Unlocking Opportunities: Preparing for IFRS 18 Compliance to Enhance Profitability and Tax Advantage

By James Njui

April 27, 2024


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On April 9, 2024, the International Accounting Standards Board (IASB) released IFRS 18, a new accounting standard that is poised to significantly impact financial reporting practices. Beyond affecting the presentation and disclosures within financial statements, IFRS 18 has the potential to trigger profound changes across various facets of organizations.

New Judgements and Assessments

Under IFRS 18, organizations will need to exercise new judgements and assessments, particularly those regarding the disaggregation and aggregation of financial information in all statements. Determining the appropriate level of aggregation and disaggregation, recognizing the main business activities, categorizing income and expenses such as financial derivative and hybrid contracts and currency differences, and selecting methods for presenting operating expenses such as by their overall nature or organizational function will require careful consideration to ensure compliance with the standard.

Disclosure Requirements

Companies will be required to introduce or update disclosures in their financial statement notes to reflect the analysis of operating expenses by nature and measures that are Management Performance Measures (MPMs). This entails further disaggregation of existing information and understanding the data sources necessary to accomplish these requirements. Additionally, some companies may need to adapt their financial reporting systems to accommodate the new disclosure demands and classify income and expenses accordingly.

System Implications

The implementation of IFRS 18 may entail significant system implications, particularly for companies presenting operating expenses by function or mixed presentation. Challenges may arise in tracking expenses across group companies, aligning classifications at consolidated and operating levels, and adhering to specific classification requirements for items like foreign currency differences, derivatives and hybrid financial instruments. Companies may need to review charts of accounts, update transaction systems, revise consolidation processes, and enhance control procedures to ensure compliance with the standard.

Impact on Self-defined Subtotals

Companies accustomed to presenting self-defined subtotals in their income statements will likely need to realign these subtotals with the new defined subtotals mandated by IFRS 18. This adjustment may necessitate revisions to remuneration arrangements, bonus schemes, and covenant tests linked to existing subtotals. It is crucial for companies to communicate these changes effectively to stakeholders and educate staff members on the implications of IFRS 18 to mitigate potential misinterpretations.

Conclusion

In anticipation of the first annual report applying IFRS 18, companies must proactively prepare for the standard’s implementation. This entails thorough assessments of judgements and assessments, meticulous adherence to disclosure requirements, and strategic adjustments to systems and processes. Early engagement with investor relations teams and comprehensive staff education are essential to ensure a smooth transition to the new standard and foster stakeholder understanding of its implications.

Engaging in pre-planning to prepare for the implementation of IFRS 18 is crucial for companies to optimize their financial reporting practices and capitalize on potential tax advantages. Through comprehensive assessments early on, companies can identify areas where adjustments may yield tax benefits, ensuring they are well-positioned to leverage any available tax incentives or deductions. Additionally, by proactively addressing gaps in current processes and implementing necessary changes, companies can enhance their competitive positioning and profitability in the market. Early preparation allows companies to streamline their financial reporting procedures, improve data accuracy, and reduce compliance costs, giving them a competitive edge over peers who may lag behind in adapting to the new standard.

Furthermore, pre-planning enables companies to anticipate and mitigate potential challenges associated with the implementation of IFRS 18, ensuring smooth compliance while maximizing profit potential. By developing tailored implementation plans that align with their strategic objectives, companies can capitalize on opportunities to enhance revenue streams and optimize resource allocation. This strategic approach not only enhances the company’s ability to meet regulatory requirements but also fosters stakeholder confidence and facilitates long-term financial success. Ultimately, by proactively preparing for IFRS 18, companies can position themselves for sustainable growth and profitability while minimizing risks and maximizing tax advantages in the evolving regulatory landscape.

Take the proactive step towards optimizing your financial reporting practices and maximizing tax advantages under the new IFRS 18 standard. Book a consultation today to ensure your company is well-prepared to capitalize on this update and gain a competitive edge in the market.

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