Across the previous six instalments of our AASB 18 series, we have explored the new standard’s key presentation and disclosure requirements, including the new structure of the statement of profit or loss, management-defined performance measures, aggregation and disaggregation, and the additional considerations for entities with specified main business activities.
Understanding these requirements is an important first step. Our focus now shifts from what AASB 18 says to what entities need to do to apply it in practice.
The good news is that AASB 18 is primarily a presentation and disclosure standard, so it does not fundamentally change how most transactions are recognised or measured. Even so, implementation should not be treated as a simple financial statement formatting exercise.
Retrospective application, new comparative reconciliations and possible changes to systems, account structures, reporting packs and public communications mean there is work to do before the standard’s effective date. In this final instalment, we look at the transition requirements, and some practical steps entities can take now to make implementation more manageable.
Transition is retrospective
AASB 18 must be applied retrospectively in accordance with AASB 108 Basis of Preparation of Financial Statements (currently titled Accounting Policies, Changes in Accounting Estimates and Errors). In practical terms, the comparative information presented in the first AASB 18 financial statements must be restated as though AASB 18 had always applied.
The first annual financial statements applying AASB 18 must also include a reconciliation for each line item in the statement of profit or loss for the immediately preceding comparative period. This reconciliation compares:
- restated amounts presented under AASB 18; and
- amounts previously presented under AASB 101 Presentation of Financial Statements.
This reconciliation is more than a general explanation of the changes. Rather, it shows, on a line-by-line basis, how the previously reported statement of profit or loss has been recast under AASB 18. For many entities, this will involve reclassifying income and expenses between the operating, investing and financing categories and introducing the new required subtotals.
There are also specific requirements for interim reporting in the first year of application. An entity preparing condensed interim financial statements under AASB 134 Interim Financial Reporting must present the headings it expects to use in its AASB 18-compliant statement of profit or loss, together with the subtotals required by the standard, even where those headings and subtotals would not otherwise be required in condensed interim financial statements.
Interim financial statements in the first year of application must also include reconciliations for each line item presented in the statement of profit or loss for the comparative periods presented. These compare the amounts restated under AASB 18 with the amounts previously presented under AASB 101.
The above transition requirements make the comparative period an important part of the implementation timetable. Not only will entities need to know what their first AASB 18 income statement will look like, but also how they will reproduce and reconcile comparative amounts. The earlier this exercise commences, the easier transition is likely to be.
Do not wait until year-end
A common mistake when implementing a new accounting standard is to treat it as a year-end reporting exercise.
For many entities, AASB 18 implementation should begin well before the first reporting period in which the standard becomes mandatory.
Running a “dry run” of the new income statement format during the comparative period can be particularly valuable. This allows finance teams to identify issues early, test reporting processes and understand how the new presentation requirements will affect key performance metrics and stakeholder communications.
Entities that wait until the financial statements are being prepared may find themselves scrambling to gather information retrospectively.
Assess whether the entity has a specified main business activity
Before mapping income and expenses to the new categories, an entity should determine whether investing in particular types of assets, providing finance to customers, or both, is a main business activity. This is an important first step because the outcome affects how certain income and expenses are classified and, ultimately, what is included in operating profit.
As discussed in Part 6 of this series, this is not a free choice. The assessment must be based on the entity’s facts and circumstances and be supported by evidence. It is also made at the reporting entity level, meaning that a consolidated group and an individual entity within the group may reach different conclusions.
Entities should therefore document the assessment early, including the evidence supporting their conclusion, before undertaking the detailed classification exercise.
Start with the income statement
Once the entity has determined whether it has a specified main business activity, an effective next step is to map its existing income statement to the new AASB 18 categories.
This exercise may reveal a number of practical questions, including:
- Which income and expense items are operating, investing or financing in nature?
- Are existing account structures sufficiently detailed?
- Are there transactions that require further analysis?
- Will existing reporting packs continue to provide the information required?
Performing this assessment early allows entities to identify potential system and process changes before they become critical.
Review your chart of accounts
For many organisations, the chart of accounts will become the starting point for implementation.
AASB 18 does not necessarily require a complete redesign of the general ledger. However, entities should assess whether existing account structures capture information at a sufficient level of detail to support:
- Categorisation requirements;
- Operating expense analysis requirements;
- Management-defined performance measure disclosures; and
- Comparative information needs.
In some cases, relatively minor changes to account structures can significantly simplify the transition process.
Management-defined performance measures require broader involvement
As discussed in Part 4 of this series, the identification of management-defined performance measures (MPMs) is not solely a finance function exercise.
Communications teams, investor relations personnel, executives and boards often use performance measures in public communications that may trigger the MPM disclosure requirements.
Consequently, implementation efforts should involve stakeholders beyond the finance team.
Many entities may be surprised by the number of performance measures being used across annual reports, investor presentations, websites and other public communications.
Revisit your ‘other’ balances
AASB 18’s aggregation and disaggregation guidance may lead entities to reconsider balances currently presented within broad categories such as:
- Other income;
- Other expenses;
- Other operating costs; or
- Miscellaneous items.
While the standard does not prohibit the use of these labels, preparers should consider whether material information is being appropriately communicated.
An implementation review provides a good opportunity to challenge longstanding presentation practices that may no longer align with the objective of providing users with a useful, structured summary.
Systems may need attention
When discussing AASB 18, organisations may be tempted to focus on the financial statement disclosures themselves. However, systems and reporting processes often require equal attention.
Questions worth considering include:
- Can existing systems produce information aligned to the new categories?
- Are management reporting structures consistent with the intended financial statement presentation?
- Is sufficient information captured to support comparative disclosures?
- Can required reconciliations be produced efficiently?
The answers will differ between organisations, but implementation projects are often most successful when system implications are assessed early.
Do not forget stakeholders
AASB 18 may change how performance is presented, even where there is no impact on overall profit.
This means some key performance indicators currently monitored by boards, lenders, investors and management may appear different once the new presentation requirements are applied.
Stakeholder education should therefore form part of any implementation plan.
Providing early visibility of changes to presentation and terminology can help avoid confusion when the first AASB 18-compliant financial statements are issued.
A practical implementation roadmap
For many entities, a sensible implementation plan may look as follows:
Not every entity will face significant changes, but almost every entity will need to perform some level of assessment.
A final thought
Although AASB 18 is often described as a presentation standard, its impact extends beyond the appearance of the financial statements.
The standard requires entities to think more carefully about how financial performance is communicated, how information is grouped and explained, and how management’s view of performance is presented to users.
For some entities, implementation may involve only modest changes. For others, it may trigger broader discussions about systems, reporting processes and financial communication.
Either way, our key message to preparers is the same: start early.
Entities that use the transition period to understand their information needs, test new reporting formats and engage with stakeholders are likely to find the move to AASB 18 considerably smoother than those who leave implementation until the last minute.
With that, we conclude our AASB 18 series. While the standard represents the most significant change to financial statement presentation in many years, early planning and a practical implementation approach can help ensure the transition is more evolution than revolution.
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This article is part of our series exploring the key changes introduced by AASB 18 and what they mean for entities.
Click the links below to explore the rest of the series:
Part 1: An overview of the new disclosure standard
Part 2: Categorising income and expenses
Part 3: New subtotals and operating expense analysis requirements
Part 4: Management-defined performance measures
Part 5: Aggregation, disaggregation and labelling
Part 6: Specified main business activities