Understanding IFRS 18: Key Updates for Financial Statement Presentation and Disclosure

Posted by Written by Carrie Yao Reading Time: 6 minutes

On April 9, 2024, the International Accounting Standards Board (IASB) released IFRS 18 Presentation and Disclosure in Financial Statements, replacing IAS 1 Presentation of Financial Statements. This new standard will impact all entities applying IFRS, influencing how they present and disclose financial performance. Effective from January 1, 2027, with earlier adoption permitted, IFRS 18 mandates retrospective adjustments for comparative financial information.

In this article, we explore the essential aspects of IFRS 18 and guide entities on the necessary steps to prepare for this upcoming standard.

Background: Why the new IFRS 18 standard?

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IFRS 18 aims to enhance investor decision-making by improving the comparability and transparency of financial information. Currently, inconsistency in financial statement presentation leads to different definitions and presentations of profit or loss statements among entities with similar operations. Additionally, management-defined performance measures may vary. To address the comparability and consistency in financial reporting, IFRS 18 mainly introduces changes to the statement of profit or loss and the notes to the financial statements while retaining unchanged requirements from IAS 1.

Key aspects of the IFRS 18 standard

Classifications and subtotals in the statement of profit or loss

IFRS 18 mandates that entities classify the income and expenses within the statement of profit or loss into one of the following categories:

  • operating
  • investing
  • financing
  • income taxes
  • discontinued operations
Category Description
Operating
  • A default category for income and expenses not classified into other categories, regardless of whether the income or expenses are volatile or unusual (e.g., income and expenses from main business activities)
Investing Income and expenses resulted from:

  • investments in associates, joint ventures and unconsolidated subsidiaries
  • cash and cash equivalents
  • other assets that generate returns separately from the entity’s business activities

Investing category includes:

  • income generated by the assets mentioned above (e.g. interest income, dividends income, the share of profit, rental income)
  • income and expenses arising from the initial and subsequent measurement of the assets, including on derecognition of the assets (e.g. gain or loss from changes in fair value, impairment loss, gain or loss on disposal of assets)
  • incremental expenses directly attributable to the acquisition and disposal of the assets (e.g. transaction costs)
  • any related foreign exchange differences
Financing Income and expenses resulted from:

  • pure financing transactions such as loans and bonds
  • other liabilities such as lease liabilities and pension liabilities

Financing category includes:

  • all income and expenses arising from the initial and subsequent measurement of pure financing transactions, including on derecognition of the liabilities, as well as incremental expenses directly attributable to the issue and extinguishment of the liabilities (e.g. interest expense, transaction costs)
  • interest income and expenses of other liabilities, as well as the effect of interest rate changes (e.g. interest income arising from the unwinding of the discount on an asset retirement obligation)
  • any related foreign exchange differences
Income taxes Income taxes category includes:

  • tax expense or tax income included in profit or loss in accordance with IAS 12 Income Taxes
  • any related foreign exchange differences
Discontinued operations Discontinued operations category includes:

  • income and expenses, net of income tax, from discontinued operations as defined in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

※IFRS 18 requires an entity to assess its ‘main business activities’. If an entity has specified main business activities, such as the bank, insurer, and investment property company, it may classify investing and/or financing items as operating in certain cases.

Plus, IFRS 18 requires an entity to present two new mandatory subtotals in the statement of profit or loss:

  • operating profit
  • profit before financing and income taxes
Subtotal Description
Operating profit The subtotal of all income and expenses classified as operating
Profit before financing and income taxes The subtotal of operating profit or loss and all income and expenses classified as investing

An example of the statement of profit or loss is shown below for an entity without specified main business activities as mentioned above.

Statement of Profit or Loss Category
Revenue  

 

 

Operating
Cost of goods sold
Gross profit
Other operating income
Selling expenses
General and administrative expenses
Research and development expenses

Goodwill impairment loss
Other operating expenses
Operating profit
Share of profit from associates and joint ventures

Gains on the disposal of associates and joint ventures

  

Investing
Interest income from cash and cash equivalents
Income from other investments
Profit before financing and income taxes
Interest expense on borrowings Financing
Interest expense on other liabilities
Profit before income taxes
Income tax expense Income taxes
Profit from continuing operations
Loss from discontinued operations Discontinued operations
Profit

Management-defined performance measures

IFRS 18 introduces management-defined performance measures (MPMs), which are alternative or non-GAAP performance metrics defined by an entity’s management. These MPMs, often derived from a total or subtotal required by IFRS with adjustments, represent subtotals of income and expenses beyond those explicitly listed in IFRS 18 or mandated by another IFRS standard. Entities utilize MPMs in external communications (outside financial statements) and to convey management’s perspective on specific aspects of financial performance to investors. It’s important to note that MPMs cannot include measures that are not subtotals of income and expenses or those already specified in IFRS. Below are some illustrative examples of MPMs:

