The International Accounting Standards Board (IASB) has issued International Financial Reporting Standard (IFRS) 18, Presentation and Disclosure in Financial Statements, which is designed to improve the comparability and transparency across IFRS reports.
While this standard will replace International Accounting Standard 1, Presentation of Financial Statements, many of the current principles will remain. The standard will not impact the accounting recognition of transactions but could change where and how these are reported.
The primary changes under IFRS 18 focus on the structure of the statement of profit and loss, disclosures of management-defined performance measures and enhancing the IFRS principles of aggregation and disaggregation.
Statement of Profit or Loss:
The new standard provides more structure in reporting on the statement of profit and loss. Items in the statement must now be classified into the following five categories: operating, investing, financing, income taxes and discontinued operations. Income taxes and discontinued operations are largely unchanged. The others are as follows:
- Operating category – Activity from an entity’s primary business.
- Investing category – Activity from equity investments (associates and joint ventures), income or loss from other investments and interest income from cash and cash equivalents.
- Financing category – Activity on liabilities and the impact of interest rate fluctuations on liabilities such as pension discount rates.
IFRS 18 also requires certain totals and subtotals – operating profit or loss, profit or loss before financing, profit or loss before income taxes, income taxes and profit or loss. Entities whose primary activity is investing or providing financing to customers will have additional disclosure requirements.
Disclosures:
IFRS 18 provides specific disclosure requirements for Management-defined performance measures or non-GAAP measures. These should be disclosed within one note to the financial statements and provide a reconciliation to the most similar IFRS defined subtotal on the statement of profit or loss. These non-GAAP measures must be based on financial performance measures and cannot be totals or subtotals specified under IFRS.
Entities can present expenses within the operating category by either nature, function or a combination of both. Certain new disclosures would be required for any operating expenses presented by function.
Aggregation:
The standard provides additional guidance on grouping similar items based on shared characteristics and should be applied across the financial statements. There would be additional disclosure for items on the financial statements grouped together as “other.”
In addition, IFRS 18 eliminates cash flow presentation options by requiring dividends and interest paid to be classified as financing activities and dividends and interest received as investing activities. Also, goodwill will now be a required line on the balance sheet, if applicable.
IFRS 18 is effective January 1, 2027 and is applied retrospectively. Early adoption is permitted. All IFRS entities will be impacted. While there are several years before the standard is effective, successful adoption will depend on preparation beforehand. Organizations should begin the process of assessing how this standard impacts their financial statements, communicate the impact and expectations with financial statement users and monitor local reporting changes between then and now.
Schneider Downs provides assurance, tax and advisory services for international entities and organizations following IFRS. For more information concerning international business matters and their impact to your organization, please visit the Schneider Downs Our Thoughts On blog or email us at [email protected].
