Introduction of IFRS 18 Presentation and Disclosure in Financial Statements: Changes Beyond the Obvious

IFRS Accounting Standard IFRS 18, Presentation and Disclosure in Financial Statements, will become effective on January 1, 2027. This standard will replace IAS 1, Presentation of Financial Statements, and introduce significant amendments to other IFRS Accounting Standards.

The new standard establishes uniform requirements for the structure of financial statements, the presentation of financial performance, and the disclosure of information. It aims to enhance the comparability and transparency of financial statements prepared in accordance with IFRS Accounting Standards.

In addition to the significant changes to the structure of the statement of financial performance, which will affect all organizations and require a revision of current approaches to its preparation, IFRS 18 contains a number of less obvious aspects that also influence the preparation of financial statements. Below are selected examples of such changes.

• Terminology and Composition of the Statement of Financial Performance
  IFRS 18 introduces the standardized title “Statement of Financial Performance”, replacing the previously used term “Statement of Profit or Loss and Other Comprehensive Income”.
  At the same time, the standard clarifies that the statement of financial performance comprises both profit or loss and other comprehensive income, while the presentation options remain unchanged. As before, an entity may present the statement of financial performance:
  • either as a single statement of profit or loss and other comprehensive income with two sections;
  • or as two separate statements: a statement of profit or loss and a statement of other comprehensive income.
• Starting Point for the Statement of Cash Flows (Indirect Method)
  In connection with the introduction of IFRS 18, consequential amendments have been made to IAS 7 to align the statement of cash flows with the structure of the statement of financial performance. As a result, operating profit or loss becomes the mandatory starting point for entities applying the indirect method, whereas previously the standard allowed flexibility in selecting this measure. This change will require entities applying the indirect method to revise their processes for preparing the statement of cash flows.
  
  
• Management-defined Performance Measures (MPMs)
  For the first time, IFRS 18 introduces requirements for the disclosure of management-defined performance measures (MPMs).
  
  MPMs include measures that:
  • are used in public communications outside the financial statements;
  • are not totals or subtotals explicitly specified by IFRS 18 or other IFRS Accounting Standards;
  • reflect management’s view of the entity’s financial or operating performance.

Examples of measures that may qualify as MPMs include adjusted EBITDA, adjusted operating profit, and adjusted profit or loss.

Examples of measures that do not qualify as MPMs include operating profit, EBITDA, free cash flow, return on equity, net debt.

• Application of the Materiality Principle
  Although the principle of materiality was already established in IFRS Accounting Standards (including IAS 1 and the Conceptual Framework), IFRS 18 provides enhanced guidance for its application in the presentation of information.
  
  The standard reinforces the need for professional judgment in determining:
  • the appropriate level of aggregation and disaggregation of information;
  • the structure and logic of the notes;
  • the extent and content of disclosures necessary to provide useful information to users of financial statements.
• Changes in the Terminology of Standards
  IFRS 18 formally clarifies and establishes the designation of the applicable set of standards.
  
  The standard introduces the term “IFRS Accounting Standards” which includes:
  • International Financial Reporting Standards (IFRS);
  • International Accounting Standards (IAS);
  • IFRIC Interpretations;
  • SIC Interpretations.

Previously, these requirements were referred to as International Financial Reporting Standards, IFRS, or IFRS standards. Thus, IFRS 18 formalizes a single official designation, which promotes consistency in the development of accounting policies, the preparation of financial statements, and the terminology used in disclosures.

Why is it advisable to begin preparations now?

Although the mandatory application of IFRS 18 becomes effective on January 1, 2027, its implementation will require:

• revision of the format and structure of financial statements;
• analysis of the classification of income and expenses;
• assessment of management-defined performance measures (MPMs);
• updates to accounting policies;
• coordination with auditors and key users of financial statements.

Early preparation will help mitigate the risks of significant adjustments and ensure a smooth and consistent transition to the new standard.

How can we assist?

Our team provides both methodological and practical support, including:

• assessing the impact of IFRS 18 on the entity’s financial statements;
• reviewing the structure and presentation of financial statements;
• evaluating and preparing disclosures related to management-defined performance measures (MPMs);
• updating accounting policies in accordance with IFRS Accounting Standards; and
• supporting entities throughout the transition to IFRS 18.

For any inquiries, please contact Amina Mustafayeva at +994 12 490 7020.