The advent of IFRS 18

On 9 April 2024, the International Accounting Standards Board issued IFRS 18 – Presentation and Disclosure in Financial Statements, effective for annual reporting periods beginning on or after 1 January 2027. It will replace IAS 1 – Presentation of Financial Statements. While the broad structure of financial statements remains unchanged – i.e. primary statements supported by accompanying footnote disclosure – there are a number of important changes, particularly pertaining to reporting performance.

The key changes that the new standard has introduced include the following -

An improved structure for the statement of profit or loss
Enhanced disclosure of management performance measures (MPMs)
Greater clarity on descriptions and aggregation/disaggregation of information

A significant criticism of the existing presentation of the statement of profit or loss is the lack of a defined structure and sub-totals for profit required to be reported. Under IAS 1, the only required profit measure is profit or loss for the period. However, most organizations also include sub-totals, e.g. gross profit, operating profit, profit before tax etc. With IAS 1 offering no guidance on which measures’ inclusion is mandatory, these sub-totals and measures are not always consistent between different organizations’ financial statements, or fully disclosed and defined. For instance, finance costs on defined benefit pension schemes could be included within operating costs (and operating profit), or within finance costs: both approaches would be accepted as per IAS 1.

IFRS 18 has amended the prescribed structure of the statement of profit or loss, requiring revenue and expenses to be presented within the following newly defined categories:

The operating category should include all items not reported elsewhere. There are special rules for entities whose main business activity is investing in certain kinds of assets (e.g. investment property businesses) or providing financing to customers (e.g. banks).
The investing category
The financing category

In addition, there are new required sub-totals for ‘operating profit or loss’ and ‘profit or loss before financing and income taxes’.

It is not uncommon for companies to use MPMs in their public communications outside the financial statements, e.g. measures such as ‘underlying profit’ or ‘adjusted EBITDA’. IFRS 18 introduces enhanced disclosure in the financial statements if such MPMs are used, to explain why the measure provides useful information, how it is calculated, and how it reconciles to the amounts determined as per IFRS.

IFRS 18, consistent with previous requirements in IAS 1, requires certain categories of items to be disclosed on the face of primary statements, with others disclosed in footnotes. What is more unclear is the extent to which items can be aggregated and disaggregated in these disclosures, and how items are described. IFRS 18 introduces enhanced guidance designed to lead to more meaningful information for investors, for example less use of ‘other items’ descriptions and greater use of meaningful labels.

What steps should your organization take?

Reporting entities need to work carefully through the full requirements of IFRS 18 and evaluate its potential impact. Whilst the changes do not change the overall profit or loss a business reports, how that information is presented and the underlying impact on accounting systems could be significant and require changes to finance and reporting processes.

For instance, a common item such as exchange differences may currently be reported as a single income or expense item within profit and loss. However, in the future, under IFRS 18, it will need to be presented separately within the operating, investing and financing categories depending on the underlying item or transaction that gave rise to them. This change not only affects presentation, but will also affect the underlying ledger structure, finance policies and processes, internal control requirements and chart of accounts.

For more information on the impact that IFRS 18 could have on your business, please contact our KPMG experts.