Issued in April 2024, IFRS 18 replaces IAS 1 and introduces several updates to how financial statements should be presented and disclosed. This new standard aligns with the ongoing efforts to improve transparency, consistency, and comparability in financial reporting globally.
IFRS 18 brings changes in how companies report financial performance, especially when it comes to presenting profit and loss, management-defined performance measures, and line items aggregation and disagregation.
Key Changes and Updates in IFRS 18
Several important updates under IFRS 18 impact how financial statements should be structured and disclosed. Key amendments have been made in the following areas:
1. Presentation of Profit and Loss (P&L)
IFRS 18 introduces a clearer structure for presenting income and expenses, categorizing them into operating, investing, financing, income tax and discontinued operations.
2. New Categories and Subtotals
The standard requires the inclusion of specific categories and subtotals in the P&L statement to provide clearer insights into financial performance.
3. Disclosure of Management-Defined Performance Measures (MPMs)
IFRS 18 requires disclosure of figures that represent management's view of financial performance, which may not align with IFRS-required totals but are useful for external stakeholders.
4. Detailed Guidance on Aggregation and Separate Presentation
The new standard provides specific guidance on how items should be aggregated or disaggregated based on shared characteristics, helping companies present a more structured summary of their financial data.
Effective Date
The provisions of IFRS 18 will be effective starting January 1, 2027 and must be applied retrospectively. However, early adoption of the standard is permitted, which allows businesses to implement the changes before the mandatory adoption date.
Objective and Scope of IFRS 18
The main objective of IFRS 18 is to provide clear requirements for the presentation and disclosure of general-purpose financial statements. This is part of the ongoing effort to increase transparency and comparability of financial data across different jurisdictions.
IFRS 18 applies to all financial statements prepared under IFRS. A complete set of financial statements consists of the following primary financial statements along with notes to the financial statements:
1. Statement of Financial Position
2. Statement of Financial Performance
3. Statement of Changes in Equity
4. Statement of Cash Flows
The Statement of Financial Position is prepared as at the reporting date, while the other statements are prepared for the reporting period. Comparatives are required for all items in the primary financial statements as well as in notes. Financial statements should be prepared at least annually. If longer or shorter period is used, disclosure is required of that fact and that the comparatives are not entirely comparable.
Requirements for Consistency and Comparability
To enhance comparability across periods, IFRS 18 mandates consistency in the presentation, disclosure, and classification of financial information from one reporting period to the next. However, exceptions are allowed if:
1. There is a significant change in operations.
2. A change is required by an IFRS standard.
In these cases, reclassification of comparative figures is required unless impracticable. If it is not possible to reclassify comparatives, the reasons must be disclosed. Additionally, entities must present an opening statement of financial position for the preceding period.
Identifying Financial Statements
All financial statements must have the following identifying characteristics:
- Name of the financial statement
- Name of reporting entity
- Reporting period
- Type of reporting entity i.e. group or individual company
- Level of rounding and currency
Identifying and Classifying Items
Financial statements present line items such as assets, liabilities, equity, income, expenses, and cash flows. These items should be:
1. Identified from transactions and events.
2. Classified and aggregated based on shared characteristics (such as nature, size, function, and measurement basis).
3. Disaggregated when characteristics are not shared.
Financial statements provide aggregate structured summaries while notes provide detailed material information. Line items and notes should be labeled and described so that they faithfully represent the characteristics of these items.
The Statement of Financial Performance
The Statement of Financial Performance can be presented in one of two formats:
• A single statement of comprehensive income
• A dual statement, which separates the profit and loss statement from the statement of other comprehensive income.
The standard specifies new categories for income and expenses:
1. Operating: This is the default category and contains income and expenses related to the company’s main business activities, along with items that do not fit in other categories. For example:
- Revenue
- Cost of sales
- General and administrative expenses
2. Investing: This category includes income and expenses from investments, such as:
- Investments in associates, joint operations, and unconsolidated subsidiaries
- Debt and equity instruments generating interest revenue and dividends
- Investment properties generating rental income
- Re-measurement of investment property to FV
- Depreciation, impairment and reversals
- Transaction costs and costs to sell the assets
- Gain / losses from asset disposals and held for sale assets
Income and expenses from equity accounted investments in associates or joint ventures are always a part of investing category regardless of the type of entity.
3. Financing: Income and expenses related to financing activities, such as borrowing costs, provisions and employee benefits.
