INTRODUCTION TO IFRS 18
In April 2024, the IASB issued IFRS-18 Presentation and Disclosure in Financial Statements replacing Presentation of Financial Statements (“IAS 1”). It introduces significant changes to the structure and presentation of financial statements, aiming to enhance transparency, consistency, and comparability globally. Whilst IFRS 18 is applicable from annual periods commencing 01 January 2027, SOCPA has permitted organizations to early adopt the said standard voluntarily in KSA. The implementation of IFRS 18 will not only increase investor confidence but also improve the entity’s reporting process and controls. The financial statements will present standardized income statements with more disaggregated information and add management-defined performance measures. This will lead to improved transparency, clarity, and comparability between entities globally.
- IFRS 18 has laid down the following concepts to standardize the presentation and disclosure of the income statement:
- Classification of all income and expenses into 5 categories (i.e., Operating, Investing, Financing, Taxes and Discontinued operations).
- New subtotals on the income statement.
- Management-defined Performance Measures – Metrices reported by management for internal or external communication will be part of the disclosures.
- Aggregation v. Disaggregation – Items are grouped (aggregated) when they share similar characteristics and separated (disaggregated) when they differ,
- Other disclosures required by the specific IFRS Standards will continue as before.
While IFRS 18 will not directly affect a company’s net profit, it will result in a new presentation of financial statements, particularly the income statement. IFRS 18 will require planning to adapt to new classifications and disclosure formats, which will lead to modifications in existing systems, processes, judgements, and presentation. The application of IFRS 18 is expected to evolve over time with businesses gradually refining their reporting practices.
KEY HIGHLIGHTS OF NEW REQUIREMENTS PROPOSED IN IFRS 18
Categories for classifying income and expenses
Income and expenses are categorized into five sections: Operating, Investing, Financing, Taxes, and Discontinued Operations. Of these, Operating, Investing, and Financing are newly introduced and consequently, defined below:
Operating Category
This category is intended to include items of income and expenses related to the entity’s operations. IFRS 18 describes it as a residual category, so the operating category will comprise all income and expenses not included within the investing, financing, income taxes, or discontinued operations categories. As a default category, it:
- Encompasses all income and expenses related to a company’s operations, even if they are volatile or non recurring. Operating profit thus reflects a full representation of the company’s performance during the period.
- Covers, but is not limited to, income and expenses from the company’s main business activities. It also includes income and expenses from other business activities, provided they do not meet the criteria for classification under any of the other specified categories.
Implementation matters
If an entity’s specified main business activity involves investing in assets, the related income and expenses will be included in the operating category. For example, real estate companies would be required to present rental income within the operating category.
The expense in the operating category may be presented either by:
- Nature (raw materials, salaries, advertising costs), or
- Function (cost of sales, distribution costs, administrative expenses) or
- On a mixed basis (i.e. some expenses by nature and other expenses by function) on the face of the income statement.
Entities are encouraged to choose the presentation method that reflects the most useful structured summary of operating expenses in consideration of the following factors:
- Which line items provide the most useful information about the main components or drivers of the entity’s profitability. For example: for a retail entity presentation of the cost of sales line item may provide relevant information in comparison to a service entity, where information of expenses by nature such as employee benefits may be more relevant
- Which line items most closely represent the way the business is managed and how management reports internally
- What standard industry practice entails
- Whether allocation of particular expenses to functions would be arbitrary such that the line items presented would not provide a faithful representation of the functions
Note- The standard also mandates that companies classifying expenses by function must disclose the amounts of depreciation, amortization, employee benefits, impairment losses, and inventory write-downs included within each line item in the operating category of the statement of profit or loss. The aforesaid is a significant change from the current requirements under IAS 1.
Investing Category
This category includes
- Income and expenses from assets that generate returns separately from a company’s business activities.
- Income and expenses from cash and cash equivalents and investments in associates and joint ventures
Implementation matters
Example of items of income and expenses included in the Investing category
- Rental income arising from investment property.
- Dividends from shares in other companies.
- Share of profits from associates and joint ventures.
- Income and expenses from unconsolidated subsidiaries (such as investments in subsidiaries held by an investment entity that are measured at FVTPL, investments in subsidiaries in separate financial statements that are accounted as at cost or equity method)
- Income and expenses resulting from the initial and subsequent measurement of those assets, including any gains or losses recognized upon their derecognition (such as Impairment losses and reversals of impairment losses, fair value gains and losses).
- Additional expenses that are directly related to the acquisition or disposal of those assets, such as transaction fees and selling costs.
One of the key criteria for an item of income or expense to be included in the investing category is that it should relate to assets that generate a return individually and largely independently of the entity’s other resources.
- Income or expenses related to the assets that an entity uses in combination to produce or supply goods or services do not generate a return individually and largely independently of the entity’s other resources and shall be classified as an operating category such as.
