IFRS 18: The new Accounting Gold Standard
The International Accounting Standards Board (IASB) issued IFRS 18 Presentation and Disclosure in Financial Statements in April 2024 to replace IAS 1. IFRS 18 improves the clarity and comparability of financial statements by introducing a mandatory structure for the statement of profit or loss. It requires entities to classify income and expenses into five defined categories – operating, investing, financing, income taxes, and discontinued operations while also introducing new disclosure requirements for management defined performance measures. The standard is effective for annual reporting periods beginning on or after 1 January 2027, with early adoption permitted and retrospective application required.
How does IFRS 18 impact Customers?
For customers, IFRS 18 will impact multiple areas in their current system set-up and would typically require adjustments to, but not limited to – chart of accounts design, G/L account assignments, financial statement version structure, updated cash flow statement, changes in group reporting configurations and to generate comparative financial statement version for previous year.
While S/4HANA’s Universal Journal provides a solid foundation to accommodate these changes, customers will need to proactively review configurations, calculations, and governance to ensure compliant and consistent reporting across entities. This will require early and proactive engagement with auditors to support the timely adaptation of the organization’s accounting policies in accordance with IFRS 18.
IFRS 18 should be approached as a business transformation initiative, not an IT project. For customers, it drives significant changes to financial reporting processes, data models, and governance frameworks, with IT enabling these changes rather than leading them.
Transition to IFRS 18
Customers should treat the adoption of IFRS 18 in an SAP Cloud ERP, SAP Cloud ERP, Private environments as transformation project. A typical IFRS 18 Transformation project could look as below:
We will summarize the steps for each phase but not limited of this transformation journey to in the below section.
Discover Phase
This is one of the most important phases for IFRS 18 Transformation. Some of the key activities that could be executed in Discover Phase.
Early Alignment with Auditors:
The adoption of IFRS 18 will significantly impact the organization’s financial reporting, including the requirement to present FY 2026 and FY 2027 comparatives under IFRS 18 despite prior audits. Early engagement with auditors is therefore critical to align on interpretation and application.
Key focus areas should include updates to the Chart of Accounts, general ledger structure and posting logic, alignment on the treatment of foreign exchange gains and losses, and an auditor‑aligned approach to restating or reclassifying prior‑year information to ensure comparability.
Understand Different Options Available for P&L Classification as per IFRS 18:
The introduction of IFRS 18, with its required classification of income and expenses into Operating, Investing, and Financing categories, will necessitate a thoughtful review of the Chart of Accounts (COA) and may require more granular GL accounts to enable accurate and consistent mapping. A clear understanding of how P&L accounts are posted and the underlying nature of the transactions should drive their appropriate categorization under IFRS 18, thereby reducing judgement, manual adjustments, and classification inconsistencies
For more information, refer to the Help Documentation
SAP Cloud ERP, Private: Activating Cost of Sales Accounting
SAP ERP: Activating Cost of Sales Accounting
In line with IFRS 18 requirements for consistent presentation of expenses by function, the functional area can be automatically derived in the accounting document through appropriate assignment within both process-related configurations and relevant master data.
For more information, refer to the Help Documentation:
SAP Cloud ERP, Private: Deriving Functional Area
SAP Cloud ERP: Deriving Functional Area
SAP ERP: Deriving Functional Area
Organizations already using Cost of Sales Accounting shall ensure that any revision to functional areas aligns with IFRS sub‑categorization requirements while continuing to support all existing statutory, management, and operational reporting needs without disruption.
Financial Statement Versions & Cash Flow Statement (Indirect Method):
IFRS 18 introduces new mandatory subtotals, such as Operating Profit, requiring existing Financial Statement Versions (FSVs) to be updated or replaced to align with the new five-category structure.
These changes affect global hierarchies used in Fiori reporting. Using the Manage Global Hierarchies app, customers can maintain FSV hierarchies based on G/L accounts, functional areas, or a combination of both, to support IFRS 18–compliant reporting.
