Update your tools to IFRS 18 standards
Why is important to deal with IFRS 18 standards?
More comparability, more transparency, the International Accounting Standards Bord (IASB) released in December 2019 the exposure draft "General Presentation and Disclosures" as part of the project to improve financial communication.
It's important to prepare for it now: focus on the issues of this new standards!
Main updates envisaged by the IASB
Most of the IASB's resolutions concern the income statement and performance measures. Indeed, the IASB wishes to regulate the presentation of the income statement in order to respond to the main criticims of investors raised during the consultation process executed in 2015 (lack of comparabilit, insufficiently detailed information and transparency in the use of performance measures)
Income statements
The following proposals presented:
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Standardization of the P&L sub-totals and of the categories composing them, especially: operating income, operating income and share of income of companies accounted for using the equity method, income before financing and tax.
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The end of the mixed presentation of expenses by nature and by destination. The next test should force companies to opt for one or the other of the presentations, with examples of selection criteria provided by the standard.
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The appearance of two lines of securities accounted for using the equity method: the IASB proposes to classify in the line "integrated MEE" associates or jont ventures accounted for using the equity method whose activity cannot be separated frow the main activities of the Group. If the entity does not meet the criterea, then it is considered non-integrated, therefore meeting the definition of an investment activity.
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The creation of "Investment" category
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The redefinition of financing activities, in order to harmonize the currend diverse practice with choices of presentation that are often poorly explained in the appendice notes.
Standardization of performance measures for an unified financial communication
Many companies present alternative performances indicators, which are financial indicators, not presented in the accounts, not defined by accounting standards and used by listed companies to communicate.
The IASB proposes the use and presentation of Performance Measures used by Management (MPM), which must meet the following criteria:
- an MPM cannot be a balance sheet indicator, such as net debt or FCF
- an MPM cannot be a total or subtotal
- it must be used in financial communication
- it must be representative for management's vision
- it must be reconciled with the nearest subtotal in the IS
- it presents the tax effect ans share of non-controlling interests
Harmonization of the cash flow statement
The IASB propose to harmonize the cash flow stastement through three types of changes:
- harmonization of the indirect method based on operating profit
- Distinct presentation of the CF from companies acconted for using the equity method integrated or not integrated within the investment flows
- Romoval of interest and divident classification options
To comply with theses new communication requirements, it will be necessary to anticipate on the tools for producing financial information.
Impacts in financial information production tools
In general, the consolidation and reporting tools will have to be adapted to meet the new financial communication requirements. We present the main issues :
- The tool account plan will have to be adapted. One of the signification impacts could be the change in the presentation of the income statement, in the event that a company could be forced to abandon a mixed presentation. In the event of a presentation by destination, it will be required to present in the notes to the consolidated financial statements a reconcialiation of expenses by nature and by destination, which leads to additional complexity particularly in the monitoring of intragroup declarations.
- As soon as the chart of account is modified, an exhaustive analysis of the configuration must be carried out: bundle data, consolidation rules, refund statements,...
Among the restitution statements, the configuration of the cash flow table will have to change to take into account both the requirement of the new standard in terms of presentation and the impacts induced by all the modifications made to the chart of accounts.
- The determination in the consolidation and reporting tool of performance measures presents a complexity in the calculation of the distribution between the group's share and non-controlling interests, as well as the calculation of deferred taxes.
- The production of pro-formats will also have to be studied: identification of the prerequisites for replaying the financial statements according to the new standard, from a tool poind of view but also production schedule.
Upstream, the accounting software packages (ERP) must be able to provide the new information.
Downstream, the disclosure management tools will also need to be updated for the preparation of fuure financial statements, as well as those, for listed groups, allowing them to establish thier electronic reporting 'ESEF).
Finally, it will be necessary to assess the impact in the tools used by the Management Control department, the latter being sometimes linked to tools dedicated to accounting and the consolidation of financial statements.
To conclude, compliance with the requirements of the future standard impacts the entire information production chain, from accounting tools to financial communication tools, including reporting and consolidation tools.