IFRS 18: Key Changes to Financial Statement Presentation

In April 2024, the International Accounting Standards Board (IASB) issued IFRS 18, a new standard for presenting and disclosing financial statements. This guidance aims to improve how companies communicate their financial performance by increasing consistency and comparability in financial reporting. IFRS 18 will officially replace the existing standard, IAS 1 ‘Presentation of Financial Statements’, introducing significant updates while carrying forward some of its principles. The standard achieves its objective by changing the layout of financial statements and introducing new rules for disclosing specific performance metrics.

The New Structure of the Income Statement

IFRS 18 introduces a mandatory and defined structure for the statement of profit or loss, a shift from the flexibility previously allowed under IAS 1. This framework requires companies to classify all income and expenses into one of three categories: operating, investing, or financing. The standard provides specific definitions for these categories to ensure that similar transactions are reported consistently across different entities.

The operating category is the default for income and expenses, including all amounts not classified as investing or financing, and reflects a company’s main business activities. The investing category includes income and expenses from assets that generate returns independently of other resources, such as dividends or gains on investment properties. It also includes income from associates and joint ventures accounted for using the equity method. The financing category captures income and expenses related to how a company raises capital, like interest expense on loans.

A feature of this new structure is the introduction of two required subtotals. The first is ‘operating profit or loss,’ calculated by subtracting operating expenses from operating income. This subtotal shows the profitability of a company’s core operations before considering its investment and financing decisions, providing a consistent starting point for analysis.

Following the operating profit, companies present items from the investing category, which leads to the second mandated subtotal: ‘profit or loss before financing and income taxes’. This figure shows the company’s performance after accounting for its primary business activities and investment returns, but before the costs of its capital structure and tax obligations. Mandating these subtotals creates a standardized framework for understanding the drivers of a company’s profitability.

Management-defined Performance Measures

IFRS 18 introduces regulations for Management-defined Performance Measures (MPMs). Investors have long used such metrics, often called non-GAAP or alternative measures, to understand management’s view of company performance. Previously, these measures were often presented without clear explanation or consistent calculation methods, making comparisons difficult.

IFRS 18 brings these measures under a formal disclosure framework. An MPM is a subtotal of income and expenses used in public communications, like investor presentations, to show management’s view of performance. The standard does not prohibit these custom metrics but aims to increase transparency and discipline around their use, giving investors necessary context.

The rules for MPMs connect these custom measures to the audited financial statements. Companies must disclose all MPMs in a single note, which prevents information from being scattered. This note must provide a clear reconciliation of the MPM to the most comparable IFRS subtotal, such as operating profit, showing users how the metric is calculated.

The disclosure must also include a statement explaining why the MPM provides useful information and how management uses it. This requirement forces companies to justify their use of non-standard measures, adding accountability. These rules provide investors with a clearer and more reliable understanding of performance from management’s perspective.

Enhanced Aggregation and Disaggregation Rules

IFRS 18 strengthens the principles for how companies group (aggregate) and separate (disaggregate) information in financial statements and notes. The standard requires material information to be presented separately, while immaterial items can be grouped with similar items. This approach prevents important details from being obscured in large, generic line items and reduces clutter from trivial information.

Companies cannot group dissimilar items, even if individually immaterial, if the total would be material and misleading. Information must be disaggregated on the primary financial statements or in the notes if the detail is needed to understand financial performance. For instance, a line item like “Other operating expenses” may need to be broken down in the notes to show the specific expenses included if they are significant.

The standard also changes the Statement of Cash Flows. For companies using the indirect method, IFRS 18 requires them to start with the new ‘operating profit or loss’ subtotal from the income statement. This change creates a direct link between the income statement and the statement of cash flows, improving consistency and simplifying the reconciliation of operating profit to cash flows from operations.

Implementation and Transition

The new standard is mandatory for annual reporting periods beginning on or after January 1, 2027, though early adoption is permitted. This timeline requires businesses to plan for implementation in advance, as the changes can affect data collection, internal processes, and financial reporting systems.

Companies must apply the new standard retrospectively. When a company first presents financial statements under IFRS 18, it must also restate the comparative information for the previous year. For example, in 2027 financial statements, the 2026 figures must be re-presented as if IFRS 18 had been in effect. This restatement ensures investors can make valid, like-for-like comparisons between periods under the new format.

This restatement requires companies to reclassify their prior year’s income and expenses into the new operating, investing, and financing categories. For the first year of adoption, companies must also provide a reconciliation explaining the changes between the income statement presented under IAS 1 and the new presentation under IFRS 18. This disclosure helps users of the financial statements understand the impact of the new standard.