Group Reporting and consolidated financial statements: harmonisation across borders under IFRS 18

The complexity of group structures

Groups are complex by definition. They consist of several companies, often in different countries and time zones, with differing local accounting standards and business models. Consolidating this diversity into a single set of consolidated financial statements is already a challenge under IAS 1.

IFRS 18 considerably intensifies this challenge. The new income statement structure must be mapped not only at the level of the individual companies, but also at the level of the consolidated financial statements. This requires consistent classification across all companies.

The challenge: mapping local accounts to group position numbers

The first step in group reporting is mapping local accounts to group position numbers. This is the process of assigning the items from the individual financial statements of the subsidiaries to the items of the consolidated financial statements.

Under IAS 1, this mapping was relatively flexible. Companies could use various classifications as long as they were consistent. This often resulted in mappings that had grown organically and were not always optimally structured.

Under IFRS 18, this mapping must be rethought. Each item from an individual set of financial statements must be assigned unambiguously to one of the four IFRS 18 categories. This is particularly complex when subsidiaries report under different local standards.

Practical example: an international group structure

Let us consider a practical example: a German company with subsidiaries in the USA, France and China. Each subsidiary reports under local standards (US GAAP, French GAAP, Chinese GAAP), but is converted to IFRS for group purposes.

The problem: the local standards use different income statement structures. What is classified in the USA as “Operating Expense” may be classified in France as “Charge d’exploitation” and in China as “营业成本”. Converting to IFRS is already complex. The additional conversion to IFRS 18 categories requires a deep understanding of the local standards and their differences.

Step 1: harmonising the local financial statements

The first step is to harmonise the local financial statements. This involves:

Analysing the local standards: analyse how each subsidiary reports under local standards. Understand the differences between the local standards and IFRS.

Identifying differences: identify differences in the classification of items between local standards and IFRS. This includes, for example, differences in the treatment of research and development costs, distribution costs or finance expenses.

Creating conversion tables: create conversion tables that show how items from local standards are mapped to IFRS items. This forms the basis for the mapping to IFRS 18 categories.

Checking consistency: verify that the conversion is carried out consistently across all subsidiaries.

Step 2: developing a group mapping

Building on the harmonisation of the local financial statements, you develop a group mapping that shows how items from the individual financial statements are mapped to group position numbers.

This mapping should contain the following information:

• The position number from the individual financial statements

• The group position number

• The IFRS 18 category

• Explanations for complex mappings

• Reference to relevant IFRS standards

Step 3: adapting the consolidation processes

The consolidation processes must be adapted to reflect the new IFRS 18 categories. This involves:

Reviewing elimination procedures: review how elimination procedures (e.g. elimination of intra-group profits, elimination of intercompany transactions) affect the IFRS 18 categories. Elimination procedures may need to be adapted to take the new categories into account.

Reviewing non-controlling interests: review how non-controlling interests are presented in the new IFRS 18 categories. This is particularly important, as non-controlling interests are often presented in a separate line in the income statement.

Reviewing consolidation adjustments: review how consolidation adjustments (e.g. deferred taxes on consolidation differences) affect the IFRS 18 categories.

Step 4: handling business divisions

Many groups are divided into different business divisions. The transition to IFRS 18 requires that business divisions are able to map the new categories.

Reviewing segment reporting: review how segment reporting works under IFRS 18. Do segments need to map the new categories? How are segments presented with the new categories?

Reviewing transactions across business divisions: review how transactions between business divisions are presented in the new categories.

Reviewing the allocation of central costs: review how central costs are allocated to business divisions and how this affects the IFRS 18 categories.

Step 5: implementation in group reporting systems

Most groups use specialised group reporting systems (e.g. SAP Group Reporting, Hyperion, OneStream) for consolidation and reporting. These systems must be adapted to reflect the new IFRS 18 categories.

Adapting data models: adapt the data models to reflect the new categories. This may involve introducing new dimensions or hierarchies.

Adapting the consolidation logic: adapt the consolidation logic to take the new categories into account.

Adapting the reporting tools: adapt the reporting tools to reflect the new categories.

Automating processes: consider how you can automate processes to improve efficiency and reduce errors.

Step 6: retrospective application

A particular challenge is the requirement for retrospective application. This means that groups must not only present the 2027 financial statements under IFRS 18, but also the 2026 comparative period.

This requires:

Adapting historical data: adapt historical data for 2026 to present it in the new IFRS 18 categories.

Ensuring comparability: ensure that the data for 2026 and 2027 are comparable.

Providing explanations: explain in the notes how the retrospective application was carried out.

Challenges and best practices

Challenge 1: consistency across companies

One of the biggest challenges is ensuring consistency across all companies. This requires clear guidelines and intensive communication.

Best practice: develop detailed guidelines for classifying items into the new IFRS 18 categories. Communicate these guidelines clearly to all companies.

Challenge 2: data quality

Another challenge is ensuring data quality. Erroneous or incomplete data can lead to errors in consolidation.

Best practice: implement validation rules in your group reporting systems to ensure that data are captured correctly.

Challenge 3: timing

The transition to IFRS 18 must be completed by 2027. This is a tight timeframe for large groups.

Best practice: start planning and implementing now. Use the time up to 2027 to proceed systematically.

Conclusion: a group-wide transformation is required

For groups, the transition to IFRS 18 is a group-wide transformation. It requires changes not only in the individual companies, but also in the consolidation processes and group reporting.

Groups that approach this transformation systematically and thoroughly adapt their processes and systems will not only ensure compliance, but also improve their group reporting and modernise their group reporting processes.