[Cosmetics Industry] When stripping away numerical illusion

The APR logo. The author is an analyst for NH Investment & Securities. He can be reached at jiyoony@nhsec.com -- Ed. K-IFRS 1118 set to be introduced in 2027 Starting from 2027, K-IFRS 1118 will become mandatory. Over the mid/long-term, the new accounting standard is expected to standardize income statement presentation, improve the comparability of OP, and strengthen disclosure requirements for management-defined performance measures. IFRS-18 classifies income and expenses into five categories: operating, investing, financing, income taxes, and discontinued operations. The most significant change for investors is that the operating category will no longer be limited to profit generated from core business activities, and expenses previously viewed as one-off or non-recurring may be classified as operating items unless they meet the criteria for investing or financing activities. The introduction of IFRS-18 standards should require companies to conduct a broad review of financial statement presentation. In many Korean companies, foreign exchange gains and losses, gains and losses on asset disposals, provisions-related items, and certain other income and expenses have traditionally been reported as non-operating items. For export-driven sectors, forex gains/losses likely to be classified into operating category Looking at export-oriented domestic cosmetics companies, foreign exchange gains and losses that were previously recognized as non-operating items may be included in operating earnings under IFRS-18. In that case, exchange rate fluctuations could directly affect their operating margins. Exporters with significant overseas sales and foreign-currency receivables are likely to experience greater volatility in OP as FX gains and losses become part of the operating category. Given only a limited number of early adopters in Korea, investors should distinguish between historical operating margins and IFRS 18-based operating margins to avoid misinterpreting earnings trends. APR is a notable example. The company adopted IFRS-18 beginning in 2026. Approximately 70% of its sales are generated in North America and Europe. As a result, won depreciation generates FX gains on trade receivables, while won appreciation leads to FX losses. Investors should therefore distinguish between changes in profitability driven by core operations and those arising from FX-related items classified within operating profit under IFRS-18.