The Impact of IFRS 18 on Key Industries: What Businesses Need to Know

The introduction of IFRS 18 marks a significant shift in financial reporting standards, with a strong emphasis on transparency, consistency, and comparability. IFRS 18 primarily focuses on improving the presentation and disclosure of financial performance, reshaping income statements, and requiring greater clarity on management performance measures (MPMs). While the principles apply across all sectors, the implications vary by industry. Below, we explore how IFRS 18 will affect four major sectors: Financial Services, Manufacturing, Retail, and Tourism & Hospitality, along with strategic considerations for each.

🏦 Financial Services Industry

Key Impacts

• Main Business Activity Classification
  Banks, insurers, and other financial institutions must now classify income and expenses based on their core activities—whether they are primarily investing or financing. This impacts the placement of interest income, investment gains, and loan-related expenses within the income statement.

• Management Performance Measures (MPM) Disclosures
  Commonly used financial ratios such as loan-to-deposit ratios and solvency capital ratios may not qualify as MPMs under IFRS 18. However, subtotals contributing to these metrics could require separate disclosure and reconciliation to GAAP figures.

• Foreign Exchange & Derivatives Treatment
  Gains and losses from foreign exchange differences and hedging instruments must align with the classification of the underlying transactions, enhancing consistency.

Strategic Considerations

Financial institutions must reassess their presentation of operating profit to ensure alignment with IFRS 18 requirements. Moreover, maintaining consistency across subsidiaries and consolidated entities will require significant coordination. Early planning is essential, as these changes will impact investor perception and regulatory compliance.

🏭 Manufacturing Industry

Key Impacts

• Disaggregation of Expenses
  For manufacturers presenting expenses by function (e.g., cost of goods sold, selling expenses), IFRS 18 mandates additional disclosure of five key expenses by nature within each function, such as depreciation and employee benefits.

• Impact on MPMs & Performance Metrics
  Popular metrics such as EBITDA and gross margin will likely qualify as MPMs under IFRS 18, requiring:

  • Clear reconciliation to IFRS figures

  • Explanation of tax effects

• Judgment in Classification
  Classifying certain costs as operating vs. investing will require significant judgment and internal policy alignment.

Strategic Considerations

Manufacturers must update ERP systems, chart of accounts, and reporting frameworks to capture the additional data and support new presentation requirements. This transition is an opportunity to streamline cost allocation processes for greater accuracy and compliance.

🛍️ Retail Industry

Key Impacts

• Restructuring the Income Statement
  Retailers will see major changes in how promotional expenses, supplier rebates, and loyalty program costs are classified under IFRS 18.

• Greater Transparency on MPMs
  Retailers frequently report non-GAAP measures such as “adjusted operating profit” or “same-store sales.” Under IFRS 18, these metrics will require:

  • Detailed reconciliation

  • Tax impact disclosure

• Comparability Benefits
  By standardizing income statement subtotals, IFRS 18 enhances cross-company comparability, benefiting analysts and investors.

Strategic Considerations

Retailers should expect heightened investor scrutiny of performance metrics. Aligning investor communications and disclosures with IFRS 18 requirements is critical to maintaining credibility and transparency.

🌴 Tourism & Hospitality Industry

Key Impacts

• Complexity in Global Operations
  For companies operating across multiple jurisdictions, maintaining consistent classification of income and expenses becomes a major challenge.

• Asset-Heavy Structures
  Income from property investments, lease arrangements, and joint ventures requires precise classification as operating or investing, impacting key performance indicators.

• ERP & System Overhaul
  Legacy systems may struggle to handle IFRS 18’s disaggregation requirements, particularly for foreign exchange and derivative transactions.

Strategic Considerations

Tourism and hospitality companies should integrate the IFRS 18 transition with broader finance transformation projects, leveraging this as an opportunity to modernize systems, improve reporting speed, and enhance investor confidence.

Additional Insights Across Industries

• Investor Relations Impact: IFRS 18 emphasizes transparency, which may redefine earnings presentations and investor discussions.

• System and Process Readiness: Updating ERP systems and internal controls will be crucial to meeting disclosure requirements.

• Training and Change Management: Organizations must train finance teams and update policies to reflect the new standard.

• Audit and Assurance: Expect increased auditor involvement in validating classifications, reconciliations, and disclosures.

Conclusion

IFRS 18 represents a transformative step in financial reporting, aimed at enhancing clarity and comparability across industries. While the transition poses challenges—ranging from system upgrades to investor communication strategies—it also offers an opportunity to strengthen transparency and stakeholder trust. Early preparation is essential, and organizations should engage finance, IT, and governance teams to develop a robust transition plan.

✅ Next Steps for Businesses:

• Conduct a gap analysis to identify areas impacted by IFRS 18

• Update reporting policies, ERP systems, and chart of accounts

• Develop disclosure templates for MPMs and reconciliations

• Engage in stakeholder communication and training programs

Next Step!