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Accounting and finance

How IFRS 18 will have an impact on financial reporting

A look at some of the key aspects of the recently issued IFRS 18, Presentation and Disclosure in Financial Statements

CPAs who think preparing for IFRS 18 income statement changes early isn’t necessary, don’t understand the new standard’s scope, says Armand Capisciolto, FCPA, Chair of the Canadian  Accounting Standards Board.

The new IFRS Accounting Standard, released in April and effective in 2027, will update profit and loss statements with a new operating profit subtotal and sorting expenses and income into financing, investing and operating categories, among several major changes. 

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This represents a shift from the minimal presentation guidance provided in IAS 1, the standard IFRS 18 replaces. “There isn't even guidance in the current standard on what makes up operating income,” Capisciolto says.

When companies decide on their own what to share in financial statements, the level of detail can vary widely, causing financial statement users to receive inconsistent information. IFRS 18 will shift reporting to a more clear and consistent approach.

“It's very much focused on investor needs and giving investors better information about the company's performance,” he says.
By promoting more meaningful comparisons between firms, Capisciolto believes the new clarity may offer some companies better access to capital. “It actually may bring things to light that investors weren't seeing before,” he says.

Management performance measures, income-based metrics like adjusted EBITDA or adjusted profit or loss, will also be disclosed in the financial statements under IFRS 18. These measures are used to present a company's financial performance outside financial statements in annual reports and press releases, but aren’t necessarily comparable, nor is the formula always standard or clear.

Gabriela Kegalj, global IFRS presentation leader at KPMG, says companies need to conduct a “comprehensive gap analysis” to identify areas of significant change for MPMs. This involves comparing information from the financial statements, with non-GAAP measurements currently used and shared in other communications. Those meeting the MPM definition will need to be included in a note to the financial statements and reconciled to relevant IFRS totals, or subtotals, including the tax and non-controlling interest effects. Changes to how they are calculated must be identified and explained.

Capisciolto says attention is needed on aggregating and disaggregating information for statements under IFRS 18, as this will require the most complexity and effort. “Identifying those changes early is going to be critical, because changing your Chart of Accounts, making system changes for automated entries—it's not something that can be done overnight,” he says. “It's something that's very difficult to be done after the fact as well.”

To illustrate this, Capisciolto offers foreign exchange accounts as an example. Under IFRS 18, a single account will no longer suffice for showing gains and losses. Those related to long-term debt, investments and accounts payable, will fall under the new financing, investing and operating categories, respectively.

Leading up to its effective date, there will be multiple opportunities for CPAs to learn about IFRS 18. The Accounting Standards Board’s thrice-annual IFRS Accounting Discussion Group is one way to keep track. “I'm expecting between now and 2027 and probably into that first year,  IFRS 18 will probably be the topic that is most talked about,” he says.

As a public forum, issues can be submitted for discussion by the group’s members, which include auditors and other accounting professionals. Following the meetings, recordings and text transcripts are shared online—for IFRS 18, and any other topics discussed by the group.

CPAs also need to watch for updates from securities authorities for IFRS 18. According to Brian Banderk, Chair of the Canadian Securities Administrators Chief Accountants Committee, this is presently underway.

“The CSA is currently evaluating the impacts of IFRS 18 on securities regulations, notably the inclusion of management-defined performance measures in IFRS financial statements on NI 52-112 Non-GAAP and Other Financial Measures Disclosure,” he says in a statement to Pivot.

Although 2027 may seem distant, CPAs should start planning and get into the right mindset for IFRS 18.

“There's no saying this doesn't impact me or impact my company,” says Capisciolto. “This will change how every company applying IFRS Accounting Standards in Canada's statement of comprehensive income statement looks.