IFRS 18: introduces new requirements for presenting operating expenses
Overview of IFRS 18 changes
IFRS 18 makes two key changes to the presentation of operating expenses in the statement of profit and loss. Firstly, IFRS 18 explicitly requires the analysis of operating expenses to be disclosed on the face of the statement of profit or loss, whereas under IAS 1 this analysis could be given in the notes.
Second, it changes how line items within the operating category are classified and presented. The aim is to present the summary of operating expenses in the most informative, structured way for users. IFRS 18 gives the flexibility to present a mixed approach for operating category line items.
Moving from a single basis to a mixed approach
IFRS 18 allows a mixed approach for line items in the summary of operating expenses. This gives flexibility to present line items by either the nature or function of the expenses, rather than only on a single basis. However, the aggregation of operating expenses into each line item must still be on one basis only – either by nature or by function.
Additional note for specified expenses presented by function or on a mixed basis
Where the summary of operating expenses is presented by function, or on a mixed basis, IFRS 18 requires a single additional note disclosing five specified expenses by nature: depreciation, amortisation, employee benefits, impairment losses and reversals, and write-downs and reversals of write-downs of inventories. An illustration is set out below.
Deciding how to present summary of operating expenses
When deciding whether to present and disclose operating expenses by nature, by function or on a mixed basis, the entity should select the approach that provides the most meaningful and clear presentation for users. The application guidance requires the following factors to be considered:
- Which line items most clearly reflect the primary factors driving profitability.
- How the business is managed and how internal management reporting is structured.
- Standard practice in the industry.
- Whether allocating certain expenses to functions would be arbitrary or potentially misleading to users. Where allocations would be arbitrary, classify those expenses by nature.
In all cases, prioritise clarity. Group related costs, such as those from human resources, IT, legal and accounting, where they share common features. In contrast, selling expenses often have different characteristics and are usually clearer when presented separately so that users can see how resources are allocated.
Preparing for adoption of IFRS 18
As your business gets ready to adopt IFRS 18, early planning will help ensure your financial statements comply with the new standards. To facilitate a smooth transition, consider the following steps:
- Decide how you will present the summary of operating expenses – by nature, by function or on a mixed basis.
- Communicate any presentation changes clearly to stakeholders.
- Update your systems and processes, including the chart of accounts, ERP, and reporting templates, ensuring all presentation and disclosure requirements relating to summary of operating expenses are met.
Ensuring compliance with IFRS 18
Presenting operating expenses under IFRS 18 requires careful planning to ensure clarity, transparency and compliance. Our accounting and financial reporting specialists can guide you in selecting the most appropriate presentation method, aligning your line items with the new requirements and updating your systems and processes to reflect these changes. Reach out to Tiaan Fourie, Lou Ward or your usual RSM contact to discuss how we can support your organisation in implementing IFRS 18 effectively.