IFRS 18 - Presentation and disclosures in Financial Statements

By CPA Dauglas Muhati

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In Summary

In April 2024, the International Accounting Standards Board (IASB) released IFRS 18 - Presentation and Disclosure in Financial Statements. The Standard contains specifications for how financial information should be presented and disclosed in financial statements for all organizations using IFRS. Entities with reporting periods starting on or after January 1, 2027, are subject to this standard. However, early adoption of the Standard is encouraged. The IFRS 18 comes to replace the current standard IAS 1 - Presentation of Financial Statements. This is in line with the mandate of the IASB of development and publication of IFRS accounting standards.

What’s new in IFRS 18

Three sets of new requirements are introduced by IFRS 18 to enhance financial performance reporting by entities and provide investors (or users) with a more solid foundation for company analysis and comparison. These requirements include;

????????? the structure of the statement of profit or loss;

????????? required disclosures in the financial statements for certain profit or loss performance measures that are reported outside an entity’s financial statements (that is, management-defined performance measures); and

????????? enhanced principles on aggregation and dis-aggregation which apply to the primary financial statements and notes in general.

In simpler terms, the standard aims to achieve improved comparability in the statement of profit or loss, enhanced transparency of management-defined performance measures, and more useful grouping of information in the financial statements. Consequentially, according to the new standard, a complete set of financial statements comprises of the following information;

????????? A statement of financial performance for the reporting period;?

????????? A statement of financial position as at the end of the reporting period;?

????????? A statement of changes in equity for the reporting period;

????????? A statement of cash flows for the reporting period;?

????????? Notes to the above statements for the reporting period;?

????????? Comparative information in respect of the preceding period as specified by the standard;?

????????? A statement of financial position as at the beginning of the preceding period if the entity applies an accounting policy retrospectively, makes a retrospective restatement of items in its financial statements or reclassifies items in its financial statements (given that this results in material information).

According to the Standard, the aforementioned statements are referred to as "primary financial statements," and each one must be given equal weight. An entity may use titles other than those listed above for the statements.

The significant changes proposed by the new standard (from the current IAS 1) are as discussed below;

1.?????? Improved comparability in the statement of profit or loss (income statement)

Under the IAS 1, the income statement do not have a defined format. Entities decide which subtotals to include on their own. The entities frequently report operational profits, but there is less comparability because different entities calculate operating profits differently. In order to improve the income statement's structure, IFRS 18 creates five distinct categories for revenue and expenses: operating, investing, financing, income taxes and discontinued operations. It also requires that all entities give newly defined subtotals, such as operational profit. Investors will have a consistent starting point for evaluating the performance of companies thanks to the updated structure and new subtotals, which will also facilitate company comparison.

Entities must disclose certain totals and subtotals in accordance with IFRS 18; the primary modification is the requirement to include "Operating profit or loss." With a few exceptions (for instance, where a bank has financing as a primary business activity and has chosen to report certain information in a particular way), the other necessary subtotals are "Profit or loss" and "Profit or loss before financing and income taxes."

2.?????? Enhanced transparency of management-defined performance measures

Known as alternative performance measures, several entities offer company-specific metrics. This information is helpful to investors, but at the moment, the majority of entities don't give investors enough details about how these metrics are determined and how they connect to the necessary metrics in the income statement. As a result, IFRS 18 requires that entities provide justifications for the management-defined performance measures—company-specific performance measures that are connected to the income statement. The new rules would subject management-defined performance measures to audit and enhance their transparency and discipline.

A reconciliation between the management-defined performance measures (MPM) and the closest comparable stated subtotal in IFRS Accounting Standards should be included in a single note in the financial statements that contains information about these measures. As a result, some non-GAAP measures will be incorporated into the financial statements.

3.?????? More useful grouping of information in the financial statements

A company's information that is too much detailed or summarized, it may hinder the investors' ability to analyze its performance. IFRS 18 provides an improved guidance on information organization and whether to include it in the notes or the primary financial statements. It is anticipated that the modifications will yield more comprehensive and practical data. In order to assist investors locate and comprehend the information they seek, the standard now requires that entities disclose operational expenses with more transparency.

In the primary financial statements and the accompanying notes, an entity must either aggregate or disaggregate information. It is best to group items according to shared attributes and separate them according to non-shared attributes. The procedure must not obfuscate important information and should allow principal financial statements and notes to serve their purposes.

4.?????? Other minor changes to other standards

a.?????? Amendments to IAS 7 – Statement of cash flows

The IAS 7 is also amended by requiring all entities, when using the indirect method;

·???????? to utilize the operating profit subtotal as the starting point for cash flows from operating operations:

·???????? to remove the presentation alternatives for cash flows related to interest and dividends paid and received as follows;

-????????? for entities with no specified main business activities:

o?? interest and dividends paid shall be classified as cash flows from financing activities on the statement of cash flows

o?? interest and dividends received shall be classified as cash flows from investing activities on the statement of cash flows

-????????? for entities that invest in assets or provide financing to customers as a main business activity, the entity is required to:

o?? by examining how dividend income, interest income, and interest expenses are categorized in the statement of profit or loss in compliance with IFRS 18, ascertain how dividends received, interest received, and interest paid should be categorized in the statement of cash flows.

o?? classify the total of each of these cash flows in a single category in the statement of cash flows (that is, either as operating, investing or financing activities).

o?? classify dividends paid as cash flows from financing activities.

b.?????? Amendments to IAS 33 – Earnings Per Share

In addition to reporting basic and diluted earnings per share (EPS), entities are required by IAS 33 to disclose (in the notes only) additional EPS calculated based on any component of the statement of comprehensive income.

The amendments to IAS 33 permit an entity to disclose these additional EPS only if the numerator is either a total or subtotal identified in IFRS 18 or is an MPM.

Figure 1: Proposed statement of profit or loss by IFRS 18 (adapted from Deloitte)

Conclusion

In concluding, the intended purpose of the new IFRS 18, besides replacing the current IAS 1, is to bring about a whole new experience in preparing our statement of profit or loss which makes it easier and more systematic for the investors (and other users of the financial statements) to carry out their analysis to gauge the performance of the entities.? The standard therefore is a welcome development in the world of financial reporting.