IFRS 18 in the financial sector

Implementation of the new P&L structure

A clearly defined structure in the income statement with the main categories 'operating', 'investing' and 'financing' should make it easier to analyse financial performance in the future. However, the purpose of companies in the financial sector is to finance and invest. Therefore, the specific rules of IFRS 18 apply: if a company has a specific main business activity - namely 'invest in assets' and 'provide financing to customers' - the resulting income and expenses must generally be reported in the operating result.

For banks, this means that the result from the financing business is generally shown in the operating result. This includes the result from refinancing. Expenses and income from liabilities that are not used to refinance the customer business can either also be reported in the operating result or allocated to the financial result.

It also follows from the principle of the specific main business activity that companies in the financial sector do not allocate their result from investments in assets (e.g. equity investments, securities, etc.), including the resulting expenses and income for cash and cash equivalents, to the investment result, but to the operating result. This applies in particular to insurance companies and asset management companies, but also to most credit institutions.

Extended identification principles

IFRS 18 also contains further rules on classification and presentation. In addition to the general requirements regarding the aggregation and disaggregation of items, the financial sector focuses in particular on the disclosure requirements for foreign currency differences, derivatives and designated hedging instruments:

Requirements for MPM

Another important aspect is the future disclosure requirements regarding management-defined performance measures (MPMs). These management-defined performance measures are subtotals of income and expenses that the company uses to disclose aspects of its financial performance. IFRS 18 requires the reconciliation of these MPMs to comparable subtotals defined by an applicable IFRS standard. Companies in the financial sector will therefore need to assess the performance measures they are disclosing to determine the extent to which they will be subject to future disclosure requirements as MPMs.

IFRS 18 in the financial sector - Services of WTS Advisory

The introduction of the new accounting standard IFRS 18 raises a number of challenges for banks, insurance companies, investment firms and other financial service providers. For example, there are extensive changes to the presentation and disclosure of financial information. In particular, the structure of the income statement and the required disclosures on the disclosed MPMs may result in far-reaching changes and operational challenges. We therefore recommend an early analysis of the potential reporting requirements of IFRS 18, as well as the relevant systems and processes, in order to meet the new requirements in a timely manner.

Contact us today to develop a customised IFRS 18 implementation strategy to ensure your institution is best prepared.