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

We already looked at 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. More broadly, the operating category of expenses includes all items not classified in those other categories. IFRS 18 prescribes separate line-item presentation for operating expenses, and a subtotal for operating profit or loss; it requires that an entity classify and present operating expense line items in the way that provides the most useful structured summary, by either the nature or function of the expenses. Most of this isn’t entirely new, but the greater degree of specificity and underlying clarity in IFRS 18 will frequently lead to reassessing existing definitions and practices (just as entities earlier did on the transition from old Canadian GAAP).

Some related comments from the discussion by Canada’s IFRS Financial Standards Discussion Group:

• Entities that already present an “Operating profit or loss” subtotal may need to change how they calculate it. Significant time and effort might be required for entities to identify into which categories their income and expenses should map within the income statement. The nature of an entity’s business activities could also determine the extent of the impact. For example, entities with multiple business activities might need to exercise greater judgment to determine if income and expenses from all their activities should be classified within the operating category.
• … Entities may need to reassess which method for presenting operating expenses (i.e., by nature, by function, or using a mixed presentation) provides the most useful information about operating expenses on the face of the income statement. Given that this decision impacts how interested and affected parties perceive an entity’s financial health and operational efficiency, selecting the most appropriate method to convey this in the context of these changes may require careful consideration. Even if the analysis results in retaining a mixed presentation, for example, the entity will still need to document why this approach is appropriate under IFRS 18, based on their specific facts and circumstances.
• … Companies may need to further disaggregate the information disclosed in existing notes. Entities must ensure they can gather, process, and report data at the level of detail required by IFRS 18, which may necessitate changes to existing workflow processes and controls. Some entities might need to adapt their financial reporting systems to track and collate the more disaggregated information and classify income and expenses into new categories. This could involve significant investments in new software or upgrades to existing systems to ensure they can capture and report the necessary information accurately. The system implications may be particularly significant for companies presenting an analysis of operating expenses by function or using a mixed presentation on the face of the income statement.

In making that determination about the appropriate basis of presenting operating expenses, an entity considers what line items provide the most useful information about the main components or drivers of its profitability, or most closely represent the way the business is managed and management reports internally; it also considers standard industry practice, and whether allocating particular expenses by function would be arbitrary and work against providing a faithful representation of the function (as might be the case, for example, in allocating depreciation and amortization and impairment charges). Again, this is somewhat familiar territory, and many companies will no doubt hope not to be pushed by their auditors into “reinventing the wheel,” as the phrase goes. Regardless, KPMG suggests that “the new requirements will help companies to better tell their story and connect their reporting in the financial statements.” But that reminds me that I previously quoted The New Yorker’s Parul Sehgal as follows:

• Story lulls. It encourages us to overlook the fact that it is, first, an act of selection. Details are amplified or muted. Apparent irrelevancies are integrated or pruned. Each decision is an argument, each argument an imposition of meaning, each imposition an exercise of power. When applied to history, it is a process that the late scholar Hayden White termed “emplotment”—in which experience is altered when squeezed into even the most rudimentary beginning-middle-end structure. 

Sehgal’s article contains suggestions of alternatives: “(putting) ideas and images into productive tension, with no reassurance of closure or comfort,” or the alternative notion of a “swarm,” which “doesn’t contain, like a story (but rather) allows—contradiction, dissonance, doubt, pure immanence, movement, an open destiny, an open road.” I wondered in that earlier post whether – especially given the new capacities and possibilities presented by advancing technology – we should be exploring financial reporting as swarm, as multiple swarms, as anything but stories. But whatever the virtues of IFRS 18, such radical paradigm-breaking isn’t among them…

The opinions expressed are solely those of the author.