Investors in large businesses are demanding greater transparency and the inclusion of more relevant information on financial statements. The International Accounting Standards Board has responded with new International Financial Reporting Standards – IFRS 18.
IFRS 18 ‘Presentation and Disclosure in Financial Statements’ was issued earlier in 2024 and is mandatorily applicable for accounting periods starting on or after 1 January 2027, with earlier application permitted.
The new standard replaces the oldest standard “IAS 1 Presentation of Financial Statements” which will no longer applicable.
It will impact every reporting entity that currently uses International Financial Reporting Standards (IFRS). The objective of the Standard is to improve how information is communicated in an entity’s financial statements, particularly in the statement of profit or loss and in its notes to the financial statements.
It is important to note that IFRS 18 is required to be applied retrospectively, with the restatement of the comparative period along with a reconciliation between the current and comparative periods. It means that if you apply IFRS 18 from 2027, the numbers for 2026 must also be presented in line with the new rules.
Overall, the majority of changes made in IFRS 18 impact the statement of profit or loss and notes to the financial statements, but there are also limited changes to specific requirements that are set out in IAS 7 ‘Statement of Cash Flows’. Only minimal changes were made to the disclosures required for the statement presenting comprehensive income, the statement of changes in equity and the statement of financial position.
We focus on the key presentational changes required to the statement of profit or loss below.
Changes to presentation requirements in the statement of profit or loss
The main change introduced by IFRS 18 is to the way in which reporting entities will structure their statement of profit or loss.
The Standard introduces two new defined subtotals:
- Operating profit, and
- Profit before financing and income taxes.
These new required subtotals are intended to increase comparability by ensuring that information presented for investors is consistent across different entities.
Additionally, the Standard requires an entity to classify all income and expenses into one of the following five categories:
- operating
- investing
- financing
- income taxes, and
- discontinued operations.
The investing category includes income and expenses from investments in associates, joint ventures and unconsolidated subsidiaries, cash and cash equivalents, and any other assets (such as cash and cash equivalents) that generate returns separately from the entity’s other resources.
The financing category distinguishes between transactions that are solely for the purpose of raising finance, and those that are not. Income and expenses from all liabilities that result solely from the raising of finance are included in this category, along with some elements of interest income or expense recognised by applying other IFRS. This category, together with the subtotal for profit before financing and income taxes enables investors to assess the reporting entity’s performance before the effects of its financing.
The income taxes and discontinued operations categories include income and expenses resulting from the application of IAS 12 ‘Income taxes’ and any related foreign exchange differences, and IFRS 5 ‘Non-current assets held for sale and discontinued operations’ respectively.
Finally, the operating category includes all other items of income and expense that are not allocated to one of the other four categories. It is a default category, so it is important to note this category will include income and expenses from an entity’s main business activities, regardless of whether the income or expenses are volatile or unusual. The operating profit subtotal provides not only a measure of past performance, but also a starting point for forecasting an entity’s future cash flows.
IFRS 18 requires foreign exchange differences to be classified in the same category of the statement of profit or loss as the income and expenses from items that gave rise to the foreign exchange differences.
For more information contact Gary Wong at +441923634453 or Gary.Wong@hhllp.co.uk
