Audit Implications of IFRS 18

In the constantly evolving field of financial reporting, auditors must stay abreast of significant changes in accounting standards to ensure accurate and compliant financial statements. One such important standard is IFRS 18, which governs the presentation and disclosure requirements in financial statements. This standard introduces several modifications that have practical audit implications, and auditors must carefully navigate these changes to provide assurance on compliance.

Key Changes Under IFRS 18

IFRS 18 becomes effective from 1 January 2027, which may seem far into the future. Auditors and their clients need to start preparing for implementation, however, as the standard requires retrospective application based on IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors). Therefore, companies with a February year-end will start preparing their classification for the 2026 year-end, so that comparatives are ready upon implementation in 2027. Early adoption is also allowed, if this decision is disclosed.

Three sets of new requirements are introduced to improve entities’ reporting of financial performance, and give users of financial statements a better basis for analysing and comparing companies:

Improved comparability in the statement of profit or loss
IFRS 18 introduces three categories for income and expenses in the statement of profit or loss:
•   Operating
•   Investing
•   Financing.
Entities are further required to present defined subtotals:
•   Operating profit or loss
•   Profit or loss before financing and income tax
•   Profit or loss.
More useful grouping of information in the financial statements
IFRS 18 introduces requirements to improve grouping of information and ensure that material information is not obscured.
• Enhanced guidance is included on whether to provide information in the primary financial statements or in the notes
• Entities are required to group certain information based on shared characteristics in the primary financial statements, and then include separate disclosure of material items in the notes based on further dissimilar characteristics
• Entities are further required to provide more transparency about operating expenses, with stricter guidance on whether the analysis of operating expenses is by nature or by function.
Enhanced transparency of management-defined performance measures
Management-defined performance measures are subtotals of income and expenses that are used in public communications with users of the financial statements outside the financial statements, and complement totals or subtotals included in the financial statements and communicate management’s view of an aspect of the entity’s financial performance.

IFRS 18 requires entities to disclose explanations of management-defined performance measures in the notes to the financial statements to improve discipline, and transparency in the use of such measures and disclosures in a single location. This further ensures that such measures are included in the scope of the audit.

Audit Implications

Auditors are required to verify compliance of the entity with the requirements of the financial reporting framework, including the presentation and disclosure requirements applicable to the entity. In preparation for IFRS 18 implementation, audit firms need to consider the following:

By which date their clients will start with their own preparations for the retrospective application of the standard, as this influences the date on which the auditors must be ready to advise clients in this process
Timing of updates to accounting and audit software to accommodate the changes in requirements
Updating audit procedures and working paper templates to ensure that the new requirements are adequately addressed
Training of audit staff on the updates in the requirements, methodology, procedures and templates to ensure consistent, and competent verification.

In summary

Audit firms should ensure that they are fully prepared in time for the implementation of IFRS 18, staff members are aware of the new requirements, and adequate audit work is performed to support the amended presentation and disclosures made in the financial statements.

References

IFRS 18, Presentation and disclosure in financial statements
IAS 8, Accounting policies, changes in accounting estimates and errors

How LEAF can assist

LEAF can assist firms with a full-spectrum service, producing manuals and risk registers, in line with firm circumstances and risks; continuous administration and monitoring of quality management systems; monitoring of audit engagement quality; thorough file reviews and EQR reviews; providing practical advice; reviewing methodology design; designing audit working paper templates; and providing staff training on the relevant requirements and procedures. Necessary safeguards are being applied to ensure the objectivity of our partners in each team.