Transparency matters: Preparing for IFRS 18's influence on financial reporting

The introduction of IFRS 18 requires entities reporting under IFRS to disclose clear, comprehensive information to enhance financial transparency. It demands businesses to be prepared for significant operational shifts, especially in terms of updating and overseeing their systems and procedures, as there will be changes in how the income statement is structured. Companies must address these changes promptly to ensure readiness for the upcoming implementation.

Key points

• IFRS 18 is set to replace IAS 1, aiming to fulfill investor demands for more insightful information regarding a company's financial results
• New requirements include: additional subtotals & totals, categories in the profit or loss statement, and guidance on aggregation and disaggregation
• Introduction of management-defined performance measures (“MPMs”)

Published by the IASB in April 2024, IFRS 18 is designed to assist entities in providing financial performance information that is crucial for users of financial statements. This information is intended to help in evaluating the potential for future net cash inflows and in assessing how effectively management is handling the company's economic resources. The standard marks the culmination of a significant project focused on the presentation of financial statements and will have substantial effects on numerous companies that report under IFRS.

IFRS 18 marks a considerable transformation in the way financial performance is reported. It necessitates that businesses reevaluate the comprehensive layout of their Statement of Financial Performance.

Highlights of the New Income Statement 

• Defined subtotals for “operating profit or loss”, and “profit or loss before financing and income taxes” and “profit or loss”
• Five new income and expense classification categories: operating, investing, financing, income taxes, and discontinued operations

A key aspect of IFRS 18 is the requirement for entities to classify all income and expense items into one of five categories: operating, investing, financing, income taxes, and discontinued operations. The first three categories are new. IFRS 18 offers detailed guidance to help preparers accurately classify items, particularly for entities whose main business activities involve investing in assets or providing finance to customers. These categories are further defined by the requirement to present specific subtotals and totals, such as "operating profit or loss," "profit or loss before financing and income taxes," and "profit or loss."

The implementation of IFRS 18 is expected to significantly improve the comparability of financial statements across companies. With the introduction of standardized categories, subtotals, and totals, entities will be able to present their financial data more consistently. Notably, “operating profit or loss” becomes a defined term under IFRS 18, applicable universally, thereby enabling analysts and investors to gauge and compare the financial performance of different companies more effectively.

Location of information, aggregation and disaggregation

The new standard draws a clear distinction between “presenting” information in the Primary Financial Statements (PFS) and “disclosing” additional details in the notes. It establishes a guiding principle to determine where information should be placed, based on the defined “roles” of the PFS and the accompanying notes. Entities are required to present information in the PFS, offering a coherent summary of the company's financial activities—including income, expenses, assets, liabilities, equity, and cash flows—that users will find beneficial. In contrast, disclosure of other significant financial data is to be provided in the notes, serving as a complement to the PFS. IFRS 18 calls for the aggregation and disaggregation of information, taking into account the characteristics that are alike or different, while considering the respective roles of the PFS and the notes. Given that the PFS are intended to present a structured and useful summary, entities will naturally aggregate significant items within the PFS and subsequently provide a more detailed breakdown in the notes.

Management-defined Performance Measures (MPMs)

MPMs are introduced in IFRS 18 as specific financial subtotals of income and expenses not required by IFRS but used by management to communicate financial performance outside the financial statements. Companies must group all MPMs in a single note, including calculation methods, relevance, and reconciliation to IFRS subtotals. MPMs will be subject to audit. They must be transparently disclosed to enhance financial performance communication.

Implementation and transition

IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, and is to be applied retrospectively for comparative periods. The effective date of the standard will depend on the local regulatory requirements, and notably the EU has still not endorsed the standard. Earlier application is permitted and must be disclosed in the notes. 

Organizations are required to provide detailed reconciliations for each item listed in the statement of financial performance for the comparative periods immediately before the current period and for the total cumulative current period. In the lead-up to the initial application date, companies must undertake a comprehensive overhaul of the income and cash flow statements, reassess the disclosures for the notes to the financial statements, restate comparative figures for both annual and interim reports, and compile the necessary reconciliations to meet the transition disclosure requirements.