I haven’t said much here about IFRS 18, Presentation and Disclosure in Financial Statements…

There’s no particular reason for that, other than perhaps generally trying to write about something that other firms and accounting commentators aren’t writing about, at least not in quite the same way. And also, as it’s only effective for annual reporting periods beginning on or after January 1, 2027, there’s lots of time (although, as always when approaching the implementation of a major new standard, the usual time-is-of-the-essence messaging is happily circulating, as indicated below). But as IASB Chair Andreas Barckow said that “IFRS 18 represents the most significant change to companies’ presentation of financial performance since IFRS Accounting Standards were introduced more than 20 years ago,” it won’t do to ignore it entirely. So then, diving in almost at random, one of the many aspects of interest is an entity’s assessment of its “main business activities,” relevant to determining whether certain expenses which would otherwise be classified as investing or financing activities should rather be viewed as operating activities. Canada’s IFRS Accounting Standards Discussion Group recently discussed this topic as follows:

• IFRS 18 may (also) require entities to make new assessments to identify their main business activities. For entities with diverse operations, this process will involve evaluating their various revenue streams and determining the significance of each to the overall business, which could require extensive analysis and judgment. For group entities with specified main business activities, such as a manufacturer that provides financing to customers, the income statement classification at the consolidated level may differ from that at the operating company level if all activities are not considered main business activities for the group as a whole…
• Consider, for example, a scenario when a car manufacturer’s group reporting includes several subsidiaries in the car manufacturing business, along with one subsidiary that holds investment property. In the group’s consolidated financial statements, the business activity of property investment does not constitute a separate operating segment and as such may not be a main business activity. However, in the subsidiary’s stand-alone financial statements, investing in property may be a specified main business activity. Therefore, if investing in property is a main business activity only at the subsidiary level, adjustments will be necessary when presenting the consolidated income statement to reclassify rental income from the operating category in the subsidiary’s income statement to the investing category at the consolidated level.

That may be conceptually clear enough, but it’s an example of how the new standard can’t avoid a certain imposed artificiality. Taking the above example, it’s unlikely that going through the described exercise will bring much value to the car manufacturer, any more than a person would gain much in the long term from having someone colour code their refrigerator shelves. And while the user of the statements may theoretically benefit, it’s unlikely that such a small tweak in presentation of long-established activities can radically alter a user’s perception of risk and opportunity. Indeed, the Group’s discussion seems almost entirely to identity more work for entities and auditors, with little mention of corresponding benefit to the entities themselves. For example, the meeting summary sums up its discussion of changes to processes and systems as follows:

• Some group members thought the changes to processes and systems might be particularly substantial for larger and more complex entities, such as those with multiple enterprise resource planning systems, and those that operate in multiple jurisdictions. They noted that entities might need to implement manual workarounds if they are unable to implement the necessary system changes in a timely manner, which will also require adequate controls to reduce the risk of errors. Although IFRS 18 only impacts presentation and disclosure, Group members think it may take a significant amount of time and effort for most entities to implement. Therefore, they encourage entities to begin this process early to ensure the changes can properly flow through the necessary processes and controls. One Group member also noted that auditors should engage with their clients early in the process of implementing IFRS 18 so that they are comfortable with their clients’ key judgments, system changes, and controls. Some Group members raised that since (management performance measures) will be included in audited financial statements for the first time, entities will need to carefully consider which performance measures are within the scope of the IFRS 18 disclosure requirements and document their rationale and disclosure considerations.

Which, even allowing that much the same gets said about any new standard, is quite a lot to consider. There’s no doubt that IFRS 18 is a conceptual and, if you will, aesthetic improvement on the current standard, which will in turn lead to more objectively satisfying financial reporting. Whether that will ultimately translate, even once in a while, into a decision-changing enhanced understanding of the underlying risks and opportunities isn’t yet as clear. ..

The opinions expressed are those of the author…