On April 9, 2024, the International Accounting Standards Board (IASB) approved the International Financial Reporting Standard (IFRS) 18, "Presentation and Disclosure in Financial Statements," has been published. IFRS 18 will replace IAS 1, "Presentation of Financial Statements," and, pending EU endorsement, will be mandatory for reporting periods beginning on or after January 1, 2027. All companies/groups preparing financial statements in accordance with IFRS will be affected by the introduction of the new standard.
The new standard contains numerous significant innovations that have a significant impact on the presentation of financial statements. This article first provides a comprehensive overview of the key changes. We then discuss in detail the challenges and requirements for system-based implementation.
The most important changes relate in particular to the income statement (new structure), the notes (new mandatory disclosures), the principles of aggregation and disaggregation (new principles), and – through amendments to IAS 7 – the cash flow statement. The new standard does not affect the recognition and measurement of items in the financial statements.
With the introduction of IFRS 18, all income and expenses will in future be classified into one of five clearly defined categories: operating, investing, financing, income taxes and results from discontinued operations.
The operating category acts as a residual category and includes all items not explicitly assigned to the other categories. The investing category includes income from investment properties, dividends, and the result from associated companies (equity method). The financing category focuses on interest expenses/income and similar income/expenses from financing transactions.
The standard contains general rules for classifying expenses and income into these categories. For entities with specific core business activities (e.g., banks and investment companies), separate rules apply regarding the allocation of items to the categories.
In addition, IFRS 18 introduces two mandatory subtotals.
Overall, the changes significantly increase the transparency, comparability and comprehensibility of the income statement, but require a comprehensive adjustment process in its preparation and presentation.
Another change concerns the classification of foreign exchange differences reported in the income statement under IAS 21. Under IFRS 18, these must be reported in the same category in which the expenses and income from the related assets and liabilities were previously reported (unless doing so would involve unreasonable costs or effort). This means that foreign exchange gains and losses will generally have to be reported in all five categories of the income statement in the future.
With the introduction of IFRS 18, the requirements for disclosures in the notes to the financial statements have been significantly expanded. A key aspect is the first-time mandatory disclosure of so-called Management-Defined Performance Measures (MPMs). MPMs are subtotals of the profit or loss for the period defined by management, which are used in external communications but are not prescribed by IFRS. IFRS 18 requires these MPMs to be summarized in a single note to the financial statements and to provide detailed information such as the calculation basis, a reconciliation to the nearest IFRS subtotal, including a presentation of the effects attributable to income taxes and non-controlling interests, and a qualitative explanation. This is intended to improve the transparency and understandability of non-standardized key performance indicators and create uniform regulations.
Another new change affects companies that use the cost of sales method (COS) for their income statement. IFRS 18 places stricter requirements on the disclosure of operating expenses/income by cost type. In particular, a separate disclosure is required in the notes that presents the items significant to the functional areas and breaks them down by cost type (e.g., personnel expenses, depreciation and amortization). This information enables users to better analyze the cost structure and compare it with companies that use the nature of expense method (GKV).
Particular attention should be paid to the use of the term "Other" in the item description. IFRS 18 clarifies that this term may only be used when no more informative description is available. Furthermore, in such cases, further explanatory notes are required to ensure transparency.
IFRS 18 contains revised requirements for the aggregation and disaggregation of financial information. The expanded principles for aggregation and disaggregation specify which disclosures must be presented in the primary financial statements (balance sheet, income statement, statement of comprehensive income, cash flow statement, and statement of changes in equity) and which information must be presented in the notes. Furthermore, the standard provides specific guidance for determining the required level of detail for the disclosures in the notes.
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.
With the introduction of IFRS 18, retrospective application of the new standards is mandatory. This means that all comparative periods, in particular the income statement and the categories and subtotals contained therein, must be adjusted according to the new classifications under IFRS 18.
In addition, IFRS 18 requires comprehensive reconciliations that make the changes transparent compared to the previous presentations under IAS 1. These include a breakdown of all affected items, including the reasons for the reclassification and the quantitative effects.
Retrospective adjustment represents a significant organizational and technical effort for companies, but it increases the comparability and consistency of annual/consolidated financial statements across reporting periods. Early analysis and planning of the transition is therefore essential.
The requirements of IFRS 18 require significant adjustments to IT systems and the underlying processes. In particular, adjustments are required in the areas of charts of accounts and position numbering plans, account mapping, reporting processes, and the system-related requirements for the retrospective initial application of the standard. The impacts range from accounting systems and changes in consolidation software to reporting, disclosure management, and ESEF tagging.
IFRS 18 places increased demands on the technical implementation of charts of accounts and item numbers in order to correctly reflect the new classification and presentation requirements. Companies must revise their existing charts of accounts and examine whether, for example, the changed aggregation and disaggregation requirements require adjustments to the grouping of items in the primary reporting components (such as the balance sheet, income statement, etc.) as well as to the breakdown and description in the notes. This requires the creation, reassignment, splitting, or even deletion of accounts.
In particular, foreign exchange differences will have to be reported separately in all five categories of the income statement, which will require the creation of new accounts and item numbers, as many companies currently only record them in a consolidated form. New accounts/items are also likely for the notes to the financial statements, for example, for the detailed breakdown of certain expense types by functional area when applying the cost of sales method within the operating category.
To present the newly introduced mandatory subtotals, operating profit or loss and profit or loss before financing and income taxes, an adjusted allocation of accounts to reporting items and categories is required. The use of mapping tables facilitates this allocation.
The entire reporting system requires comprehensive adjustments. In particular, the income statement will be restructured, with mandatory subtotals and expanded categorizations. Furthermore, the cash flow statement will undergo significant changes: Operating profit or loss will serve as the defined starting point for determining cash flow from operating activities. Furthermore, the previous options regarding the presentation of interest paid and received, as well as dividends, will no longer apply. Finally, a thorough review is required to determine the extent to which the modifications to the charts of accounts and item numbering plans will impact other reporting formats.
Due to the expanded disclosure requirements under IFRS 18, particularly the detailed requirements for management-defined performance measures (MPMs), the disclosure management system must be significantly expanded with regard to the recording, allocation, and tracking of these individual key performance indicators. This requires improved integration between the accounting data and the reporting components to transparently depict reconciliations and ensure consistent presentation in the notes. Furthermore, increased functionality for controlling the aggregation and detailing of disclosure content is necessary to meet the more complex requirements for summarizing and disaggregating financial information under IFRS 18.
The initial application of IFRS 18 is retrospective, which also requires adjustments to the comparative period of the reporting year. From a technical perspective, this presents the challenge of preparing the respective financial statements both in accordance with IAS 1 and for the presentation of the comparative figures in the subsequent year in accordance with IFRS 18. In addition, the standard requires reconciliations for all affected items in the income statement of the comparative period in the year of initial application. These reconciliations must transparently demonstrate how the amounts determined in accordance with IFRS 18 reconcile with the figures reported in the previous financial statements under IAS 1.
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.
