PSAK 118 (IFRS 18): Implementation for Investment and Retail Banks

PSAK 118, effective 1 January 2027, replaces PSAK 201 and restructures financial statement presentation. It classifies income and expenses into operating, investing, financing, tax, and discontinued operations categories. The standard requires consistent subtotals to improve comparability across entities. It also introduces Management-Defined Performance Measures (MPM) disclosures for transparency. Its implementation affects all industries, including investment and retail banks. In banking, core activities such as lending, investment, and funding are generally operating activities. Differences appear in treatment of investment results and interest income but reporting consistency improves. Overall, it enhances transparency, comparability, and decision-usefulness of financial information.

On May 28, 2025, DSAK IAI ratified PSAK 118: Presentation and Disclosure in Financial Statements, which refers to IFRS 18: Presentation and Disclosure in Financial Statements. PSAK 118 will replace PSAK 201: Presentation of Financial Statements and will be effective on January 1, 2027.

The implementation of PSAK 118 will impact the financial statements of all companies across industries that prepare and present financial statements in accordance with SAK Indonesia (Pillar 2). PSAK 118 introduces changes primarily to the statement of profit or loss and the notes to the financial statements, as well as certain changes to the statement of cash flows and limited changes to the statement of financial position and the statement of changes in equity.

In the statement of profit or loss, PSAK 118 requires, among others:

1. the presentation of subtotals for operating profit (loss), profit (loss) before financing and income taxes, and profit (loss); and
2. the classification of income and expenses into the categories of operating, investing, and financing activities, as well as income taxes and discontinued operations.

These changes result in a more consistent structure of statements of profit or loss and increase comparability between companies.

Other changes introduced by PSAK 118 include requirements for the disclosure of management-defined performance measures (MPMs), which are intended to communicate management’s view of aspects of the company’s overall financial performance. The disclosure of MPMs enables investors to better understand how management evaluates the company’s financial performance and how those measures compare with the measures defined under PSAK 118.

Accordingly, with the implementation of PSAK 118, it is expected that there will be increased:

• Comparability in the presentation of statement of profit or loss between companies through consistent subtotal and category requirements;
• Transparency through MPMs disclosures; and
• A better structure of financial statements through the establishment of requirements for aggregation (i.e., the incorporation of similar items), disaggregation (i.e., the breakdown of dissimilar items), labels (e.g., totals and subtotals), and the presentation of notes to the financial statements.

Implementation of PSAK 118 for Investment and Retail Banks

Investment Banks and Retail Banks generally perform different functions, offer different services, and serve different customers. Investment Banks facilitate fundraising in the capital markets, provide financial advisory services, act as securities and bond underwriters, advise on mergers and acquisitions, invest in financial assets, and manage initial public offerings for companies. In contrast, Retail Banks offer current accounts, savings accounts, loans, personal financial services, online banking, and other banking services to both individuals and companies.

The main change introduced by PSAK 118 concerns the statement of profit or loss, which now requires that income and expenses be classified into the categories of operating, investing, and financing activities, as well as income taxes and discontinued operations. For the Bank, this is particularly important because loans (credit), investments, and funding form key components of the Bank’s core business activities.

For Investment Banks, the impact of implementing PSAK 118 can be seen, for example, in the presentation of profits or losses from investments in financial assets. Such investments, which for most companies would typically be categorized as investing activities, are presented under the operating category because investment is a core business activity for Investment Banks.

Meanwhile, for Retail Banks, the impact of the implementation of PSAK 118 can be seen, for example, in the presentation of interest income and interest expense related to the provision of credit (loans) to customers, which remain within the operating category because lending is the Retail Bank’s main business activity. The principal change in presentation is the introduction of clearer subtotals, such as operating profit and profit before financing and income taxes. This enhances the comparability of statements of profit or loss among banks.

The following illustrates the main changes arising from the implementation of PSAK 118 in the statement of profit or loss of Investment Banks and Retail Banks. For the purposes of this illustration:

1. Investment banks and retail banks are banks that:
   1. make investments in financial assets (such as shares and bonds) that generate returns individually and largely independently of other resources as a main business activity; and
   2. provide funding to customers as a key business activity.
2. The Bank concludes that presenting all expenses classified by nature within the operating category in the statement of profit or loss provides the most useful structured summary of those expenses.
3. The Bank’s accounting policy is to classify, within the operating category, the income and expenses arising from all liabilities incurred in transactions that involve only fundraising activities, including liabilities that are not related to the provision of funding to customers.  Accordingly, banks are not permitted to present a subtotal for profit before financing and income taxes.

Banks generally present all expenses based on their nature due to the following considerations:

1. The main activities of banking are finance-related, including the provision of credit (loans), the placement of current accounts, savings, and investment/trading of financial assets (such as stocks and bonds). As a result, users of financial statements are more interested in interest income, interest expenses, loan impairment losses, income from investment/trading of financial assets, and other similar items, rather than functional categories such as cost of goods sold, selling expenses, and general and administrative expenses.
2. Functional expense categories such as cost of goods sold, selling expenses, and general and administrative expenses are less relevant for banks, whose main business activities do not involve the production and sale of goods.
3. Nature-based presentation provides greater transparency for users of financial statements, helping investors and regulators analyze key aspects of banks’ financial performance, such as net interest margin, credit risk, operational efficiency, and cost structure.
4. Regulatory considerations, accounting standards, and industry practices also support nature-based presentation, as banks operate in a highly regulated industry with specific rules governing the recognition, measurement, presentation, and disclosure of financial statements in accordance with applicable standards and industry practices.