(Second of two parts)
IN BRIEF:
•PFRS 18 emphasizes Management-Defined Performance Measures (MPMs), which are specific subtotals reflecting management’s view of financial performance, and requires detailed disclosures to enhance transparency and accountability.
•The standard enhances the guidance on aggregating and disaggregating financial information, which is expected to reinforce more disciplined financial reporting.
•Companies must prepare for the implementation of PFRS 18 by aligning their financial reporting processes, assessing data management systems, and engaging with stakeholders to ensure a smooth transition and capitalize on the opportunity for modernization in financial reporting.
Entities often provide certain information about their financial performance beyond typical PFRS totals, such as certain additional performance metrics to guide decision-making and communicate results. These data and metrics are generally communicated outside the financial statements and included in management’s press releases, strategic reports, management discussion and analysis. Users of financial statements find these to be useful; however, there are concerns about the lack of transparency on how these measures or metrics are calculated.
In the first part of this article, we discussed the upcoming IFRS 18 standard, its significant changes to financial statement presentations, and the implications for clarity, comparability, and compliance in financial reporting starting from January 2027.
In this second part, we discuss how under PFRS 18, certain performance measures, known as Management-Defined Performance Measures (MPMs), will move to the financial statements, along with the enhanced guidance on disclosures of financial information and implications for companies as they prepare for its implementation.
SPOTLIGHT ON MPMS
PFRS 18 places a significant emphasis on MPMs, which are specific subtotals of income and expenses that reflect management’s view of the entity’s financial performance as a whole and are used in public communications outside of financial statements.
The introduction of MPMs is a strategically significant change that directly impacts how an entity communicates its performance. However, the narrow definition of MPMs means that not all performance measures used in an entity’s communications will qualify as MPMs. An adjusted profit figure, which modifies a total or subtotal required by PFRS Accounting Standards, can qualify as an MPM.
However, non-financial performance measures such as market share, store surface and customer satisfaction score will not meet the definition of an MPM. In addition, certain financial performance measures, such as free cash flows, net debt and adjusted revenues will also not qualify as MPMs since they do not represent subtotals of income and expenses.
PFRS 18 also provides that certain subtotals of income and expense, such as those already required or specified by a PFRS Accounting Standard (like operating profit) or are specifically excluded (like gross profit or loss), are not MPMs. Lastly, while financial ratios such as return on equity are not MPMs, a subtotal that is a numerator or a denominator in a financial ratio could qualify as an MPM.
DISCLOSURE REQUIREMENTS FOR MPMS
PFRS 18 requires entities to include all necessary information about MPMs in a single note to the financial statements, which includes how the measure is calculated, why it is useful, and a reconciliation to the most comparable PFRS subtotal.
This requirement ensures that users have access to relevant information about MPMs, enhancing transparency and accountability.
IMPLICATIONS FOR FINANCIAL REPORTING PROCESSES
Many entities currently use alternative performance measures (APMs) when explaining financial performance, but information about these measures is generally communicated outside the financial statements, which has led to some concerns about the quality of such information. As a result of PFRS 18’s guidance on MPMs, companies must ensure that their current financial reporting process can capture all the required information about MPMs.
Entities that use APMs will also need to assess whether any of such APMs meets the definition of an MPM, which will then require additional disclosures that they may not be preparing currently, such as the reconciliation to the most comparable PFRS subtotal. The financial reporting process should also be able to monitor any changes to public communications, as these can affect which measures qualify, or cease to qualify, as MPMs.
Additionally, since MPMs are required to be disclosed in a single note to the financial statements, they will face increased scrutiny from regulators and investors.
AGGREGATION AND DISAGGREGATION GUIDANCE
PFRS 18 improves the general requirements for aggregating and disaggregating information in financial statements. It provides guidance on how entities should aggregate items based on shared characteristics and disaggregate them based on dissimilar characteristics.
IMPORTANCE OF CLEARER LINE ITEM PRESENTATION
In financial reporting, clarity is paramount. Users should not be left guessing about the nature of line items. PFRS 18 emphasizes that entities must avoid using vague labels like “other” unless absolutely necessary. If an entity cannot find a more informative label, it may use “other,” but this should be the exception rather than the rule.
PLANNING FOR PFRS 18 IMPLEMENTATION
PFRS 18 will be effective for periods beginning on or after Jan. 1, 2027. Entities are required to apply the standard retrospectively for comparative periods in both interim and annual financial statements. PFRS 18 also introduces consequential amendments to other PFRS Accounting Standards that entities must apply when adopting PFRS 18.
Given the requirement to retrospectively restate comparative periods and disclose certain reconciliations, companies need to plan ahead and start determining the impact of PFRS 18 as early as possible. For example, the annual financial statements in the year of adoption for an entity that adopts PFRS 18 beginning Jan. 1, 2027 will require information from 2025 onwards if the entity presents more than one comparative period in its statement of profit or loss.
For companies that prepare quarterly financial statements in accordance with PAS 34 Interim Financial Reporting, the impact of adopting PFRS 18 will already be reflected in their first quarterly report during the year of adoption by presenting the headings and subtotals and disclosing the reconciliations required by PFRS 18.
KEY CONSIDERATIONS FOR COMPANIES
Companies preparing for the implementation of PFRS 18 should consider the following key areas:
Compliance: Ensure that financial reporting processes align with the new requirements and that the impacts on contracts and debt covenants which currently use subtotals from the statement of profit or loss as inputs have been considered.
Processes: Evaluate existing processes and identify areas that may require modification.
Data and Systems: Assess whether current data management systems can accommodate the changes introduced by PFRS 18.
Internal reporting: Assess any potential changes to the current structure and contents of internal management reports and explore any opportunities for alignment with the new categories and subtotals required by PFRS 18.
Performance measurement: Revisit how management incentive structures are currently designed and how key performance indicators are measured, particularly those that are tied to certain subtotals in the statement of profit or loss.
Investor Relations: Communicate with investors, analysts, regulators and creditors about the changes and how they will impact financial reporting.
Strategy and People: Engage relevant stakeholders across the organization to ensure a smooth transition.
DRIVING MODERNIZATION IN FINANCIAL REPORTING PROCESSES
The countdown to PFRS 18 has begun, and as companies inch closer to the initial application of the new standard, it is essential that management understands the potential impact on their reporting. While the changes may seem daunting, they also present an opportunity for organizations to modernize their financial reporting processes.
PFRS 18 can serve as a catalyst for improving transparency and encouraging stronger cross-department collaboration in financial reporting. By redefining conversations about financial performance and performance measures, companies can rethink how they tell their story and shape how they are understood by stakeholders.
PFRS 18 represents a significant shift in financial reporting standards that will enhance the clarity, comparability, and transparency of financial statements. As companies prepare for the implementation of this new standard, they must embrace the opportunity to improve their reporting processes and engage with stakeholders effectively. By doing so, they can navigate the changes with confidence and position themselves for success in a rapidly evolving financial landscape.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
Aris C. Malantic is the assurance growth areas leader and financial accounting advisory services (FAAS) leader of SGV & Co., and Dwayne JUSTIN G. Ignacio is a FAAS senior manager from SGV & Co.
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