INTERNATIONAL Finance Reporting Standards (IFRS) 18: Presentation and Disclosure, the latest brainchild of the International Accounting Standards (IAS) Board, will take effect on Jan. 1, 2027. For decades, IAS 1 has guided the financial reporting practices of companies worldwide. But since the business landscape has evolved, so, too, has the need for a more intricate framework. Enter IFRS 18 — a new standard that promises to be more precise, more definitive and ultimately more useful for investors, lenders and other stakeholders.
But with these sweeping changes come important questions: Are we ready for the new standard? And what price will we pay for greater transparency?
At its core, the standard is about improving the transparency and comparability of financial statements. Investors, lenders and other stakeholders have long sought a clearer picture of corporate performance, and the standard seems designed to meet that demand.
The new standard introduces several key features that stand out. First, IFRS 18 requires a more structured presentation of financial statements. The income statement will now be divided into three distinct categories: operating, investing and financing — similar to the statement of cash flows under IAS 7. This change aims to address a long-standing concern about comparability across companies. Standardizing financial presentations can simplify the process of assessing performance across industries, offering a consistent benchmark for analysis.
Second, the standard introduces the need for management to disclose defined performance measures, often called non-GAAP (generally accepted accounting principles) measures. These alternative metrics extend beyond traditional financial figures, providing a more nuanced view of a company's performance. The standard recognizes financial performance is not the sole measure of a company's health, and that industry-specific metrics are crucial in evaluating success.
Lastly, the standard will affect the aggregation and disaggregation of items in financial statements. Companies that previously reported expenses by function will now need to disclose these by nature as well. Stricter rules on disaggregation based on materiality aim to reduce subjectivity and create a clearer presentation of information.
IFRS 18 is a step in the right direction. The promise of better comparability, especially in an increasingly globalized economy, is a welcome change. Investors and stakeholders should, in theory, be able to make more informed decisions with financial data that's consistent and standardized. And the shift to recognizing alternative performance measures couldn't be more timely. After all, traditional metrics alone no longer capture what success looks like in today's world.
The move to stricter guidelines on disaggregation is another positive step. By reducing subjectivity in financial reporting, we may see a more neutral and transparent presentation of information. In an age where data integrity is paramount, this could be one of IFRS 18's most important contributions.
But let's not ignore the challenges. One of the significant concerns with IFRS 18 is the increased complexity it brings to financial reporting. As helpful as the new disclosures might be, particularly around non-GAAP or alternative performance measures, there's a risk that they could complicate financial statements rather than clarify them.
A question comes to mind: Will this standard achieve its objective in making financial statements easier to understand, or will it just add layers of complexity that only experts can navigate? The subjective nature of these alternative measures also raises questions. While these alternative performance measures can provide a more nuanced picture, they can also introduce inconsistencies across companies within the same industry, undermining the comparability that IFRS 18 aims to enhance.
This isn't just an abstract concern — it's a practical challenge for auditors as well. Speaking of auditors, the burden on them cannot be overstated. With the introduction of these alternative measurements, auditors will now need to verify not just traditional financial metrics but also the relevance and accuracy of these management-defined measures.
For smaller firms with fewer resources, this could be a significant challenge. And with the profession facing a dwindling number of auditors, particularly the local firms, the increased workload could further strain an already stressed industry. In the local context, we have yet to hear definitive news on when IFRS 18 will be adopted.
While the standard represents a pivotal moment in the accounting world, it's crucial for the Financial and Sustainability Reporting Standards Council to carefully weigh its pros and cons. Our local firms, particularly the smaller ones, are already grappling with a shrinking pool of auditors and accountants, and increasingly complex reporting requirements. Will they be able to handle the additional demands that IFRS 18 introduces?
If IFRS 18 is to be adopted in the Philippines, I believe it must be done with utmost care. The standard's promise of transparency and comparability is undoubtedly appealing, but its implementation needs to align with the realities of the local accounting landscape.
For all its potential benefits, IFRS 18 can bring unintended consequences, especially for firms that may struggle to keep up with the demands of this new era in financial reporting. While the standard is promising, we should also recognize that its success will hinge on how well we navigate its complexities. Because in the end, if we're not careful, this standard could end up being more of a burden than a breakthrough.
Time is ticking. Are we ready for IFRS 18?
---------------------------------------------------------------------------------------------------------------------------
Manuel Guilius Pamorca is a former quality assurance review manager of Paguio, Dumayas and Associates, CPAs (PDAC)-PrimeGlobal Philippines and a member of the Association of Certified Public Accountants in Public Practice (Acpapp). The views and opinions in this article are the author's and do not necessarily reflect those of these institutions.
Comments