IFRS 18: Corporate Treasury perspective

IFRS 18 Presentation and Disclosure in Financial Statements introduces a new, more structured income statement, disclosure of certain non-GAAP measures into the audited financial statements, and enhanced requirements on aggregation and disaggregation of information. IFRS 18 applies to annual reporting periods beginning on or after 1 January 2027 (with early application permitted).

Of the changes introduced by IFRS 18, one that could have an impact on treasury activities is the classification of income and expenses included in the statement of profit or loss.

IFRS 18 requires entities to classify income and expenses into five categories, three of which are new - i.e. operating, investing, financing – and the income taxes and discontinued operation categories. The operating category is intended to provide a complete picture of an entity’s main business activities.

Jorge Fernandez Revilla

Partner, Head of Asset Management

KPMG in Ireland

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Assessing specified main business activities

IFRS 18 introduces a new assessment requiring an entity to determine whether it has either or both of the following business activities as a main business activities: investing in particular types of assets, and/or providing financing to customers.

Entities with these ‘specified main business activities’ (“SMBA”) of investing in assets (e.g. an investment or insurance entity) or providing financing to customers (e.g. a financial institution), are required to classify additional income and expenses in the operating category that they would otherwise classify in the investing or financing category.

Corporate treasury activities often involve investing in particular types of assets, and/or providing financing to customers for e.g. borrowing externally and lending to subsidiaries or supporting the business in providing financing to customers.

Depending on the specific facts and circumstances, the Entity may conclude that it has an SMBA. The assessment of whether an entity has an SMBA is performed at a reporting entity level. Accordingly, the assessment and classification of certain income and expenses may differ between the group and a reporting entity within the group.

The following sections outline areas and examples that could lead to particular challenges in the presentation of earnings, or areas where there is currently not sufficient clarity in practice.

1. Foreign exchange differences

IFRS 18 sets out the requirements on classification of foreign exchange differences and the gain or loss on net monetary positions.

An entity shall classify foreign exchange differences included in the statement of profit or loss, in the same category as income and expenses from the items giving rise to the foreign exchange differences.

For example, the foreign exchange differences on a receivable (arising from sale of goods) denominated in foreign currency, for which income and expenses are classified as operating category, shall also be classified in the same category i.e. operating category.

Similarly, the foreign exchange differences on a debt instrument liability denominated in foreign currency, for which income and expenses are classified as financing category, shall also be classified in the same category i.e. financing category.

Particular challenges

Foreign exchange differences on intra-group loans

Intra-group loans are often denominated in foreign currencies, which regularly leads to foreign currency effects that impact the income statement when exchange rates change. Intra-group loans are eliminated on consolidation, but the related foreign exchange differences may not be eliminated.

At present, most companies include these differences as financing items in the group profit or loss account. The IFRS Interpretations Committee (the Committee) in its agenda decision concluded that a company can make an accounting policy choice (to be applied consistently) - either to classify all of these foreign exchange differences as operating, or to classify the exchange difference in the same category in which the related income or expense was classified prior to elimination on consolidation.

This will be a change in practice for almost every large international group.

Natural hedges and compensating foreign exchange (FX) gains or losses

Companies often have compensating exchange differences due to natural hedges. Currently, the FX gains or losses on these natural hedges may be presented net in the income statement (usually within the financing expense/ income).

Following the implementation of IFRS 18, it is likely that some of these FX gains or losses could be categorised into different income statement categories resulting in higher volatility within individual categories and impact the presentation of results.

For example:

A treasury entity with EUR functional currency raises capital in USD and lends it further in USD to its US based subsidiaries having USD functional currency. The FX gains or losses arising from foreign currency borrowing and lending in the treasury entity currently are presented as net in the income statement. In applying IFRS 18, these gains or losses at group level would likely be classified separately in financing and investing/operating categories.
The FX gains or losses on a foreign currency borrowing would generally compensate for FX gains or losses on foreign currency assets such as trade receivables in the same currency. Following the implementation of IFRS 18, the FX gains or losses on the foreign currency borrowing would likely be classified in the financing category, whereas the FX gains or losses on the trade receivables would be classified in the operating category.

