IFRS 18: Presentation and Disclosure in Financial statements

Earlier this week, the IASB issued another standard, which repeals our very dear IAS 1- Presentation of Financial statements. I find IAS 1 so profound as it practically explains how quality financial statements should be presented to users of financial statements. The standard touches critical discourse from describing objective of general purpose financial statement, to describing components of FS, to materiality and aggregation, to offsetting, etc. If we allow accountants to use their discretion for example, they will offset elements of financial statements that are not rightfully supposed to be offset, all thanks to IAS 1. It’s so important therefore for financial reporting practitioners, students, researchers, and other reporting enthusiasts to be so interested in the new standard that dares replace the basics of FS presentation- IAS 1. This article is written in very domestic language to aid comprehension, I hope you enjoy it.

Esteemed readers, IFRS 18 was issued this past Tuesday, April 9, 2024, and titled Presentation and Disclosure in Financial statements – a slight change from the initial nomenclature (Presentation of financial statement). It would be effective 1 Jan 2027, with early adoption permitted.

I have been keeping track with the IASB’s Primary Financial statements Project that birthed this new standard and the overall summary I deduced from the different publications of the committee overtime was that IAS 1 needs to be replaced to specifically address three key aspects of financial statement presentation for all reporting entities.

It is instructive to note that the IASB also upholds the hard work that has gone into the issuance of IAS 1, so, IFRS 18 still carries over the requirements of IAS 1, except for the major amendments that have now been introduced in the three aspects I mention above.

I know you are longing to know what these aspects are?

The standard has now introduced new requirements on presentation within the statement of profit or loss, including specified totals and sub totals in order to improve comparability. It also touches on disclosure on management-defined performance measures for transparency purposes and additional requirements for aggregation and dis-aggregation of financial information to satisfy users of financial statement.

One would deduce, merely from noting these three aspects that the object clause of the standard is to improve quality of financial statements. Users of FS (in substance, customers of reporting entities) are considered KINGS by the IASB.

Let’s “delve” into these three areas in subsequent paragraphs.

Categories and sub totals in statement of profit or loss

Like me, you would have seen several financial statements with different sub-total formats, the IASB also identified this presentation gap and wishes to standardise the presentation format, describing what sub-totals we should be having in our statement of profit or loss. The beauty of this is that it ensures ease of comparability (whether during trend analysis or cross-sectional analysis).

Accountants in practice know how well they “creatively cook” financials, such that specific line of Interest to users of financial statements appear attractive. Again, what a lot of practitioners do is to leverage the loopholes in the standard. For instance, IAS 1 has no concerns with inclusion of share of profit from an investment in associate as part of the total operating profit, but the question is whether in actual sense, that profit derived can be called “operating” as it includes share of profit from associate? Do we have meaningful interpretations from comparing these numbers with the operating profit of another reporting entity without an associate in their financials?

We should gather together to appreciate the IASB for this good work, I’m sure auditors reading this are grateful, LOL!

IFRS 18 now requires that all income and expense lines on the statement of profit or loss be classified into operating, investing, financing, income tax and discontinued operations.

What comes to mind with the first three is obviously cash flows, yeah? Yeah, you are right, the clear intention of the standard is to make sure the income and expenses of the reporting entity are clearly communicated to the users of financial statements under the possible business activities that usually would drive business endeavours for any reporting entity. After all, businesses, irrespective of their industry or sector have object clauses which underpin the essence of their existence, these would be operating activities, as the name implies. So, sales in the ordinary course of business, direct and indirect costs incurred in the ordinary course of business would all qualify as operating.

The same applies to Investing which are typically activities affecting long term investments of the business, basically rental income from an investment property a business holds would qualify here as investment income, the share of profit in associate cited earlier in this article would also fall in this category.

A succinct call out from the standard is in paragraph 53 of IFRS 18 which espouses that even though investments in asset is an investing activity, if an entity invests in assets as part of its main business activity, it will classify applicable income and expense as operating activity except for investment in joint ventures, associates and unconsolidated subsidiaries as well as cash and cash equivalents. ??

Financing activities are basically activities driving the source of fund of the reporting entity thus finance costs would be classified here, including effective interest cost on lease liabilities.

Again, this classification is a function of what business the reporting entity engages in, a bank would most time have interest expense as operating as the interest expense paid to depositors are in the ordinary course of its business. Paragraph 65 of IFRS 18 also supports this.

How would the sub-totals look like?

IFRS 18 now prescribes that the reporting entities must present totals and sub-totals for the following: operating profit or loss, profit or loss before financing and income tax, profit, or loss.

Assignment time – please check paragraph 75 for presentation of line items required by the standard. Submit for marking in the comment section, 20 marks. Lol

Management defined performance measures (MPM)

Financial reporting enthusiasts must have heard about management commentary and integrated reporting, I think that it is in that spirit that the IASB has introduced this into IFRS 18. IFRS defines management defined performance measures as a subtotal of income and expenses that:?

(a) an entity uses in public communications outside financial statements.?

(b) an entity uses to communicate to users of financial statements management’s view of an aspect of the financial performance of the entity as a whole; and?

(c) is not listed in paragraph 118 of IFRS 18, or specifically required to be presented or disclosed by IFRS Accounting Standards.

?A quick example that comes to mind are required regulatory ratios not required by any IFRS, but the reporting entity communicates to its regulators as part of its performance metrics, IFRS 18 now requires that all these MPMs be disclosed on the FS.

Aggregation and Disaggregation

To provide a better clarification on how items on the financial statements should be presented, IFRS 18 requires aggregation and disaggregation of financial information in the primary financial statements and accompanying notes based on applicable characteristics. It emphasises that entities should aggregate based on shared characteristics and disaggregate based on characteristics that are not shared. This means the era of grouping unrelated expenses as other expenses have now come to an end, the standard in fact advises that labels and nomenclature describing items on the primary financial statements or those disclosed in the notes should be disclosed in a way that faithfully represents the characteristics of the item, i.e., by providing all descriptions and explanations necessary for a user of financial statements to understand the item. It therefore means that the phrase "other expense" (for example) would be avoided as much as practicable, unless that’s the only depiction of faithful representation.

I like to fall the curtains here; I hope you had a good time reading this. Till, I bring another meal served hot to your timeline,

Cheers!

Your IFRS Pal,

Sobur ‘Lekan Bello.