IFRS 18: A new standard on presentation and disclosure in financial statements
In April 2024, the International Accounting Standards Board (IASB) issued International Financial Reporting Standard (IFRS) 18 ‘Presentation and Disclosure in Financial Statements’.
This new standard becomes effective from 1 January 2027 (with early adoption permitted) and replaces International Accounting Standard (IAS) 1 ‘Presentation of Financial Statements’.
About IFRS 18
Certain unchanged parts of IAS 1 have been transferred to IFRS 18 and other IFRS accounting standards. IFRS 18 will of course need to be adopted by the UK Endorsement Board before it can be applied in the UK.
The standard won’t impact how companies measure financial performance, but will instead affect how companies present and disclose financial performance.
Its objective is to improve how companies communicate in their financial statements, with a focus on information about financial performance in the statement of profit or loss. It also aims to respond to feedback from stakeholders on the following matters:
| Stakeholder feedback | IFRS 18 response |
|---|---|
| Statements of profit or loss vary in structure and content. | The standard adds defined subtotals to the statement of profit or loss, which makes companies’ financial performance easier to compare and provides a consistent starting point for investors’ analysis. |
| Measures defined by management are useful to investors, but companies might not explain how these measures are calculated and why they are used. | The standard requires companies to disclose information about management-defined performance measures, which increases discipline over their use and transparency about their calculation. |
| Investors would like to see information more appropriately grouped (aggregated or disaggregated) in the financial statements. | The standard sets out requirements on whether information should be in the primary financial statements or the notes, and provides principles on the level of detail needed to improve the effective communication of information. |
Key requirements of IFRS 18
Presentation of new defined subtotals in the statement of profit or loss
IFRS 18 requires companies to report:
- Operating profit
- Profit before financing and income taxes
These subtotals provide a consistent structure for the statement of profit or loss, thereby improving comparability. IFRS 18 won’t affect how companies measure their financial performance and the overall profit figure.
Disclosure of management-defined performance measures
Many companies report alternative performance measures or non-GAAP measures. When those measures meet the definition of management-defined performance measures (MPMs), IFRS 18 requires companies to disclose reconciliations between those measures and the subtotals listed in IFRS 18 (or totals/ subtotals required by other IFRS accounting standards).
MPMs are subtotals of income and expenses used in public communications to communicate management’s view of an aspect of the financial performance for the company as a whole.
Enhanced requirements for grouping (aggregation and disaggregation) of information
IFRS 18 sets out requirements to help companies determine whether information about items should be in the primary financial statements or in the notes, as well as providing principles for determining the level of detail needed for the information. It also includes requirements for the presentation of operating expenses in the statement of profit or loss, disclosure of specified expenses by nature, and further information on items grouped together and labelled ‘other’.
Subtotals in the statement of profit or loss
IFRS 18 requires a company to:
- Classify income and expenses into operating, investing and financing categories in the statement of profit or loss - plus income taxes and discontinued operations.
- Present two new defined subtotals - operating profit and profit before financing and income taxes.
Operating category
This is intended to provide a complete picture of a company’s operations. The operating profit subtotal is used by investors as a measure of how a company is performing in its business activities and as a starting point for forecasting future cash flows. It consists of all income and expenses that are not classified in the investing, financing, income taxes or discontinued operations categories – income and expenses classified in those categories are items that investors generally analyse separately.
The operating category is the default category, and:
- Includes all income and expenses arising from a company’s operations, regardless of whether they are volatile or unusual in some way. Operating profit provides a complete picture of a company’s operations for the period. It is not intended to measure only ‘persistent’ or ‘recurring’ operating performance.
- Includes, but is not limited to, income and expenses from a company’s main business activities. Income and expenses from other business activities are also classified in the operating category if those income and expenses do not meet the requirements to be classified in any of the other categories.
Investing category
This is intended to enable investors to analyse returns from stand-alone investments separately from a company’s operations, and includes:
- Income and expenses from assets that generate returns separately from a company’s business activities. For example, a company might collect rentals from an investment property or dividends from shares in other companies.
- Income and expenses from cash and cash equivalents and investments in associates and joint ventures. For example, a company might earn its share of profits from an associate.
Financing category
This, and the subtotal for profit before financing and income taxes, is intended to enable investors to analyse a company’s performance before the effects of its financing.
This category includes:
- Income and expenses on liabilities, such as bank loans and bonds (liabilities arising from pure financing transactions).
- Interest expenses on any other liability - for example, lease and pension liabilities.
Therefore, the financing category includes interest expenses on all liabilities.
Other categories
The income taxes category consists of income tax expense (or tax income) that is included in profit or loss in accordance with IAS 12 ‘Income Taxes’, and any related foreign exchange differences.
The discontinued operations category consists of income and expenses from discontinued operations recognised in accordance with IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’.
Access to IFRS accounting standards
Standards issued by the IASB (known as IFRS accounting standards) are available on its website, and basic user registration is required to access them for free.
IFRS 18 Presentation and Disclosure in Financial Statements is not yet available to basic users. However, implementation and supporting materials (including educational webinars) are available here.
ICAS Technical Bulletin
This article was originally published in our ICAS members’ Technical Bulletin, issue no. 177 (May 2024).
