The International Accounting Standards Board (IASB) has published a revised accounting standard affecting the presentation of financial statements, IFRS 18 Presentation and Disclosure in Financial Statements. The old standard IAS 1 Presentation of Financial Statements has been with us in one form or another since 1997, so the IASB considered it was time for a refresh. IFRS 18 will become mandatory for accounting periods beginning on or after 1 January 2027. Early adoption is permitted, so many companies will want to look at adjusting their systems now so they are ready for the change and will start to report under the new standard well ahead of that date.
What’s New?
The main changes are to the income statement, though there are also changes to the statement of financial position and the statement of changes in cash flows. The new standard will not impact net profit but will affect how that profit is broken down and disclosed. There is also more detailed guidance around non-GAAP performance measures that companies might wish to disclose in their accounts.
Income Statement
IFRS 18 requires an entity to classify income and expenses into one of the following categories:
Operating
Investing
Financing
Income taxes
Discontinued operations
Two new mandatory subheadings have been introduced: Operating profit and Profit before financing and income tax.
A basic sample disclosure, with the new required subtotals in italics, would be:
Revenue from operations
Cost of sales
Gross profit
General and administrative expenses
Other operating expenses (analysed by nature, function or both as appropriate)
Operating profit
Income from equity-accounted investments in associates, joint ventures and unconsolidated subsidiaries.
Income from other investments
Interest income from cash and cash equivalents
Profit before financing and income tax
Interest expense on borrowings and lease liabilities
Interest expense on pension liabilities and provisions
Profit before income taxes
Income tax expense
Profit
The concept is to help a reader of the accounts better understand a company’s performance against these disclosures, as there is enhanced guidance on the grouping of information.
Statement of Financial Position
Goodwill is now presented as a separate line item on the statement of financial position.
Statement of Cash Flows
If using the indirect method of disclosure in the statement of cash flows, this will start from the new Operating profit subtotal.
Management-defined performance measures (MPMs)
Many companies use their financial statements to provide information to a reader of the accounts that is not specified in the accounting standards.
An MPM, as defined in IFRS 18, is a subtotal of income and expenses:
• used in public communications outside the financial statements
• used to convey management’s view of financial performance
• not listed in IFRS 18 or specifically required by IFRS Accounting Standards.
Not all non-GAAP performance measures meet the definitions of MPMs, but all subtotals of income and expenses that are not specified in the new standard do.
To aid transparency, all information about MDMs will need to be disclosed separately in a single note to the financial statements (and will be subject to audit).
MPMs can be disclosed as a subtotal on the face of the income statement as an additional subtotal in certain circumstances, but only if they are measured and recognised in accordance with IFRS, are displayed with no more prominence than the required subtotals, and do not have a misleading label.
This new requirement should enable a reader of the accounts to understand how an MPM compares to IFRS-defined measures.
Our View
Accounts users have been asking the IASB to improve comparability between financial statements as different companies interpreted the previous standard, IAS 1, differently. For example, companies have been calculating subtotals differently and using their own classifications and definitions to best fit their business and the points they wish to emphasise. However, this led to difficulties for investors in comparing entities and IFRS 18 is designed to provide much greater uniformity around the disclosures made in company accounts. The idea is to reduce diversity in reporting practices and improve consistency between companies. Better-defined subtotals and company-specific MDMs in a single note to the accounts should aid that process. The greater prescribed structure around the income statement classifications, in particular, should also help move forward towards the comparability goal.
