IFRS 18 in Practice, Part 1: The Five CO Work Steps

Part 1 summarized IFRS 18 itself, Part 2 covered the Financial Statement Version (FSV) in SAP FI, and Part 3 covered the cost flow in SAP CO. All three answered the question of what the standard requires.

This post changes the angle. Taking a practice case, it looks at what is actually touched in CO: which accounts are split, on what basis, how the categories are assigned to cost elements, and what follows in allocation, CO-PA and the income statement.

Scope note: this is a generic practice note. Accounts are named, not coded, and no company-specific or system-specific information is included, only the structure and the order of the work.

1. IFRS 18 and CO

Category	Item	Detail
Requirement of the standard	Three categories in the income statement	IFRS 18 splits the income statement into three categories, operating, investing and financing, and requires two new subtotals: operating profit and profit before financing and income taxes. It applies to annual reporting periods beginning on or after 1 January 2027.
Basis for classification	One account holds several categories	Foreign exchange gains, for example, sit in a single account today. But a gain arising on a trade receivable is operating, one on a loan receivable is investing, one on borrowings is financing. The same kind of gain falls into a different category depending on what caused it.
Route through CO	Gains and losses flow through CO	Many companies create cost elements for non-operating income and expense as well, collect them on cost centers and send them on to profitability analysis (CO-PA) through assessment, in order to see divisional results in management accounting. If this route is left as it is, financing category items get mixed into the operating allocation.
Structure	All four layers have to be split	To present one line in the income statement, the account, the cost element, the cost element group and the value field must all be split. If any one layer is left aggregated, that line cannot be produced.

2. The five work steps

Step	Question to answer	Output and scale
1. Split the accounts	Which accounts are split, and into how many	Existing P&L accounts are split by the nature of the transaction, and accounts that did not exist are created. If there are several company codes, the same account set repeats once per company code.
2. Define the basis for the split	What is the split judged on	To split an account, it has to be decided what information the judgement is made on. Once that is fixed, the FI automatic posting account determination can be adjusted. It is produced as a mapping table.
3. Assign the cost element categories	Which category group does each split account belong to	Every account is assigned operating, investing or financing, and cost element groups are built per category. In the reference project this table ran to several hundred rows. This is the step that carries most of the CO work.
4. Check for omissions	Is any account missing	The full G/L account list is extracted and compared with the category mapping table. When an account is created a cost element has to be created with it, and if it is missing, postings are blocked. Conversely, the cost elements of accounts that disappear through the split are to be retired.
5. Rebuild the report	How is the income statement put together again	The two subtotals, operating profit and profit before financing and income taxes, are inserted and the hierarchy is rebuilt. The allocation structure, the secondary cost elements, the CO-PA value fields and the transfer structure follow with it.

3. Step 1: Account split, which accounts are in scope

Category	Item	Detail
In scope	Accounts that are split	Financial gain and loss accounts: foreign exchange gains and losses, foreign currency translation gains and losses, valuation and transaction gains and losses on derivatives, gains and losses on disposal of assets, and impairment losses on assets.
Not in scope	Accounts that are not split	Revenue, cost of sales and selling and administrative expenses are not in scope, because they are already clearly operating. Even so, non-operating items such as rental income or investment income are sometimes mixed into the revenue accounts, so they need to be checked.
Example of a split	One foreign exchange gain becomes five	Foreign exchange gain → foreign exchange gain (foreign currency), (dividends), (intercompany), (long-term receivables), (other). Each one is assigned operating, investing or financing: only the one arising on dividends is investing and the rest are operating, and so on.
Derivatives	The underlying decides the category	Gains and losses on derivatives are split by what was hedged. Trade receivables and other receivables are operating, loans receivable and interest receivable are investing, borrowings and interest on borrowings are financing.
New accounts	Creating a slot that did not exist	Investment property accounts are the typical case: depreciation of investment property, gains and losses on disposal, impairment losses and their reversal, and the balance sheet accounts for investment property classified as held for sale, all needed as a set. If investment property was not managed separately before, this work is added.

