IFRS 18 WILL BE THE FIRST STANDARD DEVELOPED IN COOPERATION WITH THE DIGITAL TEAM

It defined what changes are needed in the existing standards and what new standards to be developed.

In the first half of 2024, a new standard, IFRS 18 Presentation and Disclosure in Financial Statements is planned to be published, which will enter into force on January 1, 2027 (unless an entity decides to apply the requirements earlier). IFRS 18 will completely replace IAS 1 Presentation of Financial Statements. The primary objective of the new standard is to improve the quality of reported information. New requirements will definitely be introduced, and the general approach and methodology for IFRS accounting taxonomy will be revised (read about what IFRS taxonomy is here: https://www.orients.lv/en/blog/IFRS-XBRL-parskati/). In October, our team participated in the Data Amplified event organized by XBRL International in Zurich, where Florian Esterer, representative of the IASB (International Accounting Standards Board), presented which aspects of IFRS 18 are in focus this year and which will be in the coming years. For example, this year, the focus is on the Profit or loss statement and next year on the Statement of Cash Flows reporting requirements.

This will be the first standard to be developed with the digital team. It plays a critical role in the reporting of financial statements on a global scale. This is because IFRS 18 will be harmonized in two dimensions at once.

The reported information will be strictly structured:

• according to financial information disclosure requirements and
• with the digital requirements.

This will be a big step towards comparability of financial annual reports internationally. Further in the article, let's try to understand what the mentioned conceptual changes mean in practice.

Based on the information published on the IASB official website, it is currently known that the new IFRS accounting standard will require:

1.  to disclose two subtotals in the Profit or loss statement: Operating profit or loss and Profit before financing and income tax;
2. to disclose Management-defined performance measures - subtotals of income and expenses that are not defined in IFRS Accounting Standards and that are used in public communication outside of the financial statements to communicate the management's opinion on some aspect of the company's financial performance;
3. “to strengthen the requirements for aggregation and disaggregation of information in the primary financial statements and the notes” (IASB presentation, 2023).

When the new standard enters into force, some line items that will have changes in calculation or presentation in the financial statement compared to IAS 1, will also be given new names in the IFRS Accounting Taxonomy. For example, the item “Profit (loss) from operating activities”. The IFRS 18 standard will define exactly what information should be disclosed in the item Operating profit or loss. Since it is not precisely defined in the standards now, changes will also be made in the name of the item: from "profit (loss) from operating activities" to "Operating Profit or Loss”. The main purpose of the name change is to draw additional attention to this item and to reduce the risk of misleading users. It is important that, in this case, not only the name changes but also the components of the item, as well as the calculation will apply.

IFRS 18 will also define digital reporting requirements for primary financial reporting and reporting of the sustainability part of the annual report in Inline XBRL format, for which digital XBRL taxonomies are intended to be used.

Currently, the IASB is examining the possibilities of reducing the complexity of the Accounting Taxonomy according to the principle of disclosed information unification. One of the approaches considered and discussed in the session was line item modeling, which provides:

• creation of additional accounting taxonomy elements for line items that can have in multiple/different categories. For example, the granularity of reporting in the overall P&L structure may differ for the reflection of depreciation and amortization costs;
• merged presentation of Profit or loss statement by function of expense and by nature of expense into one taxonomy group, which will reduce the scope of overlapped elements, reduce technical tagging errors by entities, and make the overall view of the report easier to understand;
• specific guidelines will be developed for extension elements creation and application.

There is ongoing discussion about the potential benefits and drawbacks of some approaches. The main benefit of shortening and simplifying the accounting taxonomy is the achievement of maximum uniformity, transparency, and comparability of all IFRS financial statements.

However, if in the accounting taxonomy, reduction of tagging blocks and merging of elements of financial statements will be made, it is possible that some companies, whose primary financial statements have specific items, will have problems with the application of the relevant tag. This implies a risk that companies will start using their own created tags (extensions) more often. The extension is an additional item created in the accounting taxonomy itself, which is always given a wider meaning or a narrower meaning from the standard taxonomy structure so that the analytical tool or a person who analyzes this report could understand which statement or category this extension applies to. More about taxonomy you can read here. 

In order to improve the quality of reported information, it is planned to implement categorical elements to the accounting taxonomy. The use of parameters as [true/false] will be required for tagging the relevant descriptive information. This will help users (for example, investors) to more quickly filter companies with the disclosure of relevant information in their financial reports for further analysis and investment. You can read more on how it might affect the structure of your report here: https://www.orients.lv/en/blog/tips-for-structuring-sustainability-report/.

Inline XBRL and the tagging exercise of your financial report can be treated as just an auxiliary step to help analytical tools understand the logic behind each value reported in financial statements. The introduction of the new standard will fundamentally bring the uniformity and comparability of the disclosed information of the financial statements. As the users of financial statements will no longer be only humans, they will also be machines with an artificial intelligence engine. To be ready for the changes of the future, start today by reorienting your human-readable reporting to digital reporting, where data and its qualitative structure will be at the core.

Should you want to know more about the iXBRL format for IFRS or sustainability reporting information or to take a look at IFRS or ESRS digital taxonomy, email our Digital financial analyst, Svetlana Komarova, at s.komarova@orients.lv. Or, read more about the IFRS application here: https://www.orients.lv/en/expertise/accounting/, IFRS audit here: https://www.orients.lv/en/expertise/audit-services/,  ESEF (iXBRL)-compliant digitalization services of the reporting here: https://www.orients.lv/en/expertise/esef-reporting/.