- Depreciation expenses, impairment losses or reversal of impairment losses, Gain or loss on derecognition of property, plant and equipment income and expenses from the derecognition of the asset, or its classification and remeasurement as held for sale.
- Interest income on financing to customers by banks.
Financing Category
This category includes
- Income and expenses on liabilities arising from financing transactions.
- Interest expenses on any other liability
Liabilities arising from financing transactions include
- Issue of bonds or debentures redeemable in cash or the entity’s equity shares.
- Liability under a supplier finance arrangement when the payable for goods or services is derecognised.
- Obligation for an entity to purchase its own shares.
- Loans raised by the company.
Items of income and expenses related to these liabilities, such as interest expense on debt instruments issued, fair value gain or loss on liability designated as FVTPL, income or expense on derecognition of liability, and dividend on issued shares classified as liabilities, shall be classified under the financing category
Other liabilities include liabilities arising from transactions that do not involve only the raising of finance such as
- Payables for goods or services that will be settled in cash.
- Contract liabilities
- Lease Liabilities.
- Defined benefit pension liabilities.
- Decommissioning or asset restoration provisions.
- We are well-positioned to serve you
Interest expense on aforementioned liabilities, shall also be classified under the financing category
Income taxes
This category includes income tax expense (or income tax income) in the statement of profit or loss as per IAS 12 Income taxes.Implementation matters
- Example of items of income and expenses included in the Income taxes category
- Zakat
- Current tax expense
- Deferred tax expense/ (Credit)
Discontinued Operation Category
This category includes income and expenses from discontinued operations recognises in accordance with IFRS 5,Non-current Assets Held for Sale and Discontinued operations.
Exception for Specified Main Business Activities
Specific requirements have been introduced for entities with specified main business activities. Entities primarily engaged in investing in assets and/or financing customers (e.g., banks) will classify some investing or financing income/expenses as part of their operating category. These requirements are not expected to apply to standalone telecommunications entities, where the core operations do not involve such activities.
However, in the context of telecommunications conglomerates or diversified groups that include financial services subsidiaries (e.g., captive financing arms or investment vehicles) or other core activities other than telecommunications operations, a consolidated assessment of the group’s main business activity will be necessary to determine the applicability of these requirements at the group level. Entities will need to carefully evaluate whether the group, taken as a whole, meets the definition of being primarily engaged in investing or financing activities.
Segregation of Operating Expenses in the Income Statement
Operating expenses can be classified using three methods: by nature, by function, or a combination of both. The entity must choose a method that provides a useful and structured summary. If the function or mixed method is used, further segregation is required in the notes to the financial statements (except when grouped by nature).
New Subtotals Introduced on the Income Statement
IFRS 18 introduces two new subtotals:
- Operating Profit
- Profit/(Loss) before Financing and Taxes
New subtotals addresses a long-standing issue of diversity and inconsistency in financial reporting under the previous standard. The consistency that IFRS 18 introduces allows users of financial statements, such as investors and analysts, to effectively compare and analyze the operational performance of companies, regardless of industry or geographical location. This improved comparability facilitates more confident decision-making for investors and stakeholders, as they can more accurately evaluate a company’s financial health and strategic direction against its peers.
Management-Defined Performance Measures (“MPMs”)
MPMs are subtotal of income and expenses that an entity uses in public communications outside financial statements and to communicate to users of financial statements management’s view of an aspect of the financial performance of the entity as a whole. MPMs must be included either on the face of income statement or as part of the disclosures.
Reconciliation with the most directly comparable reported subtotal is required if MPMs are forming part of disclosures .
Aggregation and Disaggregation
IFRS 18 guides entities on presenting material financial information in the primary financial statements or the notes to accounts.
- Line items should be aggregated or disaggregated based on similar characteristics.
- The use of generic terms like “Others” is discouraged. If used, entities must provide explanatory notes detailing the nature of the items.
Foreign exchange (“Forex”) gain or loss
Foreign exchange gains or losses should be presented under the same category as the income or expense that gave rise to the foreign exchange gain or loss. This ensures consistency in classification.
What this mean for Telecommunication Companies
P&L Reclassification: Reclassifying items like exchange income, non-trading gains, etc., into Operating, Investing, or Financing categories alters key metrics such as Operating Profit, requiring clear stakeholder communication.
Chart of Accounts (CoA) Redesign: CoA structures must be reengineered to support IFRS 18 categorization logic, especially for telecom groups with mixed-activity subsidiaries, where consistent mapping is key for consolidation.
Transparency in MPMs: Mandatory disclosure and audit of MPMs (e.g., adjusted return for computing Adjusted EBITDA enhance investor trust but increase governance and system configurations to support such MPMs’ reconciliations with reported figures in the income statement.)
Regulatory Alignment Challenges: Aligning IFRS 18’s classifications with Communications, Space & Technology Commission (CST) requirements (i.e., net telecom revenue).
