Effective 2027, IFRS 18 affects financial statement presentation, creating new differences with US GAAP and SEC Regulations.
Authors: Valerie Boissou, Amit Singh, Kayla C Molaro
Responding to investor calls for more relevant and comparable information, the International Accounting Standards Board (IASB®) issued IFRS 18 Presentation and Disclosure in Financial Statements1 in April 2024. IFRS 18 aims to provide greater consistency in the presentation of the income and cash flow statements, as well as more disaggregated information. Effective 2027, the standard notably introduces new disclosures and a more structured income statement with three new categories of income and expenses and two defined income statement subtotals. It also brings certain ‘non-GAAP’ measures into the audited financial statements for the first time. IFRS 18 will result in many new differences with US GAAP and creates interpretive questions as to its interactions with SEC Regulations for SEC Foreign Private Issuers (FPIs).
So what does this mean for companies’ financial reporting? Essentially, companies’ net profit will not change. However, what will change is how they present their results on the face of the income statement and disclose information in the notes to the financial statements. Also, certain ‘non-GAAP’ measures – management performance measures (MPMs) – will now form part of the audited financial statements. Together, the new requirements will help companies to better tell their story and connect their reporting in the financial statements.
The new standard will affect all companies across different industries so now is the time to get ready. Companies need to focus on the detailed requirements and apply them to their specific circumstances to make new judgments, navigate complexities and oversee changes to systems and processes.
Under current IFRS® Accounting Standards, companies use different formats to present their results, making it difficult for investors to compare financial performance across companies.
IFRS 18 promotes a more structured income statement, as set out below. In particular, it introduces a newly defined ‘operating profit’ subtotal and a requirement for all income and expenses to be classified into three new distinct categories based on a company’s main business activities.
1. Companies with specified main business activities of ‘investing in assets’ (e.g. insurers, investment property companies) or providing financing to customers (e.g. banks) classify additional income
and expenses in the operating category, which would otherwise be classified in the investing or financing category.
2. The operating, investing and financing categories are not aligned with those for the cash flow statement.
3. Companies providing financing to customers as their only main business activity (e.g. banks) typically do not present this subtotal.
All companies are required to report the newly defined ‘operating profit’ subtotal – an important measure for investors’ understanding of a company’s operating results – i.e. investing and financing results are specifically excluded. This means that the results of equity-accounted investees can no longer be part of operating profit and are presented in the ‘investing’ category.
US GAAP allows the use of subtotals provided they are not non-GAAP measures and their description is not misleading. Regulation S-X requires SEC registrants using US GAAP to present certain subtotals, such as ‘Income or loss before income tax’. Many companies present operating profit, although it is not defined under US GAAP.
US GAAP does not require classifying income and expenses by specific category. Further SEC regulations require presenting equity in earnings of equity method investees after income tax expense but before discontinued operations, separate from other line items.
For more detailed information about US GAAP presentation and disclosure requirement, read KPMG handbook, Financial statement presentation.
IFRS 18 also requires companies to analyze their operating expenses directly on the face of the income statement – either by nature, by function or on a mixed basis. Under the new standard, companies need to choose the presentation method that provides the ‘most useful structured summary’ of those expenses. If any items are presented by function on the face of the income statement (e.g. cost of sales), then a company provides specific disclosures about their nature.
SEC regulations require companies in certain specialized industries to analyze their operating expenses on the face of the income statement. For example, commercial and industrial companies present expenses by function (costs of sales, selling and general administrative expenses, etc.). Banks present a caption for salaries and employee benefits. US GAAP does not otherwise broadly require operating expenses to be presented or disclosed by nature. However, starting in 2027, the FASB's Disaggregation—Income Statement Expenses (‘DISE’) project will require public companies to disaggregate expenses in the notes to the financial statements. The expenses will be disaggregated into prescribed natural categories (purchase of inventory, employee compensation, depreciation, amortization, and depletion).
For a summary of the FASB project, read KPMG article, FASB completes redeliberations on DISE.
Companies often use ‘non-GAAP’ information to explain their financial performance because it allows them to tell their own story and provides investors with useful insight into a company’s performance.
IFRS 18 now requires some of these ‘non-GAAP’ measures to be reported within the financial statements. It defines MPMs2 as a subtotal of income and expenses that:
For each MPM presented, companies will need to explain in a single note to the financial statements why the measure provides useful information, how it is calculated, and to reconcile it to an amount determined under IFRS Accounting Standards. Such disclosure will enhance transparency and will afford users better information on companies’ financial performance.
For SEC registrants, whether domestic or foreign, the presentation of non-GAAP measures is governed by SEC regulations3 and interpretive guidance issued by the SEC staff. Non-GAAP financial measures are prohibited in financial statements filed with the SEC, but as an exemption, the SEC permits a foreign private issuer (FPI) to use a non-GAAP financial measure in a filing with the SEC if that measure:
To learn more about the SEC rules related to non-GAAP financial measures, read KPMG Issues in-depth, Non-GAAP financial measures.
It is unclear at this stage how IFRS 18 interacts with existing SEC views and guidance about non-GAAP financial measures. Therefore, FPIs that apply IFRS Accounting Standards should monitor communications from the SEC staff or the International Practices Task Force (IPTF) of the Center of Audit Quality. The IPTF meets periodically with the SEC staff to discuss and focus on international emerging technical accounting, disclosure and reporting issues relating to SEC rules and regulations.
To provide investors with better insight into financial performance, the new standard includes enhanced guidance on how companies group information in the financial statements. This includes guidance on whether material information is included in the primary financial statements or is further disaggregated in the notes.
Companies are discouraged from labelling items as ‘other’ and will now be required to disclose more information if they continue to do so.
There is limited guidance in US GAAP addressing aggregation and disaggregation principles, and no specific guidance regarding labelling items as ‘other’. However, SEC regulations provide an overarching principle that information provided in the financial statements and the notes cannot be misleading.
For more detailed information about US GAAP presentation and disclosure requirements read KPMG handbook, Financial statement presentation.
IFRS 18 is effective from January 1, 2027 and is available for early adoption. It requires retrospective application, so companies will need to prepare comparative information, as well as disclose specific reconciliations of IFRS 18 amounts to amounts previously presented under IAS 11. If a company chooses to apply the new standard early, then it discloses this fact in the notes to the financial statements.
In the lead to adoption, companies need to consider the IAS 8 disclosure requirements relating to standards issued but not yet effective. This includes describing the possible impact of IFRS 18 on the financial statements on initial application. Further, FPIs that apply IFRS Accounting Standards also need to consider the requirements of SAB 74, which has additional requirements to IAS 8. To learn more, read KPMG Hot Topic, SAB 74 reminders.
Now is the time to get ready to report under IFRS 18:
KPMG publication, First Impressions provides detailed insights and comprehensive analysis on applying the new standard, together with illustrative examples. You can also use KPMG high-level guide.
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