IFRS 18 in asset management: same rules, different outcomes

IFRS 18 replaces IAS 1 Presentation of Financial Statements and continues to set out the presentation requirements for a complete set of financial statements. However, IFRS 18 contains more prescriptive requirements than IAS 1 on financial performance reporting and introduces other new disclosures. Recognition and measurement in the financial statements remains to be unaffected by IFRS 18.

While IFRS 18 leaves the underlying recognition and measurement of transactions unchanged, their presentation in the income statement could significantly change. This could have an impact on how entities in the asset management sector communicate their financial performance.

Key areas of change under IFRS 18 include the categorisation of income and expenses within three new categories in the income statement, new aggregation and disaggregation requirements for income and expense items and new disclosures requirements for Management-defined Performance Measures (MPMs). There may also be knock on effects on the cash flow statement. These changes will require operational effort and management judgement to implement. Entities are therefore advised to assess the potential impact of IFRS 18 as soon as possible.

As noted above, a significant change under IFRS 18 is that income and expenses are classified into operating, investing and financing categories. Income taxes and discontinued operations will also need to be presented in separate categories. There are also new prescribed line items, such as “operating profit”.

In terms of practical application, one challenge is the judgements required when categorising income and expenses. IFRS 18 requires entities to classify income and expenses based on the nature of their business activities, so where an entity's main business activity is investing in particular types of assets, such as investment in property, the property related income and expenses are generally classified within the operating category. Investment trusts would typically categorise their investment related income and expenses as operating too. On the other hand, asset and wealth managers, under the definition in IFRS 18, may not invest in a particular type of asset as a main business activity and therefore investment related income and expenses are classified in the investing category. Therefore, similar transactions may be presented in different categories by entities operating in the asset management sector and the subtotal “operating profit” may include different items of income and expense.

There may also be instances when a more detailed assessment is needed to determine the appropriate aggregation and disaggregation of certain income and expense items. Please refer to our articles on our IFRS 18 Resource Hub for more detail.

Once the appropriate categorisation, aggregation and disaggregation of income and expenses have been determined, a formal mapping exercise from the general ledgers to the line items in the income statement has to be performed. This could be operationally complex, particularly for groups. These challenges should be built into the plan for adoption.

Some investment trusts have adopted a columnar presentation of income and expenses by capital and revenue. IFRS 18 is more restrictive on what and how information is presented on the face of the income statement. Therefore, it needs to be assessed whether this presentation is consistent with the aggregation and disaggregation requirements of IFRS 18.  

IFRS 18 also introduces new disclosure requirements for MPMs. These are measures of financial performance that provide management's perspective on an entity's financial performance and are communicated publicly outside the financial statements. Common measures such as adjusted operating profit, underlying profit and adjusted EBITDA may qualify as MPMs. However, operational metrics that do not represent subtotals of income and expenses, such as assets under management and net inflows, fall outside the scope of these requirements.

New disclosures may need to be developed for those measures that are MPMs, including an explanation of their usefulness and basis of calculation as well as a reconciliation to the most comparable IFRS subtotal showing the effects of tax and non-controlling interest. Even where two asset managers use the same label for an item, such as “underlying profit”, differences in how the measure is calculated or why it is being used would result in different disclosures.

Identifying MPMs is not limited to the annual report but will require a review of all public communications, including results announcements, investor presentations and website content.

Another, perhaps overlooked, impact of IFRS 18 is on the cash flow statement. The presentation of the cash flow statement is likely to change. The starting point for reconciling operating cash flows is going to be “operating profit or loss”, as defined in IFRS 18. The categorisation of dividends and interest may change in the cash flow statement. It is noteworthy that although the categories in the income statement and cash flow statement are the same, the classification of income and expense items and the categorisation of related cash flows may not be aligned.

The same approach to IFRS 18 will not fit all

While IFRS 18 establishes a standardised reporting framework for financial performance, its impact will vary across the asset management sector and possibly even between entities operating within the same subsector. The extent of change required to comply with IFRS 18 will depend on the main business activities, existing reporting practices including mapping to general ledgers, as well as the number and nature of non- GAAP performance measures. Peer reporting may provide useful context in the adoption of IFRS 18, but it cannot replace an entity’s own assessment.

• Asset and wealth managers may need to apply judgement when assessing whether their main business activities qualify as those of investment in assets.
• Investment trusts may need to review whether the existing columnar approach of presenting performance can be continued under IFRS 18 or whether certain adaptations are needed.
• Real estate investment businesses should assess the presentation of income from associates and joint ventures and how the new categorisation of income and expenses and subtotals will affect their performance reporting.

All entities need to consider the additional disclosure requirements for MPMs in their financial statements, which could add significant volume to the financial statements’ notes. Judgement could be needed with respect to the categorisation of certain income and expense items.

IFRS 18 is effective from 2027. There will be practical application questions and operational challenges during the adoption process. Our IFRS 18 Resource Hub can provide useful insights to keep abreast of developments.

The most successful IFRS 18 implementations are likely to be those where the impact is assessed early to ensure all key judgements and operational changes can be made timely. IFRS 18 could then be an opportunity to enhance transparency and strengthen stakeholder confidence by telling a clearer and more compelling performance story.