How IFRS 18 Will Shape the Future of Financial Reporting: What Your Business Needs to Know

The landscape of financial reporting is about to change with the introduction of IFRS 18—a new standard from the International Accounting Standards Board (IASB) that will take effect in 2027. Replacing the long-standing IAS 1, IFRS 18 aims to provide clearer, more consistent financial statements. While these changes may seem daunting, they’re designed to help businesses communicate their financial performance more effectively, making it easier for investors and stakeholders to understand and compare companies’ results.

What’s Changing?

IFRS 18 introduces some important updates, especially in how companies report their profits and financial results. Here are the key changes to be aware of:

• A New Format for the Profit and Loss Statement: The statement of profit or loss will now have defined categories, such as Operating, Investing, and Financing. This will make it easier to compare financial results across businesses. These categories will help break down income and expenses in a more logical and consistent way.
• Management Performance Measures (MPMs): Many companies use their own performance metrics, such as adjusted profits or EBITDA , when discussing financial results. Under IFRS 18, these measures (MPMs) will need to be included in official financial statements, with clear explanations on how they are calculated and why they’re used.
• More Transparent Grouping of Information: Information in financial statements will now need to be grouped based on similar characteristics, whether by nature, function, or measurement basis. This change aims to provide a clearer picture of a company’s financial situation by ensuring that related items are reported together.

Why Are These Changes Happening?

The goal of IFRS 18 is to improve transparency and consistency in financial reporting. For years, financial statements have varied greatly from company to company, even within the same industry. This lack of uniformity made it difficult for investors to easily compare companies’ financial performance.
With IFRS 18, investors and stakeholders will receive more relevant and comparable information, allowing them to better assess a company’s financial health and future prospects.

How Will This Affect Businesses?

The new reporting rules will not affect a company’s overall profit. Instead, they will change how financial results are presented and explained. While these changes are significant, they’re designed to make financial statements clearer, more consistent, and more useful for decision-making.

Here are key considerations for businesses:

• Prepare for System Changes: Companies may need to adjust accounting systems to accommodate the new structure of the profit and loss statement and to report Management Performance Measures. This might require revisiting the chart of accounts, software, and internal processes.
• Be Ready to Explain Non-GAAP Measures: If performance measures like adjusted EBITDA are used, these will need to be included in audited financial statements. A reconciliation of these measures to the closest IFRS standard must also be provided to ensure clarity for stakeholders.
• Training and Internal Communication: It’s important for teams at all levels, including accounting and management, to be informed and ready for these changes. Early training and collaboration will help facilitate a smooth transition to the new system.

What Should Be Done Now?

Although IFRS 18 will take effect in 2027, it’s best to start preparing now. Here’s a quick checklist to help businesses get ahead:
• Assess Current Financial Reporting Systems: Companies should evaluate how financial statements are currently prepared and identify areas that need updates to meet IFRS 18 requirements. This includes the new structure for the profit and loss statement, the inclusion of Management Performance Measures, and better grouping of financial data.
• Engage with Auditors Early: As IFRS 18 will require new disclosures, it’s essential to begin discussions with auditors now. They can offer guidance on integrating these new requirements into financial reporting.
• Create a Transition Plan: The transition to IFRS 18 will be significant, so businesses should plan for a phased implementation. This might involve updating systems, training staff, and communicating changes to stakeholders in advance.

The Bottom Line: Stay Ahead of the Curve

IFRS 18 may seem like a big change, but it represents an opportunity for businesses to improve their financial transparency and better meet investor expectations. By planning ahead, staying informed, and making the necessary adjustments to financial reporting, businesses will be ready when the new standard takes effect in 2027.
Starting preparations now will help companies avoid last-minute challenges and ensure full readiness for the future of financial reporting.