How companies present their financial statements is the focus for the new standard. Its objective is to make information more transparent and clearer for stakeholders. We look at what is new.
The International Accounting Standards Board published IFRS 18 Presentation and Disclosure in Financial Statements in April 2024. The new standard, replacing IAS 1 Presentation of Financial Statements, aims to improve how entities communicate in their financial statements. The focus is on providing relevant information that faithfully represents the general purpose financial statements, in a way that’s most useful to users.
What are the key changes of IFRS 18?
- Income and expenses will be classified into specified categories and presented in defined subtotals in the statement of profit or loss.
The new structure for the statement of profit or loss includes:
- Classification of all income and expenditure into these five categories:
- Operating: all income and expenses not classified in the categories below
- Investing: all income and expenses arising from investing in assets
- Financing: income and expenses from liabilities arising from transactions that involve raising finance, whether or not the transaction exclusively involves financing.
- Income taxes: tax expense or tax income included in profit or loss (applying IAS 12 Income Taxes)
- Discontinued operations: income and expenses from discontinued operations, as defined in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
All entities must follow the same classification requirements. But there are some modifications for those that invest in assets, or provide financing to customers, as a main business activity.
Although the operating, investing and financing categories may seem familiar from IAS 7 ‘Statement of Cash Flows’, it’s important to note that they are not in fact similar to the categories in the statement of cash flows.
- Mandatory defined subtotals, such as operating profit or loss and profit or loss before financing and income taxes.
- Enhanced general principles for aggregation and disaggregation of information in the primary financial statements and notes.
Entities must ensure that they focus on grouping items based on shared characteristics, and that their aggregation and disaggregation does not obscure material information.
IFRS 18 also includes specific requirements for presenting operating expenses. Companies must choose between presenting them by nature or by function, selecting the approach that provides the most useful information. They should consider which is the most informative way to present the main components or drivers of profitability and industry practice.
- A new disclosure requirement for management performance measures (MPMs) related to the statement of profit or loss. Some companies previously used alternative performance measures (APMs) in their financial statements, but IFRS 18 aims to make the more specific MPM disclosures mandatory. This means financial statements should become more transparent and useful and help stakeholders to understand and compare the financial performance of different entities more easily.
Entities must disclose information about their MPMs in a single note to the financial statements. This should include a reconciliation between these measures and the most similar specified subtotal in IFRS accounting standards.
A management-defined performance measure is one that communicates to users of financial statements the management’s view of an aspect of the financial performance of the entity as a whole. But this is not necessarily comparable to measures sharing similar labels or descriptions provided by other companies.
When does it apply?
The new standard will be effective for annual reporting periods beginning on or after 1 January 2027. But earlier application has been permitted ever since the standard was officially published, on 9 April 2024. If an entity applies IFRS 18 for an earlier period, it must disclose that fact in the notes. The UK Endorsement Board (UKEB) is currently assessing IFRS 18, but it has not yet been endorsed for use in the UK, and a decision is expected to be made prior to the standard’s effective date.
Who will be affected?
IFRS 18 will affect all companies that prepare financial statements under IFRS accounting standards. Whilst it will not alter how companies recognise and measure items in their financial statements, it will affect the presentation and disclosure of information within those statements.
How should companies present comparative information?
Entities should begin preparing for IFRS 18 sooner rather than later as it could have a significant impact on the financial statements. It’s particularly important to check that previous-period comparative information is available and reliable.
Companies must follow IFRS 18 retrospectively applying IAS 8. But they don’t need to present the quantitative information specified in paragraph 28(f) of IAS 8 (ie it’s not necessary to disclose the amount of the adjustment to each financial statement line item, nor the adjustment to basic and diluted earnings per share in the current period).
For the comparative period, they should provide a reconciliation between the restated amounts and the previously reported amounts for that period. This also applies to comparative periods included in interim financial statements. While entities may choose to present similar reconciliations for the current period and earlier comparative periods, this isn’t mandatory.
What will auditors be focusing on?
Auditors are required to challenge management on their application of IFRS 18 to ensure they’re complying with the new requirements. This may include, but is not limited to:
- reviewing MPMs for their alignment with the definitions and calculations used
- verifying the completeness of MPM disclosure and checking the financial statements genuinely reflect the company’s performance and position as required by IFRS 18
- reviewing the reconciliation of comparatives, including assessing the categorisation of profit and loss to ensure its consistency and appropriateness.
If you would like further guidance on any of the issues covered in this article, please contact Imogen Massey or Kate Walker.
