IFRS 18 – Introduction 1

What’s the issue?

In April 2024, the International Accounting Standards Board (IASB) published the new standard IFRS 18 Presentation and Disclosure in Financial Statements (IFRS 18). This is a major step forward for the IASB in improving the comparability of how entities report on their financial performance in the income statement (or statement of profit or loss).

IFRS 18 will affect all entities in all sectors and industries, albeit some entities will be impacted to a greater extent than others depending upon how they currently present and aggregate information on financial performance. IFRS 18 will not affect how entities measure financial performance, but it will affect how entities present and disclose financial performance.

What is it replacing?

IFRS 18 will replace the existing standard IAS 1 Presentation of Financial Statements (IAS 1) and will amend several other standards, including IAS 7 Statement of Cash Flows (IAS 7) and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8).

The existing standards are not very prescriptive as to the classification of income and expenses in the statement of profit or loss or on the use of totals and subtotals, and this leads to differences in presentation and difficulties in analysing and comparing entity performance.

Many principles and requirements have been retained from IAS 1 to IFRS 18 including frequency of reporting, comparative information, offsetting capital disclosures, and many of the requirements relating to the statement of financial position and statement of changes in equity.

What does this mean?

What is a summary of the key changes?

The main new requirements are based on three aspects:

• Improving the comparability of the statement of profit or loss (and, to a lesser extent, the statement of cash flows) by setting out new requirements on the structure and content – This will impact how entities must present items of income and expenses within the statement of profit or loss to report on IFRS measures.
• Improving transparency in the use of certain Alternative Performance Measures (APMs) linked to the statement of profit or loss – This will impact how entities must report and disclose their APMs and may lead to entities wishing to change the way in which they measure financial performance.
• Strengthening the requirements for aggregating or disaggregating information, both in the primary financial statements and in the notes and preventing the omission or obscuring of material information – This will impact how entities must aggregate or disaggregate information and line items within all primary statements, including the statement of financial position, as well as the notes, therefore potentially resulting in changes in the level of detail that is currently reported. 

What are more details about the changes?

Presentation of the income statement (statement of profit or loss)

Classification of income and expenses

The income statement will be structured around three new categories: operating, investing and financing, in addition to the existing categories of income taxes and discontinued operations.

The standard provides a definition of the income and expenses that are included in each category:

• The operating category is the default category, containing the income and expenses not included in other categories. This will include income and expenses from an entity’s main business activities.
• The investing category covers income and expenses from:
  • investments in unconsolidated subsidiaries, joint ventures, and associates. The share of the profit or loss of associates and joint ventures accounted for using the equity method must be presented in this category;
  • cash and cash equivalents; and
  • other assets that generate an individual return that is largely independent of the entity's other resources (e.g. financial assets or investment property).
• The financing category includes income and expenses from liabilities arising from transactions that only involve the raising of finance and those resulting from other liabilities, for example the effects of discounting a lease liability.

These general principles are supplemented by the requirements for classifying certain income and expenses, such as those relating to foreign exchange differences, hyperinflation, derivatives and hybrid contracts.

Sectoral adaptations, in particular for financial institutions, insurance companies and other investment entities, allow certain income and expenses to be classified in the operating category when, under the general provisions of the standard, they would have been classified in the investing or financing categories.

New subtotals – Mandatory and optional

IFRS 18 also imposes two new mandatory subtotals in addition to the total for profit or loss already required by IAS 1:

• operating profit or loss; and
• profit or loss before financing and income taxes.

The standard also permits the optional presentation of five additional subtotals:

• gross profit or loss and similar subtotals;
• operating profit or loss before depreciation, amortisation and impairments within the scope of IAS 36 Impairment of Assets (IAS 36), noting that this is also commonly referred to as EBITDA;
• operating profit or loss and income and expenses from all investments accounted for using the equity method;
• profit or loss before income taxes, and
• profit or loss from continuing operations.

It is important to note that these sub-totals, whether mandatory or permitted, will not qualify as MPMs as these will fall as being IFRS 18 GAAP measures.

Reporting information on management-defined performance measures (MPMs)

The standard provides a precise definition of the alternative performance measures that are linked to the statement of profit or loss and known as Management-defined Performance Measures (MPMs) within IFRS 18.

These are described as subtotals of income and expenses that an entity:

• uses in public communications outside financial statements;
• uses to communicate to users of financial statements management’s view of an aspect of the financial performance; and
• are not listed within IFRS 18 or specifically required to be presented or disclosed by another IFRS Accounting Standards. 

They will be the subject of detailed disclosures in a single note to the financial statements, presenting both quantitative information (calculation method, reconciliation to the nearest subtotal presented within the statement of profit or loss, with presentation of income tax effects and non-controlling interests) and qualitative information (definition of the indicator, and the way in which it reflects the entity's performance).

Enhanced requirements for aggregation and disaggregation to provide useful information

The role of the primary financial statements is to present a structured summary of an entity’s assets, liabilities, equity, income, expenses and cash flows. The notes provide further material information necessary to understand the quantified information in the primary financial statements.

To ensure that the financial statements fulfil their role, IFRS 18 introduces new principles for presenting information within the primary financial statements and the notes.

These principles include the requirements:

• For aggregating and disaggregating information - Enhanced requirements are set out for the aggregation and disaggregation of items based on similar and dissimilar characteristics. Items that have dissimilar characteristics must be disaggregated when the resulting information is material.
• For providing guidance to the informative labelling of the aggregates - Guidance is also included on how to describe items within the financial statements, requiring an entity to label items presented or disclosed as ‘other’ only if a more informative label cannot be found.
• For locating information within the financial statements and for the presentation and nature of operating expenses - New guidance is provided on whether information should be reported in the primary financial statements or the notes. This includes guidance on presentation and disclosure of expenses classified in the operating category, alongside introducing more prescribed requirements for an entity that classifies expenses by function as well as the requirement to disclose expenses by nature in a single note for certain amounts - depreciation, amortisation, employee benefits, impairment and write-downs of inventories.

Amendments to the statement of cash flows

IFRS 18 focuses on certain targeted improvements for the IAS 7 Statement of Cash Flows (IAS 7): 

• where an entity opts for the indirect method, the standard defines the single starting point as operating income. This is likely to be a key change as the majority preparers currently use a profit or loss total as the starting point, as permitted in paragraph 18b of IAS 7; and
• the elimination of the choices previously available regarding the classification of cashflows for interests and dividends, with precise classification requirements that depend on the entity’s main activity.

When is this effective?

IFRS 18 is mandatory for accounting periods beginning on or after 1 January 2027. The standard will be applied retrospectively. Early application is permitted, subject to UK-adoption and EU endorsement as relevant for your entity.

Who is this applicable to?

IFRS 18 will affect all IFRS reporters and all entities in all sectors and industries, albeit some entities will be impacted to a greater extent than others depending upon how they currently present and aggregate information on financial performance. IFRS 18 will not affect how entities measure financial performance, but it will affect how entities present and disclose financial performance.