Understanding the Impact of IFRS 18 on Financial Statement Presentation and Disclosure

On 9 April 2024, the IASB issued a new standard – IFRS 18, ‘Presentation and Disclosure in Financial Statements’ – aimed at improving comparability of the financial performance of sector entities and how ‘operating profit or loss’ is defined. The new disclosures requires some management-defined performance (MPM) measures to enhance transparency.

IFRS 18 will replace IAS 1; many of the existing principles in IAS 1 are retained, with limited changes. IFRS 18 will not impact the recognition or measurement of items in the financial statements, but it might change how an entity reports its operating profit or loss.

IFRS 18 will apply for reporting periods beginning on or after 1 January 2027 and applies to comparatives too. The changes in presentation and disclosure required by IFRS 18 will require the  chart of accounts to be reevaluated to assess if the existing presentation is still appropriate or whether improvements can be made to the way in which line items are clustered and described in the primary financial statements. Additionally, changes in the structure of the statement of profit or loss and additional disclosure requirements will require significant changes to systems, processes and the mapping into the charts of accounts be it at entity and group level ¹.

What is required ¹:

In the year of adopting IFRS 18, the standard requires a reconciliation between how the statement of profit or loss was presented for the comparative period under IAS 1 and how it is presented in the current year under IFRS 18. Interim financial statements in the first year of adoption include similar reconciliation requirements.

In addition, the following information must be displayed prominently and repeated as necessary such as the name of the reporting entity and any change in the name  whether the financial statements are a group of entities or an individual entity information about the reporting period the presentation currency (as defined by IAS 21 The Effects of Changes in Foreign Exchange Rates)  the level of rounding used (e.g., thousands, millions).

Aggregation and disaggregation principle

An entity is required to aggregate or disaggregate information in the primary financial statements and accompanying notes. Items should be aggregated based on shared characteristics and disaggregated based on characteristics that are not shared. The process should enable primary financial statements and notes to fulfil their roles and must not obscure material information.

There is a requirement to label and describe items presented in the primary financial statements (that is, totals, subtotals and line items) or items disclosed in the notes in a way that faithfully represents the characteristics of the item, i.e., by providing all descriptions and explanations necessary for a user of financial statements to understand the item.

Assets and liabilities, and income and expenses, may not be offset unless required or permitted by another IFRS standard.

Statement of profit or loss

IFRS 18 has a defined structure for the statement of profit or loss to reduce diversity in the reporting of the statement to make better comparisons between sector companies. The structure is composed of:

• Operating category where an entity is required to classify all income and expenses that are not classified in the other categories ([IFRS 18.52]); 

• Investing; 

• Financing; 

• Income taxes; and 

• Discontinued operations category. 

To classify income and expenses in the operating, investing, and financing categories, an assessment is needed whether an entity has a specified main business activity—that is a main business activity of investing in particular types of assets or providing financing to customers. If this is the case, the entity classifies in the operating category some income and expenses that would have been classified in the investing or financing category if the activity were not a main business activity. Further requirements include:

Required subtotals: the main change relates to the mandatory inclusion of ‘Operating profit or loss’. The other required subtotals are ‘Profit or loss’ and ‘Profit or loss before financing and income taxes’, with some exceptions.

Management-defined performance measures: Management might define its own measures of performance, sometimes referred to as ‘alternative performance measures’ or ‘non-GAAP measures’. IFRS 18 defines a subset of these measures which relate to an entity’s financial performance as management-defined performance measures (‘MPMs’). Information related to these measures should be disclosed in the financial statements in a single note, including a reconciliation between the MPM and the most similar specified subtotal in IFRS Accounting Standards. This will effectively bring a portion of non-GAAP measures into the financial statements.

Disclosure of expenses by nature, for entities that present the statement of profit or loss by function: Entities will present expenses in the operating category by nature, function or a mix of both. IFRS 18 includes guidance for entities to assess and determine which approach is most appropriate, based on the facts and circumstances. Where items are presented by function, an entity is required to disclose information by nature for specific expenses.

Statement of Other Comprehensive Income

It is worth recapping that an entity is required to present in the statement presenting comprehensive income totals for profit or loss, other comprehensive income (grouped between those items that will or will not be reclassified to profit and loss in subsequent periods and comprehensive income, being the total of profit or loss and other comprehensive income.

An allocation of comprehensive income for the reporting period attributable to non-controlling interests and owners of the parent also needs to be presented as well as in each of the categories of the statement presenting comprehensive income, line items for the share of other comprehensive income of associates and joint ventures accounted for using the equity method and other items of other comprehensive income.

An entity needs to either present in the statement presenting comprehensive income or disclose in the notes, reclassification adjustments relating to components of other comprehensive income and the amount of income taxes relating to each item of other comprehensive income, including reclassification adjustments.

Statement of Financial Position 

Although noting has changed under IAS 1, an entity is required to present a classified statement of financial position, separating current and non-current assets and liabilities, unless presentation based on liquidity is a more useful structured summary. In either case, if an asset (liability) category combines amounts that will be received (settled) after 12 months with assets (liabilities) that will be received (settled) within 12 months, note disclosure is required that separates the longer-term amounts from the 12-month amounts.

Deferred tax assets (liabilities) are to be classified as current assets (liabilities) when the classification separating current and non-current assets and liabilities is used for presentation.

Statement of Changes in Equity

A separate statement of changes in equity needs to be presented that must show total comprehensive income for the period, showing separately amounts attributable to owners of the parent and to non-controlling interests  the effects of any retrospective application of accounting policies or restatements made in accordance with IAS 8, separately for each component of equity reconciliations between the carrying amounts at the beginning and the end of the period for each component of equity, separately disclosing:

• Profit or loss other comprehensive income transactions with owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control; and

• The amount of dividends recognised as distributions and the related amount per share may also be presented on the face of the statement of changes in equity, or they may be presented in the notes.

Statement of cash flows

IFRS 18 will make some other limited changes to presentation, e.g.,  IAS 7, ‘Statement of cash flows’, is amended to specify ‘operating profit or loss’ as the starting point for reconciling cash flows from operating activities; and remove the existing options for the presentation of interest and dividends paid and received.

 

Dee Singh Kothari is a senior partner in Kothari Partners

Ideas expressed and/ or methodologies in this article are solely of the authors. The author nor Kothari Partner’s accept any liability for the incorrect application of these ideas either used by companies, employees or other individuals alike.

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