Decoding PwC's 256-page guide: 4 points that will truly trouble practitioners regarding IFRS 18
PwC Global publishes the standard reference material for IFRS practice every year titled "Illustrative IFRS Consolidated Financial Statements." This is not an explanatory document from PwC Japan (Arata/ChuoAoyama), but a collection of IFRS disclosure examples issued by PwC Global itself.
This series, which concretely demonstrates what IFRS-compliant disclosures look like for that year in the form of consolidated financial statements for a fictional company, is widely referenced by practitioners and audit firm staff. Although it is entirely in English, it is one of the documents closest to the original source for IFRS disclosure practice.
In the spring of 2026, there was a major change to the series. The traditional fictional company "VALUE Plc" was refreshed to "Reinvented Plc," and it was published as a completely new 256-page edition based on the early adoption of IFRS 18. This publication, which has renewed not only the company name but also its industry, segment composition, and note structure, can be said to be the most detailed example currently available showing what IFRS 18-compliant disclosures actually look like.
As a certified public accountant and product manager, I have decoded this document from the perspective of a practitioner. Since the basic concepts were already explained in the previous two articles (Background of IFRS 18 and Overall Picture and Structure), this time I will focus my analysis on "what will become difficult for your company."
Note that PwC's illustrative financial statements are available from the link below (some content requires Viewpoint registration). For those considering compliance with IFRS 18, I strongly recommend referring to the original source.
PwC Viewpoint – IFRS 18 Illustrative Consolidated Financial Statements
In conclusion, some of the requirements are at a level where you must start immediately or you will not make it in time.
Disclosure Burden 1: "Incorporating" MPM (Management-defined Performance Measures) into Financial Statements
What will change?
Regarding the MPM (Management-defined Performance Measures) mentioned in the previous article, the practical weight is not visible through "conceptual understanding" alone.
IFRS 18 mandates that proprietary performance indicators (such as adjusted operating profit, core profit, etc.) used in IR and financial results briefing materials must be formally disclosed as notes to the financial statements. Furthermore, the following three-piece set is required for disclosure:
Definition of the indicator and reasons for its adoption explanation
Reconciliation with IFRS-defined lines: For each adjustment item, including the impact amount on tax effects and non-controlling interests
Consistency with comparative periods: Explanation if the definition of the indicator has changed
In the PwC sample, for the reconciliation of "Adjusted Operating Profit" alone, tax effects and NCI impact amounts are calculated for each of the 5 items, including impairment of intangible assets, restructuring costs, legal fees, and gains/losses on the sale of non-financial assets.
How is it different from J-GAAP?
Under J-GAAP, there are cases where "core operating profit" and the like are disclosed in financial results summaries or integrated reports, but this is voluntary disclosure outside the financial statements. It is not subject to audit, and the explanation of calculation methods was left to the discretion of the company.
Under IFRS 18, this becomes part of the financial statements. In other words, it becomes subject to audit.
This means that "every period, you must reach an agreement with the audit firm regarding the definition, calculation basis, and comparability." The work of having the IR department and the accounting department collaborate to build everything from the design of the indicators to the disclosure text will occur every financial closing.
Disclosure Burden 2: P/L Category Changes and 'Tracking Foreign Exchange Differences by Source'
What is changing?
It is well known that the P/L will be divided into five categories: operating, investing, financing, income tax, and discontinued operations, but the practical difficulty lies in classifying foreign exchange differences.
IFRS 18 establishes the principle that foreign exchange differences should be 'classified into the same category as the transaction that gave rise to the difference.' In other words:
Foreign exchange differences arising from operating receivables → Operating category
Foreign exchange differences arising from borrowings → Financing category
Foreign exchange differences arising from investment financial assets → Investing category
In PwC's sample, to ensure this classification is thorough, foreign exchange differences are tracked and classified by five sources of occurrence. It is necessary to track the differences arising from intra-group foreign currency receivables and payables, trade receivables, borrowings, lease liabilities, cash and deposits, etc., for each transaction.
How is it different from J-GAAP?
Under J-GAAP, foreign exchange differences are generally recorded collectively as non-operating income or expenses. Regardless of the source, they are usually grouped into a single account called 'Foreign Exchange Gain/Loss'.
After transitioning to IFRS 18, the same foreign exchange gains and losses must be allocated according to the nature of the transaction. This directly impacts the system's account design. If you try to handle this with the current account structure, manual allocation will be required at every closing period.
Note that if 'undue cost and effort' is required, collective recording in the operating category is permitted, but the judgment and documentation for applying this exception itself also impose a practical burden.
Disclosure Burden 3: Notes on Expenses by Nature — The most overlooked and system-intensive requirement
What is changing?
IFRS 18 mandates that companies preparing their P/L by function (cost of sales, SG&A, etc.) must disclose the following expenses by nature in the notes:
Depreciation and amortization expenses
Employee benefit expenses (wages, social insurance, defined contribution, defined benefit, share-based payments, etc.)
