The new standard is the result of an IASB project that started in 2016 in response to investors’ concerns about the comparability and transparency of entities’ performance reporting.

IFRS 18 Presentation and Disclosures in Financial Statements replaces IAS 1 Presentation of Financial Statements, carrying forward many of the requirements in IAS 1 unchanged and complementing them with new requirements. In addition, some IAS 1 paragraphs have been moved to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and IFRS 7 Financial Instruments: Disclosures. Furthermore, the IASB has made minor amendments to IAS 7 Statement of Cash Flows and IAS 33 Earnings Per Share.

Scope

IFRS 18 applies to all financial statements that are prepared and presented in accordance with IFRS.

The new requirements of IFRS 18

IFRS 18 introduces three sets of new requirements to improve companies’ reporting of financial performance and give investors a better basis for analysing and comparing companies.

Categories for classifying income and expenses in the statement of profit or loss

Currently there is no specified structure for the income statement. IFRS 18 requires an entity to classify income and expenses included in profit or loss into one of the following categories:  operating, investing, financing, income taxes, discontinued operations.

All entities are required to follow the same classification requirements, with some modifications for entities that invest in assets as a main business activity (such as investment entities, investment property entities and insurers) and entities that provide financing to customers as a main business activity (such as banks).

Entities are required to present the following subtotals:

• operating profit or loss
• profit or loss before financing and
• income tax profit or loss.

These subtotals structure the statement of profit or loss into categories, with no requirement to present category headings. The line items listed in IFRS 18 are required to be presented unless doing so reduces how effective the statement of profit or loss is in providing a useful structured summary of the entity’s income and expenses.

Management-defined performance measures (MPMs)

MPMs are defined as subtotals of income and expenses that are used in public communications with users of financial statements outside the financial statements, complement totals or subtotals included in IFRSs, and communicate management’s view of an aspect of an entity’s financial performance. For example, EBITDA (earnings before interest, taxes, depreciation and amortization) might meet the definition of MPMs.

An entity is required to disclose information about its MPMs in a single note to the financial statements. The note requires a statement that the MPMs provide management’s view of an aspect of the financial performance of the entity as a whole and are not necessarily comparable with measures sharing similar labels or descriptions provided by other entities.

Aggregation and disaggregation of information

IFRS 18 introduces requirements to improve aggregation and disaggregation that aim at additional relevant information and ensure that material information is not obscured. IFRS 18 provides guidance on whether information should be included in the primary financial statements (whose role is to provide a useful structured summary) or in the notes.

IFRS 18 also requires companies to provide more transparency about operating expenses. Stricter guidance is introduced on whether the analysis of operating expenses is by nature or by function. The presentation should provide the most useful structured summary of operating expenses by considering several factors. Presentation of one or more-line items for operating expenses classified by function requires disclosure of amounts for five specified expenses (depreciation, amortization, employee benefits, impairment losses and their reversals and inventory write-downs and their reversals).

Amendments to other IFRS standards

Amendments to IAS 7 Statement of Cash Flows

The targeted improvements to IAS 7 aim at improved comparability between entities. The changes include:

• Using the operating profit subtotal as the single starting point for the indirect method of reporting cash flows from operating activities; and
• Removing the presentation alternatives for interest and dividends.

Amendments to IAS 33 Earnings Per Share

In addition to reporting basic and diluted earnings per share (EPS), entities are permitted by IAS 33 to disclose (in the notes only) additional EPS calculated based on any component of the statement of comprehensive income.

Effective date and transition

IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027. The standard is applied retrospectively, with specific transition provisions, and early adoption is permitted.

You can find more information in iGAAP in Focus — Financial reporting: IASB publishes new standard on presentation and disclosure in financial statements.

We will discuss the new IFRS 18 standard in more detail in future articles on our blog. We are also planning a webcast in June to discuss the main changes that the new standard will bring.

Sources: www.iasplus.com, iGAAP in Focus from 04/2024