Depending on the SAP release version, certain customers are able to configure Financial Statement Versions (FSVs) in a way that supports IFRS 18–compliant reporting requirements
SAP would deliver a sample Financial Statement Version, which will be released as specified in the below notes:
SAP Cloud ERP, Private: 3696338 – Advisory Note on IFRS 18 Transition in S/4HANA Private Cloud, S/4HANA – SAP for Me
SAP Cloud ERP: 3694359 – How to Adopt IFRS 18 for Financial Reporting in S/4HANA Cloud Public Edition – SAP for Me
SAP would also provide a new Fiori Application for Cash Flow statement (Indirect Method) for SAP ERP Cloud, Private. Please refer to the Roadmap Explorer for more details.
Scope items 1GA will also be updated to include reference content for IFRS 18, which can be adapted as per customer requirements across SAP Cloud ERP and SAP Cloud ERP, Private.
Treatment of Foreign Exchange Gain or Loss:
According to IFRS 18, foreign currency exchange gains and losses must be presented in separate categories. The category of FX Gain/Loss is decided by the nature of the items from which gain or loss arise. For example:
- FX Gain/loss arising from Trade Receivables/Payables –> Operating Category
- FX Gain/loss arising from Cash and Cash equivalents –> Investing Category
- FX Gain/loss arising from Issued bonds, borrowings –> Financing Category
As part of the IFRS 18 transformation, the nature of postings to each GL account must be analysed to determine whether a GL requires bifurcation to avoid mixed transaction types and ensure compliant presentation. Where new GL accounts are introduced, their foreign exchange gain or loss treatment must be reassessed to ensure accurate currency remeasurement. Accordingly, foreign currency valuation configuration must be adjusted based on whether the classic or advanced foreign currency valuation approach is being used.
When advanced foreign currency valuation is activated, valuation rules can include multiple steps, each using semantic tags to classify monetary items and assign the corresponding unrealized gain or loss accounts.
If you continue to use Classic Foreign Currency Valuation and do not plan to migrate to Advanced Foreign Currency Valuation prior to IFRS 18 adoption, you may update the unrealized gain/loss G/L account for transaction key KDF using transaction code OB09
Postings generated through Treasury & Risk Management (TRM):
Treasury and Risk Management (TRM) generate diverse profit and loss items that must be accurately classified as operating, investing, or financing to comply with IFRS 18. For further details on TRM, refer to the SAP community blog post:
IFRS 18 Compliance for Treasury and Risk Management in SAP Cloud ERP: Key Impacts and Approaches
Group Reporting:
For more details on how Group Reporting can support your IFRS 18 adoption journey, please refer to SAP Community blog post:
IFRS 18 and SAP S/4HANA Group Reporting: What It M… – SAP Community.
Comparative Financial Statement Version:
Because IFRS 18 requires comparative statement, the 2026 data (comparatives for 2027) must be reportable in the new format. For more details, please refer to blog:
IFRS 18 Compliance: Generating Comparative P&L Rep… – SAP Community
Prepare Phase
In the context of an IFRS 18 transformation project, once the impacted reporting and finance areas are identified during the Discover phase, the Prepare phase involves setting up the project plan, identifying the relevant business and IT teams, and provisioning a sandbox environment to execute and validate the required changes.
Create a Plan:
Create a concise, IFRS 18–aligned critical‑path plan covering Chart of Accounts (COA) redesign, Cost of Sales activation (where applicable), Financial Statement Version (FSV) updates, and Foreign Exchange reconfiguration to enable the new presentation, aggregation, and disclosure requirements.
Identify Teams:
An IFRS 18 transformation requires coordinated involvement of Project Management, Accounting Policy Owners, Controllers, Finance Operations and FP&A, Management Performance Measure owners, IT and Reporting systems teams, Audit and Controls (internal and external) and Change and Training teams to ensure compliant financial statement presentation, robust disclosures, system readiness, and clear stakeholder communication.
Provision for a sandbox environment:
Create and maintain a sandbox environment using a recent copy of production data to enable early prototyping.
Explore Phase
This is the most critical phase of this project. Key activities that should be executed in Explore Phase.
Mapping COA to IFRS Categories:
Map every existing P&L account to the mandated IFRS 18 categories: Operating, Investing, Financing, Income tax and discontinued operations. Assignment of a P&L account to a particular category will depend on the nature of transaction from which this posting is generated.
As part of the IFRS 18 transformation, when Cost of Sales accounting is activated, the required functional areas must be clearly defined together with robust and transparent derivation rules to ensure consistent classification of expenses by function.
List down any GAP identified during the mapping exercise.