Inventory write-downs
Impairment losses
Hearing this, it might sound like "just more notes," but the reality is not that simple.
Looking at Note 8 in PwC's sample, the structure of the disclosure becomes clear. For example, regarding depreciation, it shows where it is included—whether in cost of sales, cost of services, selling expenses, general and administrative expenses, or research and development expenses—by breaking it down by functional line and then further disclosing the "total amount including capitalized portions." Employee benefit expenses are similarly disclosed in a matrix of functional lines by nature of expense.
How is it different from J-GAAP?
Under J-GAAP, if you prepare a P/L with functional presentation, you do not need to cross-tabulate expenses by nature. Almost no companies disclose externally how much depreciation is included in cost of sales.
The problem is that the chart of accounts for many Japanese companies is designed by "function."
For example, depreciation is generally managed under functional accounts such as "depreciation in manufacturing costs" or "depreciation in SG&A." To comply with IFRS 18 requirements, a mechanism to aggregate the "total depreciation" across the entire company will be required.
Even more troublesome is the treatment of capitalized portions. Depreciation included in work-in-progress inventory or construction in progress is not expensed in the P/L. However, the IFRS 18 notes are expected to disclose the total amount by nature, combining both expensed and capitalized portions.
This implies a review of the ERP account design, or at the very least, the addition of a supplementary aggregation layer. If you try to handle this manually while keeping the existing account structure, the man-hours for closing processes will increase significantly.
Disclosure Burden ④: Changing the "Starting Point" of the Cash Flow Statement and Retrospective Restatement
What will change?
There are also changes to the cash flow statement. The starting point for the indirect method will change.
Under the current IFRS (IAS 7), the starting point for the indirect method was "profit before tax." Under IFRS 18, this will change to "Operating Profit."
As a result, the composition of adjustment items will also change. Interest income/expenses and foreign exchange differences, which are classified into the investing and financing categories, will be removed from the adjustment items, and instead, a process will be required to add or subtract those items that were excluded from operating profit.
Also, the classification rules for interest income and expenses will change. Previously, companies could choose whether to classify them as "operating" or "investing/financing" based on their accounting policies, but under IFRS 18, the logic is streamlined: interest related to main business activities is in the operating category, and others are in the financing category.
How is it different from J-GAAP?
Under J-GAAP, the starting point for the indirect method is "profit before tax," which differs from both IFRS after the application of IFRS 18 and current IFRS. Upon transition, retrospective restatement of the comparative period (previous fiscal year) cash flow statement is also required.
However, regarding the cash flow statement, as a transitional measure for IFRS 18, disclosure of reconciliation is not required. Nevertheless, preparing materials to explain to investors and analysts why the figures have changed will be separately necessary.
Companies that have not started yet need to take action now
The mandatory application of IFRS 18 is for fiscal years beginning on or after January 1, 2027. For December fiscal year-ends, this starts from the fiscal year ending December 2027.
However, IFRS generally requires retrospective adjustment of comparative information for the previous year as well. In other words, the 2027 financial statements will feature figures for the 2026 fiscal year that have been restated based on the new standards.
What this means is that you needed to have been in a position to aggregate data from January 1, 2026, based on the new standards.
Taking the notes on expenses by nature as an example, the data for depreciation and personnel expenses for 2026 presupposes an account design starting from January 2026. Even if you try to go back and manually aggregate later, foreign exchange differences by source and breakdowns of capitalized amounts cannot be reconstructed unless records remain in the system.
The ideal timeline is as follows.
Period: Action Required
During 2025 Gap analysis of current account design and systems, and determination of response policy
By January 2026 Completion of system modifications and redesign of account titles
Full year 2026 Data accumulation based on the new standards (comparative period)
2027 Financial Statements Initial disclosure of financial statements based on IFRS 18
Now that we are already in 2026, it is already impossible to start this timeline from now. Companies that have not yet started need to decide on a response policy immediately, including the issue of how to secure data for the comparative period. It is necessary to urgently organize what can and cannot be done, including cases where manual retrospective aggregation will be required.
Conclusion
If you remain under the impression that the disclosure burden of IFRS 18 is merely that "the presentation of financial statements will change," you will be late in noticing the problems with systems and historical data. IFRS 18 is a standard that demands a redesign of the information collection and management mechanisms themselves, rather than just a change in accounting treatment.
Even for companies not considering early adoption, as long as there is a disclosure for the comparative prior year, it has become essential for IFRS-applying companies and those considering application to start gap analysis early.
Reference Material PwC "2025 Illustratives – Early Adoption of IFRS 18" (Published April 2026). This article is the author's own analysis and interpretation of this material. The contents are the author's personal views; please consult a professional regarding specific accounting treatment decisions.