The foreign currency effects in these scenarios would appear in different profit or loss categories. Designating these natural hedges in a qualifying hedging relationship, may help in presenting these compensating FX gains or losses in the same line item in the income statement.

Companies could consider designating these natural hedges in a hedge accounting relationship under IFRS 9 to reduce earnings volatility within the individual categories.

2. Derivative gains/losses

IFRS 18 requires entities to determine where derivative gains and losses are classified within the operating, investing or financing categories depending on whether it is used for managing identified risks.

Previously, where hedge accounting is not applied, fair value movement of derivatives would generally be reported within finance expense/income.

Following the application of IFRS 18, derivative gains and losses could impact other income statement categories depending on the purpose for which they were undertaken i.e. whether used for managing identified risks and whether an entity has an SMBA. This could result in derivative fair value movements impacting the operating/investing category.

For example, if a derivative used to hedge forecast purchases (operating category) does not apply hedge accounting, the fair value movements of this derivative would also be categorised in operating category resulting in volatility in that category.

Another example is of an entity that uses an interest rate swap to hedge borrowings and does not apply hedge accounting. Where the entity has an SMBA of providing finance to customers and the derivative relates to providing finance to customers, it may result in derivative gains and losses presented within operating category.

Entities could consider application of hedge accounting to reduce the volatility in individual income statement categories and to ensure that the risk management objective is appropriately reflected in the financial statements.

3. Other areas of potential impact

Cash pooling arrangements

Treasuries often enter into cash pooling structures to optimise cash management, enhance liquidity and to manage foreign currency requirements. The categorisation of FX gains or losses in cash pooling arrangements can get quite complex due to volume and complexity of transaction flow and balances. Companies should consider accounting policy choices and updates needed to treasury systems and processes to ensure FX gains or losses are being appropriately categorised.
Bank accounts that fluctuate between a positive and negative balance

An entity may operate a single bank account that frequently fluctuates from a cash balance earning interest income to an overdrawn balance incurring interest expense. If an entity does not have an SMBA, the categorisation of the income and expenses under IFRS 18 would require interest income from positive balances (cash and cash equivalents) to be categorised as investing activities and interest expenses from negative balances (overdraft facilities) would be categorised as financing activities. Conversely, if an entity determines that it has an SMBA, then it should evaluate the classification of income and expenses on the cash and overdraft balances separately, consistent with how it classifies income and expenses from cash and cash equivalents and financing liabilities, respectively. Companies should evaluate the treasury systems and processes that would require changes to appropriately categorise such income and expenses.
Treasury strategy and performance

The categorisation of the income and expenses under IFRS 18, may require treasury to modify their hedging strategy or to consider applying hedge accounting to ensure earnings volatility is monitored and managed to avoid unintended volatility within any of the income statement categories. This could also consequently require revisions to treasury’s performance metrics and success criteria.
Debt covenants and other key metrics

Companies should evaluate the impact of these changes on the debt covenant calculations and other reported metrics. For example, certain income and expenses expected to be classified in the operating category following the transition to IFRS 18 may impact certain debt covenants or earnings metrics.
Mapping of balances to relevant categories

Companies would be required to ensure financial instruments and account balances are appropriately mapped to the suitable category to facilitate appropriate reporting. This would involve mapping of FX gains or losses and derivatives gains or losses in relevant categories, changes to the chart of accounts, mapping of existing accounts and any new accounts, etc.

Conclusion

From a treasury perspective, IFRS 18 is not an accounting measurement project; it is primarily a performance reporting and communication project.

Treasury teams will need to reassess the reporting of interest income and expense, foreign exchange gains and losses, derivative results, investment returns and management-defined performance measures, while ensuring that systems, governance and stakeholder communications are ready for implementation by 2027.

Next steps

As IFRS 18 is effective for annual periods beginning on or after 1 January 2027 with retrospective application, now is the time to kick-start your IFRS 18 journey.

Involve and communicate with all impacted stakeholders including investors, finance, IT and tax teams;
Conduct an initial impact assessment with consideration of the implications on judgements, systems, processes and controls;
Monitor the changes in the local reporting landscape; and
Appropriately track information for the FY2026 comparatives.

Contact a member of our Audit team below to get started.