IFRS 18 - Presentation and disclosure in the financial statements

An entity shall classify income and expenses included in the income statement into one of the five categories:

• Operating Category
• Investing Category
• Financing Category
• Income Taxes Category
• Discontinued Operations Category

An entity shall present additional line items and subtotals when such presentations are necessary for the primary financial statement to provide a coherent structured summary.

When an entity presents additional line items or subtotals, those elements shall:

• Include amounts recognized and measured in accordance with IFRS.
• Be compatible with the structure of the statement.
• Remain consistent from one period to the next.
• Be displayed no more prominently than the totals and subtotals that IFRS requires.

IFRS 18 introduces two new required subtotals on the face of the income statement: “Operating profit” and “Profit or loss before financing and income tax”.

These new subtotals will enhance the income statement's consistency and improve comparability of the entity's financial performance. They will also assist investors in forecasting cash flows and assessing profit margins.

The classification of income and expenses is guided by an entity's main business activities.

To categorize income and expenses into the three new sections—operating, investing, and financing—an entity must evaluate whether its main business activities include investing in assets or offering financing to customers, as specific classification requirements apply to such entities.

Determining whether an entity has such a specified main business activity is a matter of fact and circumstances which requires judgement.

The operating category will include all income and expenses from the entity’s main business activities.

An entity is required to classify all income and expenses shown in the income statement to the operating category if they do not fall under the investing, financing, income taxes, or discontinued operations categories. According to IFRS 18, the operating category is a residual category, meaning it will encompass any income and expenses not assigned to the other specified categories.

This category generally includes income and expenses related to:

• Investments in associates, joint ventures, and unconsolidated subsidiaries;
• Transactions involving cash and cash equivalents;
• Assets that generate returns on their own or largely independent of other resources, such as rental income from investment properties.

This category includes:

• All income and expenses from liabilities that involve only the raising of finance (such as typical bank loans);
• Interest earned or paid and the effects of changes in interest rates from other liabilities (such as unwinding of the discount on a pension liability or interest expense on lease liabilities)

IFRS 18 includes additional requirements for entities whose core business is to provide financing to customers, such as banks, or those that invest in assets with particular features, such as investment companies. Some income and expenses that might ordinarily have been classified in the investing or financing category, when applying the general principles, will be presented in the operating category for these entities. This ensures that the operating profit reflects the results from the entity's main business operations.

For example, if an entity has a specified main business activity of investing in assets, the income and expenses from those assets will be included in the operating category, e.g., real estate companies will need to present rental income in the operating category.

In the operating category of the income statement, an entity shall classify and present expenses in line items in a way that provides the most useful structured summary of its expenses, by either the nature of expenses, function of the expenses within the entity or by using a mixed presentation.

If any operating expenses are presented by function on the face of the income statement, companies present a separate cost of sales line item (where relevant) and disclose a qualitative description of the nature of expenses included in each function line item.

In addition, in a single note, companies are required to disclose specific quantitative and qualitative information for each of five ‘nature’ operating expenses. These are:

1. Depreciation of property, plant, and equipment (PPE), investment property, and right-of-use assets;
2. Amortisation of intangible assets;
3. Employee benefits expenses;
4. Impairment losses and reversals; and
5. Inventory write-downs and reversals.

This information is not intended to reconcile to the income statement as it captures both capitalised and expensed amounts.

IFRS 18 introduces the concept of management-defined performance measure (MPM). This is defined as a subtotal of income and expenses that an entity uses in public communications outside financial statements, to communicate management’s view of an aspect of the financial performance of the entity as a whole to the users.

Under IFRS 18, MPMs must now be openly disclosed in the financial statements. They require clear explanations, must be reconciled with other figures, and are subject to auditing procedures.

IFRS 18 defines a subset of these measures which relate to an entity’s financial performance as management-defined performance measures. Information related to these measures should be disclosed in the financial statements in a single note, including a reconciliation between the MPM and the most similar specified subtotal in IFRS.

Furthermore, in a single note in the financial statements, an entity states that the MPM provides management view of the entity’s financial performance and is not necessarily comparable to MPMs of other companies. The entity must also:

• Explain the usefulness on the MPM,
• Detail the calculation method
• Reconcile the MPM with a corresponding total or subtotal as specified in IFRS, taking into account tax implications and impacts on non-controlling interests for each item within the reconciliation, and
• Clarify any modifications, such as changes to the calculation methods or the introduction of any new MPMs.

IFRS 18 provides enhanced guidance on the principles of aggregation and disaggregation which focus on grouping items based on their shared characteristics. These principles are applied across the financial statements, and they are used in defining which line items are presented in the primary financial statements and what information is disclosed in the notes.

Key changes introduced by the standard include:

• Newly defined roles for the primary financial statements and for the notes;
• Shared characteristics of items as a basis for aggregation and disaggregation – e.g., nature, function, size, geographical location, and regulatory environment; and
• Single dissimilar characteristic, which can result in disaggregating items, if material.

New disclosures apply to discourage companies from labelling items as ‘other’ and aggregating items into large single amounts. However, the decision on how to categorize information rightly involves the use of judgment.

An entity must place any tax expense or tax income that appears on the income statement into the 'Income Taxes' category, as directed by IAS 12 Income Taxes. This category also includes any exchange rate differences related to taxes.

An entity shall classify in the discontinued operations category income and expenses from discontinued operations as required by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

IFRS 18 requires other limited changes to presentation and disclosure in the financial statements.

Materiality continues to apply when presenting and disclosing information in the financial statements. However, for the primary financial statements, companies will also need to consider if the statements provide a ‘useful structured summary’.

Under IFRS 18, foreign exchange differences recognised in the income statement are classified in the same category as the income and expenses they relate to. However, if doing so is impractical due to excessive cost or effort, they can be placed in the operating category instead.

IAS 34 Interim reporting continues to require entities to present, as a minimum in their condensed interim financial statements, the same headings, and subtotals as in the most recent annual financial statements. Further, additional line items and explanatory notes are still included if their omission would make the condensed interim financial statements misleading. The paragraph has been amended only to require entities to consider the enhanced principles of aggregation and disaggregation when preparing condensed interim financial statements. IFRS 18 introduces consequential amendments to IAS 34 that require entities to provide the additional disclosures for MPMs in their interim financial statements – i.e., these disclosures are required in both the interim and annual financial statements. However, only MPMs that relate to the entity’s performance in the interim reporting period need to be included in the interim financial statements.

To promote consistent classification and presentation of cash flows and enhance comparability between entities, IFRS 18 introduces consequential amendments to IAS 7 Statement of Cash Flows that require all entities to use the operating profit or loss subtotal as the starting point when presenting operating cash flows under the indirect method. The previous option that allowed interest and dividend cash flows to be classified as operating activities is no longer available. Additionally, goodwill must now appear as a separate line item on the balance sheet.

Under IAS 33 Earnings Per Share, in addition to reporting basic and diluted earnings per share, companies are permitted to disclose additional earnings per share calculated based on alternative measures of earnings. The amendments to IAS 33 permit an entity to disclose these additional earnings per share only if the numerator is either a total or subtotal identified in IFRS 18 or is an MPM. An entity cannot present additional earnings per share in the primary financial statements. It can only disclose additional earnings per share in the notes.