occasional confusion, particularly among investors who, in some instances, have found it difficult to compare company performance and evaluate companies against consistent criteria.
Closing this gap is the main driver behind the new International Financial Reporting Standard 18 (IFRS 18), Presentation and Disclosure in Financial Statements, which will be effective for reporting periods from 1 January 2027, with three new disclosure requirements on income.
The old standard, IAS 1, does not have detailed requirements on the classification of income and expenses in the P&L statement, or the presentation of subtotals and the aggregation and disaggregation of information.
According to the International Accounting Standards Board (IASB), “This lack of detailed requirements leads to diversity in practice.”
The IASB expects the improvements that will follow the adoption of IFRS 18 will enable investors to make more informed decisions, leading to “better allocations of capital that will contribute to long-term financial stability”.
New categories
Amir Ghandar FCA, CA ANZ’s reporting and assurance leader, explains that IFRS 18 will introduce new categories on investing and financing to the income statement that were previously included in cash flow statements.
“People will be familiar with these categories because they’ve been included in cash flow reporting for decades, but now they’ll be part of the income statement to give a more standardised view,” says Ghandar.
Interest on loans, for example, “can show up in different places within an income statement right now”.
“Some companies would have it right up top next to revenues and have all their income and expenses put together, whereas now it must go in a special section dedicated to financing related items, and then you’ll be able to see the total profit or loss from those operating activities,” he says.
“There may be some companies that have a really good business in terms of operating activities but they’re losing money due to decisions made in the past about investment or how they’re financed, and now you’ll be able to more easily break these things down.”
Imposing consistency
Ghandar recalls a presentation from regulators several years ago, which highlighted a case study of a company that “used seven different profit measures in seven years”.
“But to their credit they admitted that they simply just picked the one which delivered the best number,” he says.
“So, these differences in approach have led to confusion among stakeholders, and this change will impose a structure and a granularity which will be consistent.”
While IFRS 18 has been created largely to clarify the results of large public companies, it will also have an impact on the reporting obligations of smaller companies and not-for-profit organisations.
Organisations with public accountability or tier one companies will have to fully comply with the new standard, and standards bodies in Australia and New Zealand will determine the compliance regime for smaller entities and not-for-profits.
“These standards have been written with big-end-of-town companies and investors in mind, but they will flow down to private companies and not-for-profits,” says Ghandar.
“They are going to have to fit into this framework. Any standardisation does that and while it’s not necessarily an argument against it, it will come with costs and challenges in the SME space.
“What we have seen before is that accounting standards boards dial back the disclosures and the measurement of some items, so while CA ANZ supports the standard, I also hope that the boards think about how it will impact smaller organisations and make sure it’s not a copy-and-paste for them.”
Cost of change
For accountants, Ghandar says IFRS 18 will require an “upfront effort in the first couple of years to reclassify items”.
“I don’t see it as a huge effort,” he says. “The information underlying the income standards will be the same and will use the same systems, but effort will be invested upfront to work out the new income stream for each particular business.”
While it may not be complicated, it will still be a burden for accountants working with large numbers of small entities.
“This is where the cost of change will be slightly sharper, but hopefully we’ll see some proportionality and scalability brought in by the local standard setters as the regime is introduced,” says Ghandar.
This article was first published by Acuity Mag at the following URL: https://www.acuitymag.com/finance/new-ifrs-18-standard-for-financial-reporting
