IFRS 18

When does IFRS 18 come into effect?

What are the challenges in implementing this new standard?

According to the International Accounting Standards Board (IASB), January 1, 2027 is the effective date of the new International Financial Reporting Standard 18 (IFRS 18) to prepare financial statements issued as of December 31 of the same year.

In order to improve the comparability and transparency of organizations' performance reports, the IASB published the new standard in April 2024.

In this regard, as of January 2027, IFRS 18 will replace International Accounting Standard (IAS) 1: “Presentation of financial statements” and will establish the new requirements for the presentation and disclosure of financial statements.

Some of the main modifications include:

New subtotals and categories to present the statement of income
New definitions and disclosures on management performance measures to be included in the notes to the financial statements
New principles and requirements on the aggregation and disaggregation of the information presented, including their respective notes
New classification criteria in the statement of cash flows applicable to interest and dividends

Specifically for Mexico, entities reporting under IFRS, including those that publish annual and quarterly financial reports and statements on the Mexican Stock Exchange (BMV), will need to consider the following four issues:

To improve the comparability of statements of income, organizations are required to submit the following:
- Profit or loss
- Gross profit or loss
- Operating profit or loss
- Profit or loss before financing and income tax (ISR)
- Pre-tax profit or loss

These subtotals help structure the statement of profit or loss in categories; for the items listed in IFRS 18 they need to be presented, unless doing so would reduce the effectiveness of the income statement by providing a useful, structured summary of the company’s income and expenses.

Such income and expenses will be classified into the following categories in the statement of income:
- Operation
- Investment
- Financing
- Income tax, discontinued operations

To provide greater transparency in the process, it is essential to make information disclosures about performance measures defined by management (also called non-GAAP measures), which can be used in public communications off the financial statements and help communicate Management’s vision on a specific aspect of the entity’s financial return.

In order to provide greater value in the information, the aggregation and disaggregation requirements were improved in a general and specific way. Among the former are the roles of the main financial statements, in addition to the notes and required items, including the individual breakdown of goodwill in the statement of financial position, as well as its grouping and use of representative terms.

As for the specific requirements, disclosures of determined or operational expenses are required by nature or role, so in this case, it is possible to make a mixed presentation.

New classification criteria were established in the statement of cash flows in order to reduce divergent practices. That is, the “Operating profit or loss” subtotal will be the starting point to prepare the statement of cash flows under the indirect method. <br><br>In this regard, these principles shall include investment activities and financing for interest received and paid, as well as for dividends.

Entities are permitted to apply IFRS 18 early; however, the only way to adopt this new IFRS is through retrospective application, which involves restating comparative financial information.

The application of IFRS 18 is universal; that is, it affects all entities that use IFRS to prepare financial statements, regardless of their line of business.

94% of S&P 500 companies included at least one non-GAAP performance measure in their first quarter 2020 earnings releases.

_{Source: Non-GAAP Financial Measures. Issues In-Depth, 2023.}

In an environment in which regulators' requirements are increasingly strict, it is vital to have the support of qualified third parties to fully comply with the new standards.

Therefore, adopting and developing a comprehensive strategy will allow organizations to be better prepared for the requirements of the new standard and comply with its requirements without major complications.

Nuestros servicios:

KPMG Mexico can provide you with advice on the following topics, in order to prepare and implement a compliance strategy around IFRS 18:

— Interpretation of new accounting criteria
— Identification of main conceptual differences between current criteria and new requirements
— Analysis of gaps between current accounting policies and new requirements
— IFRS 18 impact assessment on accounting and reporting, processes and controls, as well as data, technology environment and systems
— Preparation of an implementation plan that covers the definition and formalization of activities to be carried out
— Development of new accounting and operational policies
— Definition of accounting judgments and assumptions
— Adaptation of computer systems and automations in reporting financial statements
— Preparation of new financial statements and disclosures

Contact our specialists to discover the benefits that a tailor-made program can bring to your business.