For a long time, the “income statement” at some companies and co-operative societies has been much like an artist’s canvas… on which the figures are painted not as they are, but as we would like them to appear. Today, as the application of International Financial Reporting Standard No. 18 (IFRS 18), “Presentation and Disclosure in Financial Statements”, draws near, the age of the brush and the paints is over.
The new standard does not invent new profits, nor does it wipe out old losses. All it does is one thing only: it puts every figure in its proper place. Operating here, investing there, and financing in its own category. And with that, the mask falls from the practices of dressing up the figures that have worn shareholders down for years.
The question is no longer: how much profit was made in the company or the society? The question now is: where did that profit come from? And is it real?
The aim: transparency and preventing manipulation
Standard No. 18 imposes a mandatory division of the income statement into 3 main categories:
- Operating activities: whatever relates to the core activity of the company or the society, namely selling and distribution.
- Investing activities: such as income from letting shops and properties.
- Financing activities: such as interest and borrowing costs.
The message is clear: from today it is no longer possible to move an item from one category to another to improve the picture. Every figure will be put in its proper place, and it will be easy to compare one company with another, or one society with another.
Wrong practices that reality has exposed
In the course of my work as an auditor, spanning more than forty years, we have observed two main practices that conflict with the spirit of the new standard:
First: treating the “quantity discount” as revenue. Instead of the discounts granted by suppliers being deducted directly from “cost of goods sold”, they are recorded as a separate revenue item. The result? An inflated sales figure and an illusory operating profit margin.
Second: charging depreciation to the “social aid provision in societies”. The depreciation expense is deducted from the provisions item instead of being charged to the income statement. The aim: to reduce the reported expenses, raise net profit, and reduce the amount deducted for social aid.
The expected impact on societies
The standard will not change the laws, but it will expose deviations quickly.
- For the Ministry: monitoring performance will become easier and more precise.
- For the auditor: the grey area will shrink and professional judgement will be clearer.
- For the shareholder: he will at last obtain a true and non-misleading financial picture.
Urgent recommendations
- Issuing a binding circular from the Ministry of Social Affairs on applying Standard No. 18 to all societies.
- Directing rental income to the “investing” category and not “operating”.
- Defining a unified accounting treatment for quantity discounts.
- Strictly prohibiting the charging of operating expenses, such as depreciation, to provision items.
Conclusion
In the end, IFRS 18 is not a punishment for societies; it is an opportunity. An opportunity for the transparent society to stand out, for sound management to be rewarded, and for the shareholder to understand exactly where his money goes. As for anyone who has grown used to hiding weak operating performance behind investment income, or to charging expenses to provisions… the new standard will be his mirror that does not lie.
The final message is clear:
From today, window-dressing will not protect you. What will protect you is your company’s real performance. Because the future belongs not to those who excel at “presentation”, but to those who excel at good performance.