Industry
Banking
Banking Services Transformation: Unlocking Exponential Value
HIGHLIGHTS
- In April 2024, the International Accounting Standards Board (IASB) issued a new accounting standard IFRS 18 – presentation and disclosures in financial statements.
- To become compliant with IFRS 18, banking, financial services, and insurance (BFSI) firms would need to build upon their recent experience of becoming compliant with the considerably complex IFRS 9 and IFRS 17 standards.
- Financial institutions must act swiftly to align with the management-defined performance measures introduced by IFRS 18 and enhance financial transparency for stakeholders.
On this page
A quick background
IFRS 18 would come into effect on January 1st, 2027, in more than 100 jurisdictions across the globe.
To comply with the new requirements, BFSI firms must take a structured approach. This includes understanding the updated reporting standards, assessing their impact on the existing financial reporting processes, controls, systems, and data, and implementing necessary upgrades. Firms must also test outcomes, train staff, conduct parallel runs, and refine their compliance processes to ensure a seamless transition.
The two-and-a-half-year compliance window may seem ample, but it could prove to be barely adequate for completing all necessary actions on time.
IFRS 18 introduces key changes, including three new income statement categories, two additional subtotals, improved MPM disclosures, and clearer guidelines on aggregation and disaggregation. These updates aim to enhance standardization, improve comparability, and offer deeper insights for financial statement users. By ensuring more structured and transparent reporting, these changes will also support better decision-making for investors.
The introduction of MPMs
As BFSI firms assess the impact of the new standard, it would help to take a closer look at management-defined performance measures (MPMs) and their implications for financial reporting.
The IASB has mandated the MPMs to be part of financial statements because these measures are useful to the users of financial statements. Today, quite a few performance measures are published by BFSI firms as part of their annual reports, investor reports, communications to stakeholders, and even on websites. But the users of financial statements often struggle to fully comprehend these performance measures due to significant variations with respect to the metrics used, their definitions, and locations within the reports. The users of financial statements find it difficult to interpret these due to inconsistencies in information and dispersion across lengthy reports. Additionally, users struggle to compare performance across multiple firms due to inconsistencies in the way financial information is presented.
The new requirement of publishing MPMs as part of financial statements is a welcome change. New MPM disclosures will provide insights into how management evaluates a firm’s performance, enhancing transparency, consistency, and accountability in reporting.
MPMs differ from other performance measures such as alternative performance measures (APMs), non-IFRS performance measures, or non-GAAP performance measures, which many BFSI firms already publish in various reports, including annual and quarterly shareholder reports, investor presentations, and regulatory filings.
Let’s understand what constitutes MPMs, under IFRS 18. The key requirements for an APM to qualify as MPM are:
- An MPM must be a sub-total of income and expenses (sub-totals of only incomes, or only expenses or ratios thereof do not qualify).
- An MPM needs to be publicly communicated outside financial statements (private communication or communication via social media is not considered public communication).
- An MPM must be a measure used to communicate the management’s view of the BFSI firm’s overall performance (not just in part).
- It must not be a requirement under IFRS 18 or any other IFRS.
What is and what isn’t an MPM
We reviewed the most frequently reported performance measures by global BFSI firms in the light of the new requirements and identified which of these commonly used measures could potentially qualify as MPMs – and the analysis has been quite enlightening.
Almost 80% of the performance measures frequently used by BFSI firms do not qualify to be MPMs under IFRS 18. The reasons are varied, but they can be mostly attributed (nearly 95% of the times) to the fact that the performance measures disclosed are not sub-totals of income and expenses (e.g. measures that pertain to the balance sheet, order-book, cash-flow, customer, or risk-related metrics would be ineligible). Also, there are performance measures like net interest income and net interest margin that are not considered as MPMs under IFRS 18.
As such, under IFRS 18 requirements, only a few (or for some BFSI firms, none) of the APMs, non-IFRS performance measures, or non-GAAP performance measures would qualify to be reported as MPMs.
Nevertheless, BFSI firms would need to independently scrutinize various reports, publications, and more, to identify the performance measures that would qualify to be MPMs under IFRS 18.
The way forward
BFSI firms would need to make many additional disclosures. Performance measures that qualify as MPMs will need to be disclosed as such in a single note, stating that the MPM discloses management views on the financial performance of the firm.
Additionally, the note shall also disclose:
- A description of the aspect of financial performance that it communicates, including why the management believes the MPM provides useful information about the company’s financial performance.
- A description of how the MPM is calculated.
- A reconciliation between the MPM and the most directly comparable subtotal listed in IFRS 18, or a total or subtotal required by IFRS accounting standards, including the income tax effect and the effect on non-controlling interests for each item disclosed in the reconciliation.
- A description of how the company determined the income tax effect.
We believe that reconciling the MPM with the IFRS subtotal – along with calculating the related income tax effect and the effect on non-controlling interest – will be a rigorous exercise requiring significant effort when reporting MPMs.
Given these complexities, BFSI firms will need robust systems, internal controls and reconciliation processes to ensure MPM disclosures are accurate, transparent and compliant with the IFRS 18.
Conclusion
The fact that only a few frequently reported performance measures qualify as MPMs comes as a relief for BFSI CFOs.
Nevertheless, to become compliant with IFRS 18 in a systematic and timely manner, BFSI firms will need to build upon their recent experiences of becoming compliant with the largely complex IFRS 9 and IFRS 17 standards.
A comprehensive set of activities needs to be completed for on-time compliance with IFRS 18, and starting early will ensure a smoother transition. The process of MPMs reconciliation with the closest line items in the income statement and the computations of income tax effect along with the impact on non-controlling interests would comprise complex activities requiring knowledgeable staff and additional IT interventions. It will also be time-consuming and expensive.
BFSI firms need to conduct a thorough impact analysis of IFRS 18, finalize the MPMs, and start working toward establishing the right rigor in terms of setting up processes, controls, and systems, restructuring data, revising the chart of accounts, training their staff, and creating the target operating model and standard operating procedures to ensure a smooth transition to the IFRS 18 regime. Additional time must be allocated for conducting parallel runs of MPM reporting alongside existing performance reporting frameworks. This is crucial because MPM reporting will now be subject to rigorous internal reviews and statutory audit surveillances.
