The International Accounting Standards Board (IASB) has published a new accounting standard to be used by IFRS reporters from 2027, IFRS 18 Presentation and Disclosure in Financial Statements. The new standard will transform the look of the income statement and aims to improve comparability and transparency of financial reporting.
Who will the changes impact?
All entities reporting under IFRS Accounting Standards will be required to adopt IFRS 18 which will replace IAS 1 Presentation of Financial Statements.
Changes to the statement of profit or loss
Currently there is no specified structure for the statement of profit or loss (income statement) set out in IFRS Accounting Standards; this has led to diversity in the presentation of the income statement and can potentially limit stakeholders’ ability to compare the financial performance of different companies.
IFRS 18 introduces a defined structure for the income statement and will require profit or loss items of income and expense to be presented in five categories: operating, investing, financing, income taxes and discontinued operations. The first three categories will be familiar to reporters as they mirror the classification of cash flows set out in IAS 7 Statement of cash flows and IFRS 18 contains some general guidance for entities as to how to classify items of income and expense between each category.
In addition, IFRS 18 establishes two new defined subtotals to be presented within the income statement: operating profit and profit before financing and income taxes. Profit or loss, as previously set out in IAS 1, will continue to be a required subtotal under IFRS 18.
Figure 1 (below) shows the structure of, and subtotals to be included in, an income statement to conform with the requirements of IFRS 18.
Increased transparency
Management-defined performance measures (MPMs) are alternative performance measures not defined in IFRS Accounting Standards; such measures are often used by companies in their communications with investors or other stakeholders. However, there can be a lack of transparency with some companies not providing sufficient information to enable investors to understand how the measures are calculated and how they relate to the income statement.
IFRS 18 introduces the requirement to disclose the following for each MPM identified:
- A reconciliation between the measure and the most directly comparable subtotal listed in IFRS 18 or total or subtotal specifically required by another IFRS Accounting Standard,
- A description of the aspect of financial performance that is being communicated by the MPM, including why management believe the MPM provides useful information about the entity’s financial performance,
- How the MPM is calculated,
- An explanation of any changes in the methodology for calculating the company’s MPMs, and
- A statement advising users of the financial statements that the MPM reflects management’s view of an aspect of financial performance and is not necessarily comparable to other companies disclosing similar named MPMs.
Additional guidance on information grouping
The final significant change introduced by IFRS 18 enhances the requirements on grouping of information within the financial statements and provides guidance to preparers of where information should be located in the financial statements (ie within the primary statements or in the notes to the financial statements).
This guidance on the location of information will hopefully provide clarity to preparers of the financial statements on roles of the primary financial statements and notes to the financial statements. A company is required to present a structured summary of the financial performance and position of the company within the primary financial statements. The notes to the financial statements should be used to disclose other material financial information to enable stakeholders to understand the line items within the primary statements.
Items will need to be from items with different characteristics. The standard includes the following examples of characteristics to be considered: nature, function within the business, frequency of the item, measurement basis, size, geographical location or regulatory environment. These aggregation and disaggregation principles set out in IFRS 18 will need to be applied across the financial statements in their entirety, including the notes to the financial statements.
When does IFRS 18 come into effect?
The effective date for the adoption of IFRS 18 is accounting periods commencing on or after 1 January 2027, with earlier application permitted.
Retrospective application of IFRS 18 is required; this means that the comparative information will need to be restated and prepared under IFRS 18 in the year of adoption. In addition, in the year IFRS 18 is adopted, reporters must include a reconciliation of the comparatives presented under IAS 1 in the previous financial statements and the comparatives presented under IFRS 18 in the current financial statements.
For UK adopters of UK-endorsed IFRS, the UK Endorsement Board (UKEB) are responsible for endorsing IFRS standards issued by the IASB for use in the UK. The UKEB’s endorsement project for IFRS 18 is currently in progress and they expect an adoption decision to be made before the effective date of the standard; the current timetable anticipates the earliest review and approval by the UKEB of IFRS 18 to be in the last quarter of 2025.
If you’d like to discuss any of the points raised, please get in touch with Anna Hicks.
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