With the publication of IFRS 18 Presentation and Disclosures in Financial Statements in April 2024, the International Accounting Standards Board (IASB) is specifying the requirements for the structure and disclosure content of IFRS financial statements. The standard applies to financial years beginning on or after 1 January 2027 and focuses in particular on a revised structure of the income statement. At the centre are three newly defined categories (operating, investing, financing) and two mandatory subtotals, which may have an impact on the presentation and classification of key performance indicators. As part of the first-time application, an adjustment of the previous year's comparative figures including a reconciliation is planned. Parts of the previous IAS 1 will be retained or have been transferred to other standards, including IAS 8 and IFRS 7.
The categorisation described above has a direct impact on the accounting treatment of financial instruments in accordance with IFRS 9, as the resulting interest expenses and income, exchange rate differences and measurement effects must be reported separately in future. The regulations are aimed at increasing the transparency and comparability of the presentation of results. In practical application, however, there are considerable delimitation and allocation issues, particularly in the group context with complex treasury and intercompany structures. The following section analyses examples of application cases for companies without specific main business activities where IFRS 18 can lead to particular challenges in the presentation of earnings and where there is currently no clear clarity in practice with regard to disclosure.
A first example relates to foreign currency differences from intercompany loans. Intercompany loans are often denominated in foreign currencies, which regularly leads to foreign currency effects when exchange rates change. Depending on whether the respective foreign currency effects result from the investment or borrowing side, it could be assumed that they should be recognised in the investment or financing result. Alternatively, it is discussed that such internal loans do not exist at all from a Group perspective and therefore there is no underlying transaction to which the recognition of foreign currency effects can be orientated. According to this line of argument, allocation to the "operating result" category would be appropriate.
Another relevant scenario arises in the case of bank accounts with signs that change over time. In practice, it is common for certain collective accounts to fluctuate regularly between a positive and a negative balance. IFRS 18 stipulates that interest income from positive balances (as a component of cash and cash equivalents) is allocated to the investment result, while interest expenses from negative balances, to be understood as overdraft facilities, are allocated to the financing result. The challenge lies in the system-side recognition and correct categorisation of such balance transfers. Especially in the case of mass transactions and daily changes, many treasury systems can reach their limits, as such a dynamic balance check per account often cannot be carried out automatically in the standard system.
The handling of foreign currency effects in the context of cash pooling poses an additional challenge. Many groups have centralised cash pools through which subsidiaries cover foreign currency requirements or provide surplus liquidity. For example, a subsidiary may have an existing external foreign currency liability account (e.g. a trade payable in USD) and procure USD via the cash pool for early coverage. The foreign currency effects from the measurement of the trade payables are allocated to the operating result, while the foreign currency effects from the USD bank balance would be allocated to the investment result. At the level of the parent company, there are also offsetting entries, which can also lead to a mismatch between the effects of investment and financing results. The challenge lies in the fact that a single economic transaction can lead to different result allocations, which affects the informative value of the income statement and is often not in line with internal treasury reporting.
Issues also arise for financing companies that are responsible for raising and transferring capital within a group. For example, if a German holding company takes out a loan in USD on the capital market and passes this on to a US subsidiary in the same amount, exchange rate differences arise from both transactions. However, these are classified differently in accordance with IFRS 18: The foreign currency effects from the external loan fall under the financing result, while the effects from the intragroup on-lending of the loan are to be located in the investment result or - following the discussion above - in the operating result. The economic logic that this is a transitory financing transaction is no longer immediately apparent in the new structure. The foreign currency effects appear in different earnings lines. This in turn can lead to the question of whether a designation of hedge accounting in accordance with IFRS 9 can provide a remedy. The designation of external financing as a hedge for the internal loan position (hedged item) could reduce earnings volatility within the interim results and achieve a more consistent presentation, as the designated hedging transaction follows the hedged item in hedge accounting. In practice, however, corresponding documentation and evidence of effectiveness would have to be provided, which would increase the application effort.
The issue raised above leads directly to another constellation that may become more relevant as a result of IFRS 18: the natural hedge. In their accounting strategy, many companies deliberately pursue the approach of neutralising foreign currency risks for the income statement by offsetting items on the assets and liabilities side. These are often items with the same currency and a similar maturity structure, the valuation effects of which largely offset each other in the income statement. In some cases, derivatives are also used to hedge risks. Previously, it was permissible under IFRS to present foreign currency effects on an aggregated basis in the financial result, which allowed a certain degree of flexibility in the presentation of the result. However, the mandatory categorisation of income and expenses under IFRS 18 restricts this flexibility. Individual measurement effects, for example on the assets side in connection with trade receivables, would now be allocated to the operating result, while specific liability items, such as loan liabilities, would continue to be recognised in the financial result. The previous P&L-neutralising effect of the natural hedge would thus be systematically broken up at the level of interim results. This would not only lead to higher earnings volatility, but also to information asymmetries, as economically consciously managed, interrelated issues would now appear in different income statement categories. Strategically, this raises the question for the companies concerned as to whether the previous management models are still compatible with the new earnings logic. Possible adjustments could include the increased use of hedge accounting (with corresponding designation of hedging relationships) or the restructuring of intra-group financing flows in order to avoid accounting distortions between the individual earnings categories in the income statement. It should also be examined whether it makes sense to redefine existing natural hedge strategies in order to synchronise the effects in the IFRS 18 categories accordingly. Close coordination between Accounting, Treasury and Group Controlling is required here in order to maintain the economic informative value of the income statement and at the same time fulfil the regulatory requirements.