4. Step 2: What the split is based on

Type of gain or loss	Basis for the split	Where it is determined
Foreign exchange and translation gains and losses	The offsetting balance sheet account	It depends on whether the offsetting item sits in other receivables, loans receivable or borrowings. If there are five kinds of other receivables, the foreign exchange gain splits into five as well. In the FI automatic posting account determination, a separate P&L account has to be assigned per offsetting account.
Gains and losses on disposal and impairment of assets	The asset account determination key	It splits by type of asset: land, buildings, structures, machinery, vehicles, fixtures, investment property. This is handled in fixed asset account determination (account determination per asset class).
Interest income and expense	What the borrowing or lending is for	Interest on general borrowings, bank overdrafts and bonds is financing, interest on loans receivable is investing, and interest related to trade payables is operating.
Common to all	The information has to be on the document	To split an account, which offsetting account the item arose on has to be known at the time the document is created. If documents come in from a legacy system, the first thing to check is whether the interface message carries the basis for the judgement.

5. Step 3: Assigning categories to cost elements

Category	Item	Detail
What is done	Cost element groups per category	Existing cost element groups are grouped by the nature of the cost (salaries, depreciation, fees and so on). IFRS 18 asks for grouping by activity category. The approach used is to keep the existing groups and lay one more layer of category groups on top of them.
Code convention	Primary cost element groups	The reference project used "leading digits of the existing group code + category number (1 = operating, 2 = investing, 3 = financing)". A foreign exchange loss group splits into three sets, operating, investing and financing. Account groups that have only one category keep the existing code as it is.
Code convention	Secondary cost elements	A different approach was chosen here. The existing code is kept and a category suffix is added at the end. The draft also considered replacing a middle position of the code with a category character, but the final version settled on the suffix.
Naming	Organization level + category + item	In Korean the names take the form "division operating_salaries" or "cost center financing_interest paid". In English the 20-character name limit was hit, so the organization level was shortened from two characters to one and a one-character category was put in the freed position. Name length limits are checked before the work starts.
Case that splits	Retirement benefits	Severance pay, current service cost and past service cost are operating, but interest cost and the expected return on plan assets are financing. Retirement benefit expense lands on cost centers and flows on through allocation into manufacturing cost, and the category splits inside that flow.
Case that splits	Depreciation	Ordinary depreciation and depreciation of right-of-use assets are operating; only depreciation of investment property is investing. Depreciation is posted directly to cost centers, so if it is not split at account level the category cannot be restored at any later step.
Case that splits	Interest expense	Not all interest expense is financing. All three groups, operating, investing and financing, can exist.

6. Step 4: Checking for omissions

Category	Item	Detail
Method	All accounts against the category mapping table	All G/L accounts in the chart of accounts are extracted and checked against the category mapping table with a lookup function. The reference project added a single verification column to the full account list.
What is looked for (1)	Accounts that disappear through the split	The original accounts that were split. The cost elements of these accounts are to be retired. For them, not being in the mapping table is the correct result.
What is looked for (2)	A genuine omission	The case where all the sibling accounts in the same account group are there and only one is missing. This is the reason the comparison table is built.
What is looked for (3)	Accounts that were never in scope	Items for which no cost element is created, such as income taxes, discontinued operations, and statistical or analysis accounts. Only confirm that the exclusion is correct and move on.

7. Step 5: Allocation, CO-PA and reports

Object	Action	Detail
Allocation structure	Create new ones per category	Where allocation structures used to be divided by the nature of the cost (selling and administrative / manufacturing), they are built again per category. However, if the assessment cycle does not list cost elements individually but references a cost element group, changing the group alone carries through to the whole cycle. The work volume depends on which of the two structures is in place.
Secondary cost elements	Create new ones per category	The result of an assessment also has to carry the category. If assessment happens in several steps (cost center → intermediate organization → division), the category has to be preserved at each step; if it is mixed at any one step, everything below it breaks.
CO-PA transfer structure	Create new ones per category	The category splits at the point where a cost center assessment or an order settlement moves into CO-PA. If it is not split here, operating and investing get mixed together in the CO-PA value fields.
CO-PA value fields	Rename and create new ones	Existing value fields keep their code and only the name changes (selling and administrative direct_salaries → operating direct_salaries). The investing and financing categories had no value fields at all, so they are created. In the reference project the number of value fields increased by about 40 net.
Income statement report	Rebuild the hierarchy	The two subtotals, operating profit and profit before financing and income taxes, are inserted. In the reference project the number of digits in the account code was itself the hierarchy depth (1 digit → 2 digits → 5 digits → 8 digits). An account split down to 8 digits attaches directly at the lowest level.

