Implementation of IFRS 18 – Practical challenges and solutions for an efficient transition

IFRS 18 – assuming the outstanding endorsement by the EU – will be mandatory for financial years beginning on or after 01/01/2027, including the adjustment of prior-year information. Voluntary early application is also possible after the EU endorsement. The new standard regulates the topic of “Presentation and Disclosures” and thus replaces the currently valid IAS 1 with regard to these basic regulations. The new regulations focus on the following areas:

• New uniform structure of the income statement with three new categories: Operating Result, Investment Result, and Financing Result, as well as corresponding mandatory subtotals
• New guidelines for the aggregation and disaggregation of information in the primaries and in the notes
• New disclosure requirements (including reconciliation) for so-called Management-Defined Performance Measures (MPMs), i.e., key performance indicators that are not defined according to IFRS (e.g., company-specific definition of EBIT or EBITDA)

For a comprehensive overview of the new features, see “IRFS 18 and the practical effects of the transition”.

Technical considerations as a starting point for the transition

The starting point for the transition to IFRS 18 is the restructuring of the income statement, which in a next step may also require disclosures on MPMs and their reconciliation. The following stylistic diagram illustrates, by way of example, what effects may arise. However, the transition effects are company-specific and, in particular, also depend on the previous – currently still individually customizable – structure of the income statement. It should also be noted that IFRS 18 does not prescribe a detailed breakdown, but rather – now on the basis of the new guidelines on aggregation and disaggregation – the presentation is to be worked out individually in detail. This includes, among other things, the classification of operating expenses according to the total cost method, the cost of sales method, or a mixed form.

The technical considerations also include the question of how internal performance measurement should be structured in the future. Individually defined performance indicators may have to be explained as MPMs in the notes if they are reported outside the financial statements. It should be noted here that the management report is also a reporting element outside the financial statements and, according to the regulations of DRS 20, financial and non-financial performance indicators must be reported there. Accordingly, a reporting obligation in the IFRS notes is also indirectly introduced for the central internal control variables. This may be a trigger to rethink the internal corporate management and, if necessary, to redesign it. For example, a closer link to the new subtotals according to IFRS 18 (e.g., Operating Result) could possibly be a practical solution in order to avoid the disclosure requirements for MPMs.

In any case, it is crucial that companies think about possible consequential effects of the restructuring of the income statement at an early stage. Especially in combination with a possible change in internal performance measurement, the topics of management remuneration or covenants in loan agreements could also play a role in this context.

The introduction of the new subcategories in the income statement leads to a reclassification of individual income and expense items (see diagram above). The central building block for an efficient implementation of the new requirements will therefore be the group chart of accounts and the account mapping. After the technical preliminary work, the implementation will therefore largely take place via the IT systems. Here, a company-specific decision must be made as to whether this should be done directly as a fully integrated solution in the (ideally group-wide uniform) ERP system or in the consolidation software. Different valuation levels can help to create reconciliations between the “old” structure and the new structure according to IFRS 18.

In some areas, extended data preparation may also be required, e.g., division of currency translation differences into the areas of operations, investment, and financing. Here, too, it must be clarified to what extent an automated solution in the IT systems can be used and process and workflow structures must be revised.

Our interdisciplinary project approach (see diagram below), which, in addition to the technical development of the transition to IFRS 18, also includes the IT-based implementation, ensures in five steps not only an efficient introduction of the new standard, but also an efficient ongoing preparation of IFRS 18-compliant reports after implementation.

The starting point for the successful introduction of IFRS 18 is a well-thought-out project preparation (step 1). Here, a quick check helps to define the project framework in order to tackle the further project steps in a targeted manner, depending on the individual impact.

In a second step, the status quo is recorded in the as-is analysis, which from a technical perspective includes not only the existing structure of the income statement and internal performance management, but also the consequential effects. From an IT perspective, the existing processes and systems, including interfaces and any existing gaps, must be examined.

In the target concept phase (step 3), the target image of the transition is defined. The focus here is on the technical development of the future structure of the income statement, but also on internal performance measurement and its external communication. From an IT perspective, a requirements catalog and the concept for technical implementation are developed here.

The implementation (step 4) then largely takes place via the corresponding IT systems. However, further adjustments may also be necessary, e.g., to manuals or internal processes. At the end of the project, the roll-out takes place and the first IFRS 18 reports are prepared.

Practical challenges in the transition project and individual solutions

In an international group, a change in accounting always entails a number of practical challenges. For example, efficient implementation can be made more difficult by the fact that there are no uniform IT systems or that there are process weaknesses in data preparation.

The transition to IFRS 18 can therefore also be an opportunity to rethink existing structures and, if necessary, to modernize them. In particular, manual (often Excel-based) consolidation solutions or preparations of internally used performance indicators could be reconsidered in this context. Our experts from the IT consulting area, e.g., on SAP S/4HANA or on consolidation with Lucanet, are integrated into the transition projects as needed and are happy to support finding a suitable solution here. The sometimes temptingly obvious solution of manually and approximately determining transition effects in the group headquarters may prove to be practical in individual cases, but in many cases will lead to additional effort in the further course of daily application. A careful consideration is required here.

Ready for IFRS 18 – Thought of everything?

The above explanations show that IFRS 18 can have a number of consequential effects in addition to the purely technical development of the new features. The fact that a central reporting element is being reformed with the income statement can have a wide range of effects on different departments and stakeholders.

An early analysis ensures that the effects are fully recognized and that a decision on efficient implementation can be made in good time. The concrete effects must be determined individually in each case and can range from merely moderate reclassifications within the income statement to a holistic modernization of (external and internal) accounting. As a rule, the key to an efficient implementation of IFRS 18 will only be possible via the IT systems. An interdisciplinary project approach as presented is therefore essential.