Navigating the Transition to IFRS 18: What CFOs Need to Know

‍The International Accounting Standards Board (IASB) has unveiled IFRS 18, "Presentation and Disclosure in Financial Statements," which is set to replace the longstanding IAS 1 from January 1, 2027. This development signifies a substantial shift in financial reporting standards, designed to enhance clarity and comparability across global financial statements.

Understanding IFRS 18

‍IFRS 18 introduces a transformative approach to the income statement, creating a uniform format that emphasizes transparency and comparability. Here are the critical changes CFOs and finance leaders should be aware of:

1. Defined Subtotals: The new format will feature two defined subtotals—operating profit and profit before financing and income taxes. This clarity facilitates better understanding and analysis of a company's financial performance.
2. Categorization of Income and Expenses: Income and expenses will be categorized into distinct sections: operating, investing, financing, income taxes, and discontinued operations. This categorization aids stakeholders in better assessing the profitability and cash flow generation of core versus non-core activities.
3. Inclusion of Depreciation in Operating Profit: Unlike some current practices, depreciation will be considered a part of operating costs, which aligns operating profit more closely with cash flow from operating activities.

Implications for Indian Companies

‍With the IFRS 18 effective date looming in 2027, Indian companies are expected to adopt a corresponding standard, Ind AS 118, for the financial year 27-28. The anticipation of this change stems from the active participation of several Indian companies in the field testing of the draft IFRS 18—a move seen as a significant positive.

Strategic Preparations Required

‍Despite 2027 seeming distant, companies need to start preparing now. The changes will impact various aspects of financial management including:

• Long-Term Incentive Plans (LTIPs)
• Valuation of private shareholder arrangements
• Preparation of comparative financials for FY26-27

These preparations are crucial for a smooth transition and to leverage the enhanced comparability and transparency that IFRS 18 promises.

Insight on the New Standard

This shift towards a more standardized approach in financial reporting under IFRS 18 brings with it a sense of logical progression that begs the question—why wasn't this implemented sooner? The move away from potentially deceptive metrics like EBITDA, which can obscure the true costs and profits in capital-intensive industries, towards a more transparent and meaningful representation of business returns, is highly commendable. This change is not just a procedural update; it's a strategic enhancement that I believe is crucial for reflecting the actual financial reality of businesses. With the adoption of IFRS 18, the profit and loss statement will now offer a clearer, more accurate view of an organization’s operational success. Personally, I find this new standard to be a breath of fresh air, bringing much-needed clarity and value to financial reporting, ensuring that every line on the P&L aligns more closely with true business performance.

Resources for Further Understanding

‍To help finance professionals delve deeper into IFRS 18, here are two essential resources:

Watch the IFRS Introduction Video‍

A concise overview provided by IFRS, explaining the rationale and details of the new standards.

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Download the Detailed PDF Note‍

A comprehensive 3-page summary of IFRS 18 as published by IASB.

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The introduction of IFRS 18 marks a significant milestone in global financial reporting standards. As the changes aim to provide a more transparent, comparable, and comprehensive view of financial statements, CFOs and financial executives must begin their preparations early to fully adapt and leverage the benefits of the new standard.