Create/Update of Financial Statement Version (FSVs) and Cash Flow Statement (Indirect Method):
As part of the IFRS 18 transformation, identify and agree the new Financial Statement Version (FSV) format with the auditor, ensuring clear segregation of operating, investing, financing, tax, and discontinued operations categories. The FSV structure should leverage functional areas, where available, and align with the new sample FSVs and the Cash Flow Statement (Indirect Method) app introduced during the Discover phase to ensure compliance and consistency across financial statements.
FX Gain/Loss Changed due to bifurcation of underlying GL accounts:
If the Chart of Accounts (COA) are going to have new set of GLs based on nature of postings, Foreign currency valuation configuration will also be changed. List down all the GLs for which Foreign currency valuation configuration needs to be updated. Define the posting rules based on advance or classis FC valuation approach you are using.
Comparative Financial Statement Version:
IFRS requires comparative statements to be presented with 2026 data restatement. Please refer to the blog:
IFRS 18 Compliance: Generating Comparative P&L Rep… – SAP Community
Thereafter, decide the approach to be taken. Once finalized, you may need to add additional extension ledger or other solution based on your ERP version and the approach chosen.
Document the Design:
After finishing the mapping files, make a simple design document. In this document, list each area clearly, such as GL requirements, the new FSV structure, cash flow changes, and FX impacts.
At this stage, you should also create a list of gaps where the standard solution is not enough to meet your needs.
Realize Phase (Configuration & Testing)
During the Realization phase, we will implement the approved design by configuring the system, creating required master data, developing custom enhancements (if needed), and testing the solution. This work will support the new IFRS 18 presentation and disclosure requirements, especially around income statement structure, operating categories, and cash flow reporting.
We will create new GL accounts and update the Chart of Accounts, ensuring correct assignment to account determination settings. Cost of Sales Accounting will be configured, and the required functional areas will be defined and carefully derived to support IFRS 18‑aligned income statement presentation.
A new Financial Statement Version (FSV) will be created using transaction OB58 or the Manage Global Hierarchies Fiori app to reflect the updated IFRS 18 structure (operating, investing, and financing categories).
The Fiori Cash Flow Statement (Indirect Method) app will be activated, or a custom report will be developed if defined in the Discover Phase, to support enhanced cash flow disclosures under IFRS 18.
Where transaction-level detail is not available, new or updated allocation rules will be configured to reclassify amounts from one GL account to multiple reporting GLs, ensuring correct IFRS 18 categorisation.
If required, Advanced Foreign Currency Valuation will be configured using valuation rules and semantic tags, or Classic Foreign Currency Valuation (OB09) will be adjusted, in line with reporting requirements.
System Validation (SIT & UAT):
Below are some examples of activities during this phase but not limited to:
- Validate that the transactions generated are now posted to correct setup of GLs as per nature of transaction.
- FSV is generated as per required and agreed reporting format.
- Derivation of functional areas for different processes is correct and complete.
- Posting of FX Gain/Loss is posted correctly to correct set of GLs
- Cash Flow Statement (Indirect Method) is working as expected.
- Simulate month end and quarter end closing to validate that there are no unexpected issues coming.
In this phase active involvement of accounting and finance team is crucial to make the transition successful.
Deploy & Run Phase
Below are some activities but not limited to, that could be considered in this phase:
Cutover Activities:
Some of the cutover activities related to IFRS 18 Transformation Project could be, but not limited to:
- Move all required system changes (standard and custom) to the system in the correct order
- Create or update basic financial data, such as new GL Accounts, Assignment of Cost Centres to correct functional categories, New Cost Element Groups etc
- Switch on the Cash Flow Statement app and verify it works correctly
- Check that all automatic accounting rules (derivations and substitutions) are correctly set
- Make sure all cost allocations (allocations between departments or functions) are correctly updated
- Activate Cost of Sales Accounting so expenses are reported by business function
- Update user access and roles so users can see new reports and apps
Conclusion
IFRS 18 is the biggest change to how financial statements are presented since IFRS began. While it does not change how revenue or assets are measured, it significantly changes how income and expenses are grouped and shown in the financial statements.
IFRS 18 applies from 1 January 2027, and companies need to start preparing now to produce comparative information for 2026 and avoid implementation challenges
Credits to Co Author: @Pradeep_M
