[Cosmetics Industry] When stripping away numerical illusion

The cosmetics industry will see a significant change in 2027 as K-IFRS 1118 becomes mandatory. This new accounting standard aims to standardize income statement presentations, enhance comparability of operating profit, and tighten disclosure requirements for performance measures defined by management.

Under IFRS-18, income and expenses are categorized into five types: operating, investing, financing, income taxes, and discontinued operations. The most notable alteration is that the operating category will no longer be restricted to profits from core business activities. Previously considered one-off or non-recurring expenses may now be classified as operating items, unless they meet the criteria for investing or financing activities.

Investors can expect companies to thoroughly review financial statement presentation following the introduction of IFRS-18 standards. In Korean companies, foreign exchange gains and losses, disposals gains and losses, provision-related items, and certain other income and expenses have traditionally been categorized as non-operating items. However, for export-driven sectors like the cosmetics industry, forex gains and losses may be classified into the operating category under IFRS-18.

For domestic cosmetics companies, this change could directly impact operating margins. Previously unrecognized forex gains and losses may now influence operating earnings, potentially causing greater volatility in operating profit (OP). Exporters with substantial overseas sales and foreign-currency receivables, such as the cosmetics sector, are likely to experience this increased volatility.

Investors should be cautious when comparing historical operating margins and IFRS 18-based operating margins to prevent misinterpreting earnings trends. For instance, APR, a prominent cosmetics company, adopted IFRS-18 in 2026. Approximately 70% of its sales come from North America and Europe. Consequently, won depreciation generates foreign exchange gains on trade receivables, while won appreciation results in forex losses.

Investors should differentiate between profitability changes stemming from core operations and those emerging from forex-related items classified within operating profit under IFRS-18.