MPMs can include: MPMs cannot include:
  • Adjusted profit (e.g., profit excluding goodwill impairment, share-based payments, etc.)
  • Non-financial performance measures (e.g., customer satisfaction)
  • Adjusted operating profit (e.g., operating profit excluding the effect of a natural disaster)
  • Financial performance measures that are not subtotals of income and expenses (e.g., adjusted operating cash flows, financial ratios)
  • Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA)
  • Totals/subtotals specified in IFRS (e.g., gross profit)

IFRS 18 requires entities to disclose MPMs in a single note, and these disclosures are subject to audit. The following information should be included:

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  • A reconciliation between the MPM and the most directly comparable subtotal listed in IFRS 18, or any total/subtotal required by another IFRS, including the income tax effect and the impact on non-controlling interests for each item disclosed in the reconciliation;
  • A description of how the MPM communicates management’s view and how it is calculated;
  • An explanation of any changes in the entity’s MPMs or in how it calculates its MPMs; and
  • A statement that the MPM reflects management’s view of an aspect of financial performance of the entity as a whole and is not necessarily comparable to measures sharing similar labels or descriptions provided by other entities.

Grouping of information: Aggregation and disaggregation

IFRS 18 defines distinct roles for the primary financial statements and the notes. The primary financial statements serve as a useful structured summary of assets, liabilities, equity, income, expenses, and cash flows, while the notes are to provide additional material information.

The standard also offers guidance to entities on how to group transactions and other events into the line items within the primary financial statements and the notes, based on principles of aggregation and disaggregation of information. These principles generally require entities to:

  • Aggregate items that share common characteristics and disaggregate items that exhibit distinct features;
  • Group items in a way that does not obscure material information or reduce the understandability of the information presented; and
  • Place items in the primary financial statements and the notes to fulfill their complementary roles.

IFRS 18 discourages entities from the use of generic labels such as “other”. Instead, entities should strive for more informative labels. The “other” label should only be employed when a more specific label cannot be found. For aggregated immaterial items, entities must consider whether the aggregated amount is significant enough that users of financial statements might question its composition. If so, further information about that amount is material and should be disclosed.

When presenting operating expenses in the statement of profit or loss, entities can choose to present them either by nature (e.g., salaries, depreciation) or by function (e.g., selling expenses, administrative expenses), or opt for a mixed presentation that provides the most useful structured summary. If operating expenses are presented by function in the statement of profit or loss, specific expense amounts (such as depreciation, amortization, employee benefits, impairment losses, and write-downs of inventories) must be disclosed by nature in the notes.

Changes introduced to other IFRS standards

To align with the requirements of IFRS 18, changes to other IFRS standards have also been introduced. The main changes are listed below.

IFRS standard Main changes
IAS 7 Statement of Cash Flows
  • To use the operating profit subtotal as the starting point for reporting cash flows from operating activities under the indirect method
  • To eliminate the option for classifying interest and dividends cash flows as operating activities (interest and dividends paid to be classified as cash flows from financing, and interest and dividends received as cash flows from investing, for entities without specified main business activities)
IAS 33 Earnings per Share
  • To disclose additional earnings per share (EPS), in addition to basic and diluted EPS, only if the numerator is either a total or subtotal identified in IFRS 18 or MPMs
IAS 34 Interim Financial Reporting
  • To disclose information about MPMs in interim reports
  • To apply other changes (including those related to subtotals) to condensed financial statements in interim reports

Next steps: How can entities get prepared for the IFRS 18

IFRS 18 will take effect from January 1, 2027, with comparative information required from January 1, 2026. To prepare for this transition, entities should consider the following steps:

  • Analyze requirements: Entities are encouraged to thoroughly analyze the requirements of IFRS 18. This includes understanding the new categorization of income and expenses.
  • Collect information: Gather relevant data and information related to income and expenses. This will help assess the impact of the changes and identify areas that need adjustment.
  • Evaluate impacts: Assess how IFRS 18 may affect existing systems, processes, and controls. Consider whether adjustments are needed in IT systems, internal controls, and reporting procedures.
  • Group financial reporting: For groups of entities with diverse main business activities, evaluate how the categorization of income and expenses will impact group financial reporting and consolidation processes.
  • Communication strategy: Develop a strategy for communicating the requirements and impacts of IFRS 18 changes to shareholders and other stakeholders.

Early preparation is essential to ensure a smooth transition to IFRS 18. If you have any further questions or need professional assistance, Dezan Shira & Associates’ Audit team is more than willing to help.

Disclaimer
The information provided is for general purposes only and may not account for local variations. No liability is assumed for the completeness or accuracy of the information. For personalized advice on specific business queries, consult our experts at Dezan Shira & Associates by emailing China@dezshira.com.
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