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Highlights
- In April 2024, the International Accounting Standards Board (IASB) issued a new accounting standard IFRS 18- presentation and disclosures in financial statements.
- BFSI CFOs need to understand the new requirements under IFRS 18 and the changes from prevailing IAS 1 guidelines
- BFSI firms must act swiftly to complete the process of implementing principles of aggregation and disaggregation for on-time compliance of IFRS 18
Introduction
The new accounting standard IFRS 18 issued by IASB would come into effect in more than 100 jurisdictions across the globe from Jan 1st, 2027.
To comply with the new standard, BFSI firms must take a structured approach. This includes understanding the updated reporting requirements, assessing their impact on financial reporting processes, controls, systems, and data, and implementing necessary upgrades. Firms should also train staff, test outcomes, conduct parallel runs, and refine processes to ensure a seamless transition.
The two-and-a-half-year compliance window may seem ample, but it could prove just enough to complete all necessary actions on time.
The key changes introduced in the standard includes three new income statement categories, two new subtotals, enhanced disclosure of management, defined performance measures (MPMs), guidance on aggregating and disaggregating line items etc. These are expected to drive greater standardization, improve comparability, and provide valuable insights for financial statement users. All these will boost investor confidence.
New IFRS 18 Rules
Users of financial statements find reports hard to understand or compare due to insufficient detail on line items or excessive information that obscures key facts
In the light of such observations, IASB decided to add principles of aggregation and disaggregation to the IFRS 18 accounting standard. The new principles are defined within the ‘Conceptual Framework’ that will help both the creators and the users of financial statements by incorporating just the required amount of information in a systematic way.
Simply put, principles of aggregation and disaggregation require items of income, expenses, assets, liabilities, equity and cashflows to be aggregated based on common shared characteristics i.e. nature, function, measurement basis etc. These items need to be disaggregated if there are no common characteristics to ensure that material information remains clear and not obscured.
While presenting the financial statements and the notes, the BFSI CFOs need to aggregate and disaggregate items based on their characteristics while adhering to the guidance on the roles of the primary financial statements and their accompanying notes. That is, the financial statements need to provide structured summaries of financial information that:
- Provide understandable view of the assets, liabilities, equity, income, expenses and cashflows
- Facilitate comparison between entities and across periods for the same entity
- Highlight line items that might need further information or explanations
The primary role of the notes to financial statements is to provide additional supporting material information that would help to comprehend the line items in the financial statements.
It must be remembered that IFRS 18 has introduced 3 new categories, i.e. operating, investing and financing in the income statements. These categories will majorly change the overall structure of income statements of BFSI firms. Principles of aggregation and disaggregation will need to take into consideration these new structures.
Let’s discuss what’s the best way forward for BFSI CFOs on their IFRS 18 compliance journeys.
Way Forward
BFSI CFOs would need to start by understanding the new requirements under IFRS 18 and what are the changes from prevailing IAS 1 guidelines.
For this purpose, the application guidance provided by IASB would come in handy. The application guidance on this topic comprises:
- The process of deciding whether to aggregate or disaggregate information
- The basis of aggregation and disaggregation
- Description of items presented or disclosed, and
- The characteristics of assets, liabilities, equity, income and expenses that an entity considers in assessing whether items have dissimilar characteristics.
We expect that understanding and implementing the new principles will be a time-consuming process.
The finance heads will need to put in place a standard process or framework to decide whether to aggregate or disaggregate general ledger accounts. There might be a need to create/ modify policies for the accounting and disclosure of "Unusual" items.
The finance, accounting, and reporting staff will need training in the new policies and processes, with hands-on support during the initial transaction period.
Finance heads will also have to budget adequate time to review the chart of accounts and hierarchy of account grouping to ensure that new principles of aggregation and disaggregation are complied with. The chart of accounts set ups might need some changes with respect to the current hierarchy/ groupings/ labeling etc. They will need to review current groupings to ensure that grouped line items share common characteristics, such as nature, function, measurement basis and so on. Additionally, they would need to review the titles of accounts to ensure that they accurately represent the characteristics of the account. Consequently, any automated accounting frameworks and rules will also have to be reviewed and redefined as needed.
Particularly, the accounts grouped under the category ‘Others’ will have to be reviewed thoroughly for the common characteristics and the materiality aspects for compliance with the new guidelines. This implies further segregation of the income, expenses, assets, liabilities, cashflows into smaller homogeneous groups that share common characteristics as defined in the standard. Additionally, it is essential to ensure that the group names are relevant and reflect material items included therein. Historical data will also have to be re-organized/ migrated to the new structures.
Finally, the reports for primary financial statements and notes to accounts will undergo structural changes based on the new guidance on aggregation and disaggregation. Internal MIS/DSS reports, along with certain regulatory reports, will also need to be aligned and reconciled with the new financial statement structure.
All the above changes will have to be carried out in close collaboration with the IT teams. While the new guidelines will not impact the firm’s profitability, senior management must still be informed about the changes in financial statement presentation.
BFSI CFOs must proactively engage with regulators, auditors, and investors to ensure a smooth IFRS 18 transition. Clear communication on new reporting structures, MPM disclosures, and financial impacts will help maintain compliance and investor confidence. Internally, leadership and business units must be aligned to ensure consistent adoption and accurate financial reporting across the organization.
Conclusion
We have reviewed the financial statements and notes of many BFSI Firms. Based on our analysis, most BFSI firms have a good amount of transparency in their financial statements.
Very few BFSI firms have line items ‘Others’ as part of financial statements that are material and would need further expansion.
Nevertheless, to become compliant with IFRS 18 in a systematic and timely manner, BFSI firms need to further build upon their recent experiences of becoming compliant with extremely complex IFRS 9 and 17 Standards.
There are a lot of activities to be completed for on-time compliance with IFRS 18. And an early start would help. The process of implementing principles of aggregation and disaggregation would comprise of thorough review of chart of accounts, financial statements, MIS, DSS reports etc. i.e. activities requiring the deep involvement of IFRS 18 trained staff that are familiar with the accounting policies of the firms & additional IT interventions and would prove to be time-consuming and expensive.
It is high time that BFSI Firms quickly complete impact analysis of IFRS 18, finalize the changes to Chart of Accounts, groupings and hierarchies thereof, and start working towards establishing the right rigor in terms of setting up processes, controls, systems, data related aspects, train the staff, create target operating Model and Standard Operating Procedures to ensure smooth transitioning into the new IFRS 18 regime. This is crucial as additional time will have to be budgeted for parallel runs, internal as well as statutory audits.
Begin your IFRS 18 implementation now!
