Let’s return to the upcoming IFRS 18, Presentation and Disclosure in Financial Statements…

Another key aspect of the new standard is its treatment of management-defined performance measures (MPMs), subtotals of income and expense that aren’t specifically required to be presented or disclosed under IFRS, but that an entity uses in public communications outside financial statements, to communicate management’s view of an aspect of financial performance. This would broadly include adjusted profit measures that add back various items. Under IFRS 18, an entity discloses information about its MPMs in a single note to the financial statements, including a statement that the MPMs provide management’s view of an aspect of the financial performance of the entity as a whole and are not necessarily comparable with measures sharing similar labels or descriptions provided by other entities. For each MPM, the standard requires describing the aspect of financial performance that it communicates, including why management believes the MPM provides useful information about the entity’s financial performance; the calculation and a reconciliation to the most directly comparable subtotal or total reported under IFRS; and how the entity determined the income tax effect, as well as explanations of any changes in the calculations.

Canada’s IFRS Discussion Group discussed the area in the following terms:

• Entities using performance measures in their public communications (including management discussion and analysis (MD&A), press releases, and investor presentations) that meet the definition of MPMs in IFRS 18 will need to establish a process to capture and analyze these key performance metrics to ensure consistency with financial statement disclosures. For example, entities will need to capture relevant financial information to disclose reconciliations of MPMs to the most directly comparable IFRS subtotals, including tax effects and effects on non-controlling interests. Determining which key performance metrics constitute MPMs under IFRS 18 and deciding where they will be disclosed in the financial statements will likely involve multiple interested and affected parties and may take some time. Furthermore, since MPMs will be included in audited financial statements with requisite disclosures for the first time, entities will need to document their process for identifying which performance measures qualify as MPMs, their rationale, and how they comply with the requisite disclosure requirements in IFRS 18.

For companies in Canada and various other jurisdictions, the information required for MPMs, and the points made there, are very similar to current regulatory requirements and expectations relating to “non-GAAP measures,” which have tightened significantly over the years (ten years ago on this blog, I noted an OSC review in which 82% of the issuers reviewed were required to improve their future disclosures in one way or another – presumably that number would be substantially lower now). As such, companies may feel a certain weariness in having to once again establish and document processes and reconciliations and all the rest of it. And while bringing such measures within the scope of the audit provides a theoretical boost in credibility and reliability, it’s unlikely that the decision-relevance (such as it may be) of such measures in recent years has been impeded by them not being directly audited. Still, to the extent that the standard provides more integrated and less fragmented information on financial performance, it should be a positive step forward…

While we’re at it, that same discussion group meeting provided the following examples of other IFRS 18-related system implications:

• For groups of companies, the output of one company within the group might be the input for another. In some cases, the nature of expenses is lost or not tracked at the consolidated level. This may be more significant when the standard costing method for inventories is used. There might also be more than one set of business activities in the group, and the classification of items of income and expenses may be different at the consolidated level compared to the operating company level.
• IFRS 18 includes specific classification requirements for certain items, such as foreign exchange differences, fair value gains and losses on derivatives, and income and expenses from hybrid contracts. Such income and expenses may therefore need to be classified into different income statement categories. Some companies may also have separate treasury management systems to record information on financial instruments at a more granular level compared with the enterprise resource planning systems, which may also require updates.
• Entities may need to review charts of accounts, update transaction recording systems, revise consolidation processes, add new data points for disclosures, or design revised control procedures to ensure compliance. This may mean entities will need to redefine account classifications and ensure consistency across different entities within a group.

As we noted before, it may not be immediately clear to all stakeholders that the real-world benefit of these efforts exceeds their cost. But perhaps they can content themselves with the reflection that financial reporting under IFRS 18 will at least generally be conceptually sharper and aesthetically enhanced…

The opinions expressed are solely those of the author.