The International Accounting Standards Board (IASB) published IFRS 18 Presentation and Disclosure in Financial Statements on 9 April. It becomes effective for financial statements beginning on or after 1 Jan 2027, with restatement of the prior year comparatives. This means companies have around 18 months to consider disclosure impacts on financial statements, KPIs shared with the market, and system capabilities.
The IASB sought to address two key objectives:
- To address the lack of guidance on presentation of P&L.
- To provide greater transparency around alternative performance measures such as KPIs, non-generally accepted accounting principles (GAAP)_ measures or management performance metrics (MPMs).
Both objectives ultimately seek to address the transparency and comparability of financial performance between companies.
The face of the P&L now splits into five required categories - operating, investing, financing, income taxes, and discontinued operations; and two sub-totals – operating profit, and profit before financing and income taxes. This is akin to cash flow statement presentation, although categorisation can differ between the two statements.
IFRS 18 applies to financial and non-financial companies and so guidance also exists as to what constitutes investing, financing or operating activities of financial companies.
Critically, the operating category becomes the default category for items of income and expense that do not fit uniquely or substantially into one of the other categories.
The five categories are, of course, supported by further information in the notes to the P&L statement. Additional guidance now exists for the aggregation and disaggregation of items in both the P&L statement and supporting notes. The standard expects to see less use of ‘Other’ categories as a result, which should bring greater rigour and auditor focus on the use of such categories, and what lies beneath them.
IFRS 18 also places disclosure requirements around management performance measures. That is KPIs used by the company in public communications. In doing so, it makes those KPIs auditable for the first time. Perhaps most critical and impactful for non-financial corporates is the additional granularity as to exactly what is and is not included in a company’s definition of EBITDA, as a non-GAAP KPI, and how that reconciles with GAAP-defined OPDIA (operating profit before depreciation, interest and amortisation). This may become a much more familiar term in the future.
Treasurers may wish to re-evaluate their FX hedging policies, particularly where cash flows, assets and liabilities that fall across the operating, financing, and investing categories are risk-managed on a net basis, as this may have implications for the categorisation of FX gains and losses on the face of the P&L.
For example, the standard describes a typical situation of using derivatives to hedge a net position. In the example it is foreign currency revenues and interest expenses. It requires the derivative P&L to be presented entirely in the operating category (by default) rather than grossing up across operating and financing categories. This therefore creates FX volatility within operating profit, which is offset by FX impacts in the financing category.
Similarly, companies will need to consider how FX gains and losses on items that bridge categories should be allocated. For example, trade payables on extended credit terms give rise to an expense in the operating category and financing expense in the financing category. However FX impacts on such payables will likely be attributed solely to the operating category, as the allocation of FX differences between financing and other categories on such balances are prohibited.
The same principles apply to gains and losses on FX derivatives whether hedge-accounting designated, or not. These are expected to sit within the same P&L category as the item on which the hedged FX risk arose. Moreover, where hedge accounting is applied, the same rule relates to designated and undesignated components and ineffectiveness.
Act now
Finance and treasury teams should move swiftly to assess the impact of these new requirements on P&L categorisation, disclosure, and key performance measures.
In respect of FX, companies should:
- Ensure systems are able to provide the necessary granularity for the disaggregation of FX impacts across categories.
- Consider whether it is desirable to amend hedge strategies, adopting a ‘gross’ exposure approach in order to be able to allocate derivative P&L between categories rather than using the operating category as a default for derivative gains and losses that hedge net exposures.
