The International Accounting Standards Board (IASB) recently completed work on a new standard - IFRS 18 Presentation and Disclosure in Financial Statements.
"IFRS 18 represents the most significant change to companies' presentation of financial performance since IFRS Accounting Standards were introduced more than 20 years ago", IASB Chair Andreas Barckow said in a statement on 9 April 2024.
The standard aims to give investors more transparent and comparable information about companies' financial performance, thereby enabling better investment decisions. It will affect all companies using IFRS Accounting Standards.
In summary, IFRS 18 introduces three sets of new requirements to improve companies' reporting of financial performance and gives investors a better basis for analysing and comparing companies.
Firstly, IFRS 18 introduces three defined categories for income and expenses — operating, investing and financing — to improve the structure of the income statement, and requires all companies to provide new defined subtotals, including operating profit. The improved structure and new subtotals will give investors a consistent starting point for analysing companies' performance and make it easier to compare companies.
Secondly, IFRS 18 requires companies to disclose explanations of those company-specific measures that are related to the income statement, referred to as management-defined performance measures. The new requirements will improve the discipline and transparency of management-defined performance measures and make them subject to audit.
Finally, IFRS 18 sets out enhanced guidance on how to organize information and whether to provide it in the primary financial statements or in the notes. IFRS 18 also requires companies to provide more transparency about operating expenses, helping investors to find and understand the information they need.
From a tax perspective, companies will need to identify the income tax effect and effect on non-controlling interests for each reconciling item in the reconciliation between a management-defined performance measure and the most directly comparable subtotal listed in IFRS 18 or total or subtotal required by IFRS Accounting Standards. It is recognized that such a requirement can be costly for the companies, so a simplified approach is provided as an option.
Thus, IFRS 18 gives companies the option of calculating the income tax effects using:
- the statutory tax rates applicable to the transactions in the tax jurisdictions concerned;
- a reasonable pro rata allocation of the current and deferred tax of the company in the tax jurisdictions concerned; or
- another method that achieves a more appropriate allocation in the circumstances.
Apart from this, even if not mentioned in the connected documents the IASB released, one can imagine the impact of the standard in other parts regarding taxes. For example, transfer pricing. One of the most commonly used profit level indicators to test the arm's length principle under the transactional net margin method (TNMM) method is Return on Sales defined as earnings before interest and taxes (EBIT) divided by Sales. The same is also the starting point for the OECD Amount B calculation. With the new IFRS standard it is recognized that the IASB's definition of "profit before financing and income taxes" is likely to differ from the definition companies use for EBIT - thus also impacting the calculations for transfer pricing purposes, including those of potential comparables.
IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, but companies can apply it earlier.
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