IFRS 18: Transforming Financial Statement Presentation and Disclosure

The International Accounting Standards Board (IASB) has unveiled IFRS 18, “Presentation and Disclosure in Financial Statements,” a landmark standard designed to enhance the transparency, comparability, and usefulness of financial statements. This new standard represents a significant shift in financial reporting practices, aiming to provide investors with clearer, more consistent information, facilitating more informed decision-making.

Overview of IFRS 18

IFRS 18 supersedes IAS 1, “Presentation of Financial Statements,” and introduces comprehensive changes to how financial performance is presented and disclosed. This standard is part of the IASB’s ongoing effort to improve the quality and comparability of financial information reported by entities using IFRS Accounting Standards.

Key Changes Introduced by IFRS 18

1. Improved Comparability in the Statement of Profit or Loss

Current Challenges
Under the previous framework, companies had considerable flexibility in structuring their income statements. This led to varied calculations and presentations of key metrics such as operating profit, complicating comparisons across companies.

IFRS 18 Solution

To address these inconsistencies, IFRS 18 introduces specific requirements for the presentation of the statement of profit or loss :

• Defined Categories : Income and expenses must be classified into three distinct categories: operating, investing, and financing. This classification aims to standardize the presentation of financial performance and improve comparability.
• Specified Totals and Subtotals : IFRS 18 mandates the use of specific totals and subtotals, including :
     – Operating Profit : A standardized measure of profit from core operations.
     – Profit Before Financing and Income Tax : A subtotal that excludes financing costs and income tax expenses, offering a clearer view of operational performance.
     – Income Tax and Discontinued Operations : Separate reporting of these items to enhance clarity and comparability.

These changes provide a consistent starting point for analyzing companies’ performance, making it easier for investors to compare financial results across different firms.

2. Enhanced Transparency of Management-Defined Performance Measures

Current Challenges
Companies often report alternative performance measures, referred to as management-defined performance measures (MPMs), to provide additional insights into their operations. However, the lack of standardization and transparency in calculating these measures has been a significant concern.

IFRS 18 Solution

IFRS 18 requires companies to disclose detailed explanations for any MPMs related to the income statement :
• Calculation Methods : Detailed descriptions of how these measures are calculated.
• Reconciliations : Clear demonstrations of how these measures relate to the standard figures reported in the income statement.

These disclosures enhance the transparency and reliability of MPMs, ensuring they are subject to audit and providing investors with better insights into a company’s performance.

3. More Useful Grouping of Information in Financial Statements

Current Challenges
The usefulness of financial information can be diminished if it is either overly summarized or excessively detailed. Achieving the right balance is crucial for providing meaningful insights.

IFRS 18 Solution

To improve the usefulness of financial information, IFRS 18 provides enhanced guidance on organizing and presenting data within financial statements:
• Primary Financial Statements vs. Notes : Clear guidelines on what information should be included in the primary financial statements versus the notes.
• Detailed Disclosures : Requirements for more detailed disclosures about operating expenses, including a breakdown of key expense categories.

These enhancements ensure that investors receive more detailed and useful information, facilitating a deeper understanding of a company’s financial health.

Implications for the IFRS Accounting Taxonomy

The changes introduced by IFRS 18 have direct implications for the IFRS Accounting Taxonomy, which is used to facilitate the electronic filing of financial information. Key impacts include :

• Addition and Deprecation of Elements : New line-item elements have been added to reflect the category information, while outdated elements have been deprecated. This ensures that the taxonomy remains relevant and accurate.
• Changes to Labels and References : Labels and references of existing elements have been updated to align with the new requirements, ensuring consistency across financial statements.

Timeline and Transition
IFRS 18 will take effect for annual reporting periods beginning on or after January 1, 2027, with earlier adoption encouraged. The impact of the new standard will vary depending on a company’s current reporting practices and IT systems.

Transition Strategy

• Assessment : Companies need to assess their current reporting practices and identify the changes required to comply with IFRS 18.
• Training : Training programs should be implemented to ensure that staff understand the new requirements and how to apply them.
• System Updates : IT systems must be updated to support the new reporting structures and disclosure requirements.

Improving communication of financial performance
IFRS 18 helps companies improve how they communicate financial performance in the statement of profit or loss to investors. Better information will contribute to efficient and resilient capital markets by enabling investors to make better decisions. IFRS 18 introduces three sets of requirements to achieve these goals. In combination, these requirements strike a balance by introducing defined subtotals that create a consistent structure in the statement of profit or loss to provide a starting point for investors’ analysis, while leaving room for companies to report their own performance measures. The disclosure requirements for management-defined performance measures anchor companies’ own performance measures to the defined subtotals, increasing the transparency of these measures. Additionally, the principles for grouping of information will help companies provide more useful information.

Summary of key requirements in IFRS 18
Presentation of new defined subtotals in the statement of profit or loss (pages 5–8) IFRS 18 requires companies to report: • operating profit; and • profit before financing and income taxes. These subtotals provide a consistent structure for the statement of profit or loss, thereby improving comparability. IFRS 18 will not affect how companies measure their financial performance and the overall profit figure.

Disclosure of management-defined performance measures (pages 9–11) Many companies report alternative performance measures or non-GAAP measures. When those measures meet the definition of management-defined performance measures (MPMs), IFRS 18 requires companies to disclose reconciliations between those measures and subtotals listed in IFRS 18 or totals or subtotals required by IFRS Accounting Standards. MPMs are subtotals of income and expenses used in public communications to communicate management’s view of an aspect of the financial performance for the company as a whole.

Enhanced requirements for grouping (aggregation and disaggregation) of information (pages 12–13) IFRS 18 sets out requirements to help companies determine whether information about items should be in the primary financial statements or in the notes and provides principles for determining the level of detail needed for the information. IFRS 18 also includes requirements for the presentation of operating expenses in the statement of profit or loss, disclosure of specified expenses by nature, and further information on items grouped together and labelled ‘other’.

Access and Support for IFRS 18

The IASB provides various resources to support the implementation of IFRS 18, including :

• IFRS Digital Subscription : Access to the full standard, illustrative examples, and the Basis for Conclusions.
• Implementation Webpage : Support materials and guidance to assist companies with the transition.

Additional resources include :

• Video Summary : A short video featuring IASB Chair Andreas Barckow summarizing the new requirements.
• Quick View Document : A one-page overview of IFRS 18.
• Project Summary : An overview of the project in non-technical language.
• Effects Analysis : An analysis of the expected benefits and costs associated with IFRS 18.
• Feedback Statement : A summary of feedback received during the development of the standard and the IASB’s responses.
• Reference Materials : A comparison table showing changes from IAS 1 to IFRS 18.

These resources are available through an IFRS Digital Subscription or can be purchased as a PDF from the IASB web shop.

Conclusion

The introduction of IFRS 18 marks a significant advancement in financial reporting. By standardizing income statement structures, enhancing the transparency of performance measures, and improving the organization of financial information, IFRS 18 aims to provide investors with the robust and consistent data they need to make better-informed investment decisions. As companies prepare to implement these changes, the enhanced disclosures and standardized reporting will foster greater comparability and transparency in the financial markets.