If a telecom company/group offers mobile wallet or fintech services, it is required by SAMA to comply with regulations such as the Electronic Money Institutions (EMI) Framework and Payment Services Provider (PSP) guidelines.
Reporting Process Overhaul: Enhanced disaggregation and MPM requirements demand system upgrades, data granularity, and staff training to ensure compliance by 2027.
KEY ENHANCEMENTS IN IFRS 18: IN-DEPTH ANALYSIS
In this section, we delve into some of the most significant and critical changes introduced by IFRS 18, with a particular focus on their relevance to telecommunications entities. While the new classifications enhance financial reporting, certain aspects demand closer attention due to their complexity and impact on financial statements.
We will specifically explore the Specified Main Business Activities, Management-Defined Performance Measures (MPMs), and Aggregation and Disaggregation of information.
These elements introduce new reporting requirements that influence how telecom entities classify income and expenses, communicate performance metrics, and present financial disclosures. To provide clarity, we will also illustrate each concept with a detailed case study, helping readers understand their practical implications.
3.1 Specified Main Business Activities
IFRS 18 introduces new requirements for entities with specified main business activities, i.e., those entities that are primarily engaged in investing in assets or providing financing to customers. Unlike other entities, these businesses must classify certain investments and financing income and expenses under the Operating category, reflecting their core revenue-generating activities. This requirement ensures that financial statements accurately represent the entity’s primary business operations.
3.2 Management-defined performance measures (MPMs)
The introduction of MPMs in IFRS 18 marks a significant step towards enhancing transparency for investors. MPMs refer to metrics management used in public communications, such as press releases, management commentaries, and investor presentations. These may include alternative performance measures like Adjusted EBITDA, internally monitored figures like gross profit, or other key financial indicators beyond standard IFRS measures.
3.3 Aggregation and Disaggregation
The purpose of financial statements is to provide users with essential information about entities’ assets, liabilities, income, expenses, equity and cashflow. To achieve this, the entity will need to assess the appropriate level of detail on the primary financial statements and in the notes to the financial statements. IFRS 18 introduced the concepts of ‘Aggregation’ and ‘Disaggregation’ to present information in financial statements.
Management will need to apply professional judgment to figure out how to group financial statement items. This involves assessing whether items have similar characteristics and should be aggregated or whether disaggregation is necessary due to differences in nature, function, measurement basis, size, or regulatory environment.
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Assessment of Telecom Companies’ Income Statements
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COMPARISON OF IFRS 18 AND IAS 1
TRANSITION TO IFRS 18
The transition to IFRS 18 is a critical step for telecom companies aiming to align with International financial reporting standards. Compared to previous Standards, IFRS 18 emphasizes transparency, requiring businesses to provide more detailed and comprehensive financial disclosures. This shift offers organizations the opportunity to enhance the quality, consistency, and comparability of their financial reporting. However, it also presents significant challenges, including the need for system upgrades, better data management, and stronger internal controls.
For telecom companies, this change brings both opportunities and challenges. On the one hand, enhanced disclosures offer an avenue to improve stakeholder confidence by providing clearer insights into profitability drivers, such as separating infrastructure lease costs, network operating expenses, spectrum amortization, or differentiating between revenue from wholesale, retail, and digital services. However, for businesses with complex operations, such as subsidiaries, joint ventures or multiple revenue streams, gathering, organizing, and reporting the required data can be overwhelming. Existing accounting systems may not be equipped to oversee the level of detail needed by IFRS 18. Many telecom companies may need to upgrade legacy ERP platforms or deploy specialized financial reporting tools to accommodate the required granular reporting.
Equally important is the impact on internal controls. With the increased disclosure requirements, companies must reassess their control frameworks to ensure that all data is accurately captured and reported. Finance teams must ensure that all financial line items, especially those involving high volumes of contracts, such as device financing or postpaid service bundles, are accurately captured and appropriately classified. This will require redefining reporting responsibilities across business units, standardizing intercompany data flows, and improving collaboration between finance, technology, and commercial teams.
Employee training also plays a crucial role in ensuring a smooth transition. Finance teams must be well-versed not only in IFRS 18’s specific requirements to avoid errors and ensure compliance but also in interpreting what disaggregation means in a telecom context, such as knowing how to split ‘network-related costs’ into infrastructure maintenance, IT license fees, or outsourced support costs. Tailored training programs that cover both the technical aspects of the standard and practical steps for preparing compliant financial statements will help organizations manage the transition effectively.
When implementing IFRS 18, entities must produce a reconciliation for each line item in the income statement for the comparative period, outlining the adjustments from the amounts previously reported under IAS 1 to the restated amounts under IFRS 18. When it is impracticable to reclassify comparative amounts (for example, due to system limitations in older billing platforms or lack of historical disaggregation), an entity shall disclose the reason for not reclassifying the amounts and the nature of the adjustments that would have been made if the amounts had been reclassified.
