IFRS 18: What Treasury Needs to Know Now

IFRS 18 introduces significant changes to FX classification and reporting requirements by January 2027. Despite that this adoption date still feels quite far away, there is quite some time required in order to be compliant. Treasury Management Systems and ERP platforms must be updated to ensure compliance with new operating, investing, and financing categorizations. Introduced by the International Accounting Standards Board (IASB) in April 2024, IFRS 18 is required to be implemented by January 2027 at the latest. The new standard addresses how companies classify foreign exchange (FX) gains and losses, particularly affecting treasury operations. 

In the past, for simplicity and pragmatic reasons, many organizations reported all FX results as part of operating income. Under IFRS 18 however, guidance on the treatment of these FX results is more explicit and must now be categorized into three groups: operating, investing, and financing dependent on the nature of the underlying exposure.  

While this is a simple requirement conceptually, certain challenges may exist in creating a holistic transparent view on the FX impacts, particularly when considering the treatment of FX derivatives. This shift means that businesses must reassess their accounting practices and treasury and hedging strategies to ensure compliance. 

Key Changes Under IFRS 18:The primary change in IFRS 18 is the requirement to classify FX gains and losses based on their source: 

• Operating: FX results from accounts payable (AP) and accounts receivable (AR) transactions fall into this category. 

• Investing: FX fluctuations linked to investments are recorded here. 

• Financing: FX changes related to loans and borrowings belong in this section. 

Key Date: Full implementation required by January 2027 

The P&L impact from FX derivatives should also be considered in these changes, where the selection of P&L category is determined based on the nature of the exposure. IFRS 18 does allow for the P&L classification from FX derivatives to be entirely posted as Operating in the case where it is not practical to uniquely identify the nature of the underlying exposure.  

This may be a common occurrence, specifically in the example of Balance Sheet FX hedging, where it is not common to hedge the individual elements of the balance sheet separately. While posting to Operating for derivatives is easier to achieve, it would create inconsistencies in categorization between the FX result from hedging, and the FX result from source. 

The goal of IFRS 18 is to create clearer and more comparable financial statements across different businesses, therefore the treatment of FX results from hedging activities should be carefully considered. 

Treasury’s Role in the Transition  

The treasury department will play a crucial role in implementing IFRS 18. While the new classification rules are straightforward, their practical application requires an in-depth review of the drivers of FX exposure and the applied hedging strategies. Determining which department takes primary responsibility for IFRS 18 implementation can be challenging. The cross-functional nature of the project requires clear ownership and accountability structures to ensure successful implementation. This coordination challenge makes a strong case for external advisory support to facilitate collaboration between treasury, finance, accounting, and IT teams. 

One major challenge of IFRS 18 is the potential mismatch between FX hedging strategies and accounting classifications. Traditionally, companies have managed FX risk through balance sheet hedging, using a single FX deal to cover multiple exposures. However, with the new classification rules, companies may need to adjust their hedging approach to ensure that hedge results align with the appropriate classification. 

For example, if a company hedges a foreign currency loan, and the loan’s FX impact is now categorized under financing, the FX gain or loss from the hedge should also be classified under financing. If it remains under operating income, the company may see artificial volatility in financial statements, which could misrepresent its risk management effectiveness. 

Operational and Systemic Adjustments  

Beyond policy updates, IFRS 18 requires changes to Treasury Management Systems (TMS) and Enterprise Resource Planning (ERP) systems. These systems must be configured to ensure that FX transactions are correctly classified into operating, investing, or financing categories. This may involve adding new data fields, updating existing reporting structures, or even implementing new hedging processes. 

Challenges and Considerations: 

Companies may face several key challenges in implementing IFRS 18: 

• Instance Structure Differences: Companies must determine how to apply classification rules across different subsidiaries and business units. Classification of operating for a finance company like the Treasury center may differ from that of a regular business operation. 

• Chart of Accounts Adjustments: Treasury teams must assess whether existing FX hedging strategies need to be revised. 

• System Updates: IT teams must modify TMS and ERP systems to support the new classification structure. 

• Cross-Department Coordination: Treasury, finance, and accounting teams must work together to ensure a smooth transition. 

How Zanders Can Help 

Zanders, a leading treasury advisory firm, offers support to companies transitioning to IFRS 18. Our expertise extends beyond compliance, helping organizations develop effective hedging policies, update financial systems, and align their reporting strategies. Our services include: 

• Reviewing FX exposure and hedging strategies. 

• Identifying and resolving classification challenges. 

• Developing a step-by-step plan for IFRS 18 compliance. 

• Assisting with system updates and configuration changes in TMS and ERP platforms. 

By addressing IFRS 18 proactively, treasury teams can not only comply with the new standard but also enhance their overall risk management approach. Zanders is committed to helping organizations navigate these changes efficiently. 

Conclusion  

IFRS 18 represents a significant shift in how FX gains and losses are reported and viewed through accounting principles and hedging strategies. While the standard itself is not overly complex, its impact on hedging and financial reporting requires careful planning, BI preparation, and compliance validation. 

With the compliance deadline approaching in January 2027, now is the time to act. Zanders is ready to assist companies in this transition, providing both strategic guidance and practical implementation support to ensure a seamless adaptation to IFRS 18. 

To find out more about IFRS 18 and key changes for treasury, please contact Jonathan Tomlinson or Mitchell Ponder.