4. Income Tax: This section includes income taxes that affect profit and loss.
5. Discontinued Operations: This section captures the financial impact of discontinued business segments.
Presentation can be based by function, by nature or on a mixed basis.
By Function: | By Nature: | ||
|
Revenue |
X |
Revenue |
X |
|
Cost of Sales |
(X) |
Other Income |
X |
|
Gross Profit |
X |
Total Revenues |
X |
|
Other Income |
X |
Raw Materials |
(X) |
|
Distribution Costs |
(X) |
Changes in Inventory |
X/(X) |
|
Administrative Expenses |
(X) |
Depreciation |
(X) |
|
Operating Profit |
X |
Other Operating Expenses |
(X) |
|
|
|
Operating Profit |
X |
When presenting the statement by function, the cost of sales must be listed as a separate line item, and additional disclosures are required, including:
• Qualitative description of the nature of expenses in each line item.
• Total amounts for depreciation, amortization, employee benefits, impairments, write-downs, and reversals.
Special Requirements for Specific Entities
For certain types of businesses, IFRS 18 requires that income and expenses normally classified as investing and financing to be classified as operating category:
1. Investment entities, such as real estate companies or insurers.
2. Entities providing financing to customers, such as banks, lessors, and manufacturers/dealers offering financing.
Entities can have more than one business activity.
Foreign exchange gains and losses must be classified in the same category as the income and expenses that gave rise to them, ensuring consistency in reporting.
Mandatory Totals and Subtotals
IFRS 18 requires certain mandatory totals and subtotals to be included in the financial statements, such as:
• Operating profit and loss
• Profit and loss before financing and income taxes
• Profit and loss
Additional totals (such as Profit and loss before Tax, Profit and loss from continuing operations) may be necessary for clarity and in accordance with the company’s financial activities. These totals must be in line with IFRS standards and presented consistently across periods. Several non-zero items are mandatory such as revenue, operating expenses, share of profit or loss of associates or joint venture by equity method, and income tax.
Statement of Other Comprehensive Income (OCI)
The Statement of Other Comprehensive Income includes items that are not recognized in the profit and loss statement but instead are reported directly in equity. IFRS 18 mandates the following totals for OCI:
- Profit and loss
- Other comprehensive income, which is divided into items that are:
- Subsequently reclassified to profit and loss
- Not reclassified to profit and loss
- Comprehensive income, which is broken down as attributable to both:
- Owners of the company
- Non-controlling interests (NCI)
Statement of Financial Position
Presentation of statement of financial position remains largely the same as in IAS1. Current and non-current assets and liabilities are required unless presentation based on liquidity is more relevant.
Notes to Financial Statements
The notes to the financial statements provide additional context and detailed information necessary for understanding the primary financial statements. These notes should include:
- General information about the reporting entity.
- The basis of preparation, including the going concern assumption.
- A summary of material accounting policies.
- Other disclosures as required by specific IFRS standards.
- Information related to Management Defined Performance Measures (MPMs) and capital-related disclosures.
Management-Defined Performance Measures (MPMs)
MPMs are specific measures used outside of financial statements, often communicated to the public to reflect management's view of financial performance. Common examples of MPMs include adjusted EBITDA or adjusted profit. These measures are useful for providing a clearer understanding of how management evaluates performance, but they do not follow IFRS-defined totals.
The key requirements for MPMs under IFRS 18 are:
- They must be disclosed in a separate note with an explanation of their purpose and calculation.
- A reconciliation must be provided between MPMs and the most directly comparable figures in the financial statements.
- The impact of taxes and non-controlling interests (NCI) should be included along with an explanation of how this impact was calculated.
- Comparative information must be provided for MPMs, and the MPMs are subject to audit.
It’s important to note that MPMs are not:
- Subtotals of income or expenses alone.
- Financial ratios or non-financial performance measures.
- Measures related to assets, liabilities, or liquidity.
Conclusion
IFRS 18 introduces clear categories for income and expenses, requiring the disclosure of management-defined performance measures, and detailing how to aggregate and disaggregate items, ensuring further clarity and consistency for investors, regulators, and other stakeholders. As the effective date approaches, businesses must prepare to implement these changes, ensuring that their financial statements are in compliance and reflective of best practices in financial reporting.
Further Resources
IFRS Navigator Conceptual Framework IFRS 18 Project Summary Key Terms of IFRS 18 IFRS 18 in One Page
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