Queries about IFRS 18

As covered previously (see AB articles ‘Preparing for IFRS 18’ and ‘Make IFRS 18 sing’), the major changes arising from IFRS 18 involve the presentation of items within the statement of profit or loss. While IFRS 18 won’t change the actual measurement of profit or loss items, it is likely to have presentational changes that affect all companies.

Implementation queries

As a result of this, even though it is not yet effective, there have already been queries (see ‘More information’ panel) regarding its implementation. These queries are dealt with by the IFRS Interpretations Committee (IFRIC). Any stakeholder can submit a question about the application of a standard. (I’m in the process of compiling one about football transfers – watch this space). IFRIC will then consider the question and either recommend standard-setting or not.

If no standard-setting is recommended, IFRIC publishes a tentative agenda decision open for general comment, before it is passed to the International Accounting Standards Board.

With that in mind, there are a number of tentative agenda decisions ongoing in relation to IFRS 18. Some are more interesting and wide-ranging than others. Some relate to rewording of items from IAS 1 or the potential removal of previous decisions rendered obsolete by the introduction of IFRS 18, but others contain some good queries regarding the implementation of the new standard.

Main activity

One such example is in relation to clarifying an entity’s main business activity. Under IFRS 18, an entity must record income and expenses relating to its main business activity in the operating section of profit or loss.

The query that came to IFRIC involved an ultimate parent company of a large group of entities where its only activities are holding investments in subsidiaries, making decisions on the management, acquisition and disposal of those subsidiaries, and distributing returns on those investments to shareholders.

The query was raised of how to deal with the income and expenses in relation to the subsidiaries in the parent’s separate financial statements where the subsidiaries are held at cost. If the company’s main activity is classed as investing in assets, then all of these expenses would be recorded in the operating category. Otherwise, IFRS 18 would require them to be held within the investing category.

If you read an agenda decision, you will see that these are incredibly detailed documents, referencing paragraph numbers and items in the basis for conclusions in each standard. We won’t get into them here but the important conclusion was that the main business activity could be regarded as investing in assets; otherwise, the parent company would have no main business activity at all.

This means that the main business activity of the parent company in its separate financial statements can differ from that of the main business activity in the consolidated financial statements of the parent and its subsidiaries as a group.

As a result, no standard-setting was recommended, which means that the decision is highlighting that the principles and requirements in IFRS 18 provide an adequate basis for the parent to have reached a conclusion.

Classification

Another question related to the requirement to disclose certain items separately if expenses are classified by function (such as cost of sales, operating expenses) rather than nature. A company classifying expenses by function must also separately disclose, in a single note, the total and the amount included in each line item for depreciation, amortisation, employee benefits, impairment of non-financial assets (and reversals) and write-downs of inventories (and reversals).

The query came as to whether this was only applicable if operating expenses were presented by function rather than other items. The conclusion was that there is no exception from these disclosure requirements and that if any expense in the operating category is recorded by function, then these additional disclosures must be made.

There are also agenda decisions relating to derivatives, intragroup items and presentation of taxes currently issued, and there will surely be more to come, even so far ahead of the standard coming into effect. All of this shows the importance of being on top of the details within the standard this year, as there may be things that preparers haven’t considered.