IFRS 18 – The New Era in Presentation and Disclosure in Financial Statements

IFRS 18 – The New Era in Presentation and Disclosure in Financial Statements

The new era of IFRS 18 Presentation and Disclosure in Financial Statements is here. 

Though the effective date is 1 January 2027, the 2026 comparatives in the 2027 financial statements need to be based on IFRS 18. This means that entities need to work on the IFRS 18 presentation and disclosure requirements from 2026.

IFRS 18 replaces IAS 1 Presentation of Financial Statements but not everything changes. The three key changes that IFRS 18 introduces are as follows:

·    Classification of income and expenses into categories (operating, investing, financing, income taxes, discontinued operations) and requirements for defined subtotals (including operating profit)

·    Disclosure and reconciliation of management-defined performance measures (MPMs)

·    Grouping (aggregation and disaggregation) of information in profit or loss

These changes, which have been introduced following investors’ concerns about comparability and transparency, affects entities in all sectors. The impact of these changes is on presentation and disclosures, not recognition and measurement in the financial statements. Therefore, IFRS 18 will most likely affect the operating profit figure (which is widely used by investors and analysts) but it will not change the net profit figure. 

It is important to note that IFRS 18 is not just an accounting change. Most entities will require changes to the financial reporting systems and processes. For example, changes are required to the chart of accounts to ensure that amounts feed to the correct category of the profit or loss.

A key element of IFRS 18 is to determine whether an entity has a specified main business activity of:

·    Investing in particular type of assets e.g., debt securities; or

·    Providing financing to customers

An entity with a specified main business activity classifies in the operating category some income and expenses that would have been classified in the investing or financing category if the activity were not a main business activity. For example, investment and retail banks may both invest in assets and provide financing to customers as a main business activity. Hence, for such financial institutions, the interest income and expenses form part of the core operating activities. 

The assessment of main business activities may require use of judgement. This assessment is performed from the perspective of the reporting entity. In the consolidated financial statements, the assessment is performed from the perspective of the group, which may differ from the parent or the subsidiary’s assessment in its own financial statements. This requires consolidation adjustments to classify income and expenses between categories in the group’s consolidated statement of profit or loss. 

The standard also provides guidance in relation to classification of foreign exchange differences, income and expenses from derecognition and changes in classification, gains and losses on derivatives including hedging instruments and income and expenses from hybrid contracts. 

In addition to classification of income and expenses into categories, IFRS 18 brings management-defined performance measures (MPMs) into the audited financial statements. MPMs are a subtotal of income and expenses. Hence, they are a subset of alternative performance measures (APMs) that entities normally refer to. The disclosure and reconciliation requirements of IFRS 18 apply only to MPMs.

Lastly, IFRS 18 also provides enhanced guidance to help entities aggregate and disaggregate information in the financial statements. This includes the following:

·    Role of the primary financial statements and the notes

·    Aggregation vs disaggregation based on shared vs non-shared characteristics

·    Guidance for labelling and describing items in a way that faithfully represents an item’s characteristics

IFRS 18 includes no specific requirements on unusual income and expenses, so where do investors’ find information about these items?

Material information about unusual income and expenses is obtained through:

·    Disaggregation of items with dissimilar characteristics

·    Description of items using labels that faithfully represent the characteristics of those items

·    Disclosure of information about MPMs

Has your entity evaluated the impact of IFRS 18? If not, the time to do so is now.