The newly issued IFRS 18 may change your future income statement and disclosures

Companies will need to prepare new or update disclosure within the notes to the financial statements for the analysis of operating expenses by nature (if presentation by function or mixed presentation is used in the income statement) and MPMs (if they communicate using measures that are MPMs). In addition, companies may need to further disaggregate the information disclosed in existing notes.

Companies will need to understand how the underlying data needed to provide or update the relevant disclosures will be sourced, and if any data collection processes and controls need to be updated to facilitate this.

Some companies may need to adapt their financial reporting systems to track and collate the more disaggregated information and classify income and expenses into the new categories.

The system implications may be more significant for companies presenting an analysis of operating expenses by function or mixed presentation on the face of income statement.

System implications may also arise, for example, where:

• the output of one group company is the input of another group company and the nature of expense is lost or not tracked at the consolidated level. This may be more significant where the standard costing method for inventories is used.
• there is more than one set of business activities in the group, and the classification of items of income and expenses will be different at the consolidated level as compared to the operating company level.
• IFRS 18 includes specific classification requirements—for items such as foreign exchange differences, fair value gains and losses on derivatives and income and expenses from hybrid contracts. Such income and expenses may therefore need to be classified into different income statement categories. Some companies may also utilise separate treasury management systems to record information on financial instruments at a more granular level compared with the ERP systems, which may also require updates.

Companies may need to review charts of accounts, update transaction recording systems, revise consolidation processes, add new data points for disclosures or design revised control procedures to ensure compliance.

Currently, some companies present self-defined subtotals in the income statement, which are likely to change to align with the new defined subtotals in IFRS 18. For example, the introduction of the mandatory defined subtotal for operating profit under IFRS 18 would mean companies that currently present a subtotal labelled operating profit may need to change how they calculate the subtotal.

Remuneration arrangements, bonus schemes or covenant tests that directly link to, or use existing self-defined subtotals such as operating profit or loss as a starting point for the relevant assessment will need to be reviewed to determine if they are impacted by IFRS 18. Depending on the specific arrangements in place, it may be necessary to amend existing terms and conditions. Where this is the case, companies will need to determine the changes required, explain these to the relevant counterparties and, indeed, assess results and outcomes on the new terms.

In the UK, the annual report is a key aspect of a company’s communication with its stakeholders. It is common for the analysis in the strategic report included within the front-half of the annual report to use non-GAAP performance measures, for example adjusted operating profit or EBITDA, in assessing progress against strategic objectives and measuring business performance. IFRS 18 may cause companies to revisit the non-GAAP performance measures discussed in their front-half of annual report.

Additionally, ensuring that investors and other stakeholders really understand how your income statement and disclosures will change ahead of the first annual report and accounts applying IFRS 18 will be critical. Involving your investor relations team early will be important so that when mandatory reporting under IFRS 18 is here, all your key stakeholders already understand the impact of the new standard and you avoid potential misinterpretations. Similarly, companies will need to educate their staff members on the requirements in IFRS 18 and changes to processes, systems and controls.