What changes will companies face and what needs to be taken into account when implementing them on the system side?
The International Accounting Standards Board (IASB) published the International Financial Reporting Standard (IFRS) 09.04.2024 "Presentation and Disclosures in Financial Statements" on April 18, 18. IFRS 1 will replace IAS 01 "Presentation of Financial Statements" and is mandatory for reporting periods beginning on or after January 2027, 18 (subject to endorsement by the EU, which is still to be made). The new IFRS XNUMX brings with it a large number of new regulations. In this article, we would first like to give you an overview of the most important innovations. We will then go into what needs to be taken into account when implementing the standard in the system.
The most important innovations at a glance
The introduction of the new standard affects all companies preparing their financial statements in accordance with IFRS. The most important changes relate in particular to the profit and loss account (new structure), the notes (new mandatory disclosures), the principles of aggregation and disaggregation (new principles) and, through changes to IAS 7, the cash flow statement. The new standard has no impact on the recognition and measurement of items in the financial statements.
Profit and loss statement:
IFRS 18 introduces two new mandatory subtotals for the income statement: "operating profit or loss" and "profit or loss before financing and income taxes". To determine these subtotals, all expenses and income must be assigned to a category. IFRS 18 defines a total of five categories, the first three of which are new: (1) operating (2) investing (3) financing (4) income taxes (5) discontinued operations. The standard contains general rules for classifying expenses and income into these categories. For companies with specific main business activities (e.g. banks and investment companies), special rules must be observed regarding the allocation of items to the categories. Another innovation concerns the classification of foreign exchange differences that are reported in the income statement using IAS 21. According to IFRS 18, these must be reported in the same category in which the expenses and income from the associated assets and liabilities were previously reported (unless this would involve unreasonable costs or effort). This means that in future, foreign exchange gains and losses will generally have to be reported in all five categories of the profit and loss account.
Attachment:
IFRS 18 introduces new disclosure requirements for the notes. This particularly applies to information on certain publicly communicated performance measures that do not result from an IFRS accounting standard but have been defined by the company's management (so-called management-defined performance measures, or MPMs for short). IFRS 18 defines exactly when an MPM exists. It must be a subtotal of expenses and income that is communicated publicly, outside of the IFRS financial statements, and that reflects management's view of the financial performance of the company as a whole. Identifying an MPM leads to very extensive disclosures in the notes. For example, a separate section of the notes must include a reconciliation of the key figures to the most comparable defined (subtotal) in the income statement, including a presentation of the effects attributable to income taxes and non-controlling interests. When the cost of sales method is used within the operating category, additional disclosures will be required in the notes in the future. On the one hand, the total of expenses and income must be stated for certain types of expenses (e.g. depreciation of property, plant and equipment, employee benefits), and on the other hand, it must be stated in which functional areas these are included.
Principles of aggregation and disaggregation:
IFRS 18 contains amended rules on aggregation and disaggregation. The expanded principles on aggregation and disaggregation determine which information is to be presented in the primary reporting components (balance sheet, income statement, statement of comprehensive income, cash flow statement, statement of changes in equity) and which information is to be presented in the notes. It also contains guidance on how detailed information is to be provided in the notes.
Cash flow statement:
There are two major changes to the cash flow statement. Firstly, the "operating profit or loss" (the newly defined subtotal) is set as the starting point for determining the cash flow from operating activities. Secondly, the currently existing options for the presentation of interest/dividends paid and received are no longer applicable. For companies without a specific main business activity, the future rule is that interest and dividends paid are to be shown in the cash flow from financing activities, and interest and dividends received are to be shown in the cash flow from investing activities.
The system-side implementation
The new regulations of IFRS 18 have a significant impact on companies' IT systems. The necessary adjustments particularly affect the chart of accounts/position number plans, account mapping, reporting and the system-technical requirements for a retrospective initial application of the standard.
Charts of accounts/position number plans:
The chart of accounts/item number plans must be revised. It must be checked whether the grouping of items in the primary reporting components and the breakdown/description in the appendix must be adjusted due to the changed regulations on aggregation and disaggregation. It can be assumed that new accounts/item numbers will have to be created, reassigned, split or deleted. In order to be able to show foreign currency differences in all five categories of the profit and loss statement, new accounts/item numbers will usually have to be created, as many companies currently only show these differences in one item. New accounts/item numbers are also very likely for the appendix, for example for the necessary breakdown of certain types of expenses by functional areas when applying the cost of sales method within the operating category.
Account mapping:
The introduction of the new categories in the P&L means that the allocation of accounts/positions to the five categories (account mapping) must be adjusted. For example, rental income from investment properties must be shown in the new investment category. The same applies to expenses and income from associated companies accounted for using the equity method. In addition to this account mapping, the mapping of accounts from the annual financial statements of the companies included may also need to be adjusted to the corresponding group position numbers when preparing the consolidated financial statements.
Reporting:
The entire reporting system must also be revised. Changes will be made in particular to the profit and loss statement. In the future, this will have a new structure with new mandatory subtotals and new categories. Further changes will be made to the cash flow statement. Here, there is a newly defined starting point for determining the cash flow from operating activities, the operating profit or loss. In addition, the options for presenting interest/dividends paid and received are no longer applicable. It must also be checked whether the changes in the chart of accounts/position number plans affect other reports.
Retrospective first application:
The initial application of IFRS 18 must be made retrospectively, so that the comparative period 2026 must also be adjusted. In terms of system technology, the major challenge is that the financial statements as of December 31.12.2026, 1 can be prepared both in accordance with IAS 18 and IFRS 2027 (for the presentation of the comparative year in 18). In the year of initial application, the standard also requires reconciliations for each item in the income statement that relates to the comparative period, showing how the amount adjusted (using IFRS 1) corresponds to the amount reported in the previous financial statements in accordance with IAS XNUMX.
The new IFRS 18 has significant implications. We support you in the technical analysis of the adjustment requirements for your company as well as in the system-side implementation in the relevant IT systems and in reporting.