8. Points observed in the reference material

Category	Item	Detail
Case 1	Categories are overturned up to the last moment	The category of interest income changed from operating to investing, and as a result one value field was deleted and another was repurposed. Judgements were still being changed six months before the effective date. Build a slot for managing unconfirmed items from the start.
Case 2	The naming convention gets redone once	At first the category was shown as an English abbreviation at the end of the account name (/O, /I); in the final version it changed to Korean words for operating and investing. Readability of the abbreviations appears to be the reason. Account names have a length limit and other languages follow along with them, so the naming convention is fixed before the work starts.
Case 3	Combinations that are not used are not created	Filling in combinations mechanically, 3 categories × direct and indirect, piles up value fields that are never used. Not creating every combination is also an option.
Case 4	Impairment losses are sometimes not automated	The reference project created the impairment loss accounts but did not attach automatic account determination to them; when an impairment occurs it is handled with a manual journal entry. Control is weaker, but it is a possible choice when the transaction frequency is low. Note as well that if a cost element is attached, a CO object has to be entered on the manual document too.
Case 5	It conflicts with management accounting	Many companies allocate interest to divisions in order to see divisional results. Under IFRS 18 interest is in the financing category. The allocation cannot simply be removed, so the principle "keep the allocation but preserve the category" has to be agreed first. This is not something that can be decided at working level.
Case 6	The volume of data constrains the design	If CO-PA line items accumulate at a scale of hundreds of thousands per month or more, adding value fields is not cheap, because a value field is a table column. Reprocessing historical data also becomes impractical, so the design is built on the premise that it applies only from the conversion date onward.

9. Items to check before starting

No.	Check	Reason
1	How many P&L accounts are there	The work population is the P&L accounts, not all accounts. Some companies are mostly balance sheet accounts, so the population can be smaller than expected.
2	Are the financial gain and loss accounts already split	Depending on the company, foreign exchange gains may already be split by offsetting account. In that case steps 1 and 2 are skipped and only the category mapping is done. The work volume differs, so this is checked first.
3	Is CO-PA used, and is it costing-based	Costing-based CO-PA has a value field structure, and the work that goes with it follows. Account-based CO-PA has no value field work.
4	How do the assessment cycles specify cost elements	If they are listed individually, every cycle has to be changed; if the cycle references a cost element group, only the group has to be changed.
5	How many steps does the allocation have	The category has to be preserved at each step. The number of steps determines the work volume.
6	Is the income statement a standard FSV or custom-developed	A custom-developed report means program changes follow. If there is a report that is sent to an external system, the lead time for agreeing with the receiving side has to be counted in as well.
7	Is the interest cost on retirement benefits separated	This is an item that has to stand as its own line in the body of the income statement. If it is not split at account level, a new account is needed.
8	How far does investment property go	If the scope moves, the account mapping gets reworked again and again. Fix it first as an accounting policy.
9	Are foreign subsidiaries included	With several charts of accounts the scope multiplies. One approach is to narrow the first scope to the main chart of accounts.
10	Who creates the documents	If documents come in through a legacy interface, check whether the basis for the category judgement is carried in the message. If it is not, a change to the legacy system comes into scope.

10. Summary

Category	Item	Detail
Scope	The account split is only step 1	Splitting the accounts is only step 1. Cost elements, groups, allocation structures, secondary cost elements, the CO-PA transfer structure, value fields and reports all follow on from it. The work volume is concentrated in the later steps.
Order	Decisions come before the work	How the category is shown in names, how many value fields are created, the scope for foreign subsidiaries, the principle for running alongside management accounting. Starting without deciding these means redoing the work at the end.

Korean version of this post: blog.naver.com/jeonnow/224420134615