Publication of IFRS 18 Presentation and Disclosure in Financial Statements

The existing standards are not very prescriptive as to the classification of income and expenses in the statement of profit or loss or on the use of totals and subtotals, and this leads to differences in presentation and difficulties in analysing and comparing company performance. The primary objective of this new standard is to ensure that entities present relevant information on their financial performance. Many of the provisions of the current IAS 1 have been incorporated without change. The main new requirements are based on three pillars:

• improving the comparability of the statement of profit or loss (and, to a lesser extent, the statement of cash flows) by setting out new rules on their structure and content;  
• improving transparency in the use of certain Alternative Performance Measures (APMs) linked to the income statement;  
• strengthening the requirements for aggregating or disaggregating information, both in the primary financial statements and in the notes, and preventing the omission or obscuring of material information. 

Presentation of the income statement  

The income statement will be structured around three new categories: Operating, Investing and Financing, in addition to the existing categories of income taxes and discontinued operations. 

The standard provides a definition of the income and expenses that are included in each category: 

• the Operating category is the default category, containing the income and expenses not included in other categories. This will include income and expenses from an entity’s main business activities.  
• the Investing category covers income and expenses from:
  • investments in unconsolidated subsidiaries, joint ventures, and associates. The share of the profit or loss of associates and joint ventures accounted for using the equity method must be presented in the Investing category;  
  • cash and cash equivalents; and  
  • other assets that generate an individual return that is largely independent of the entity’s other resources (e.g. financial assets or investment property);
• the Financing category includes income and expenses from liabilities arising from transactions that only involve the raising of finance and those resulting from other liabilities, for example the effects of discounting a lease liability. 

These general principles are supplemented by provisions for classifying certain income and expenses, such as those relating to foreign exchange differences, hyperinflation, derivatives and hybrid contracts.  

Sectoral adaptations, in particular for financial institutions, insurance companies and other investment entities, allow certain income and expenses to be classified in the Operating category when, under the general provisions of the standard, they would have been classified in the Investment or Financing categories.  

IFRS 18 also imposes two new mandatory subtotals in addition to the net profit or loss already required by IAS 1: operating profit and net profit before financing and income taxes. 

The standard also permits the optional presentation of five additional subtotals:  

• gross profit or loss and similar subtotals,  
• operating profit or loss before depreciation, amortisation and impairments within the scope of IAS 36,  
• operating profit or loss and income and expenses from all investments accounted for using the equity method, 
• profit or loss before income taxes, and  
• profit or loss from continuing operations.

These sub-totals, whether mandatory or permitted, will not qualify as MPMs (see below). 

Information on management-defined performance measures (MPM)  

The standard provides a precise definition of the alternative performance measures that are linked to the statement of profit or loss and known as Management-defined Performance Measures (MPMs). They will be the subject of detailed disclosures in a single note to the financial statements, presenting both quantitative information (calculation method, reconciliation with the nearest income statement subtotal, with presentation of income tax effects and noncontrolling interests) and qualitative information (definition of the indicator, and the way in which it reflects the company’s performance). 

Enhanced requirements for aggregation and disaggregation to provide useful information  

The role of the primary financial statements is to present a structured summary of an entity’s assets, liabilities, equity, income, expenses and cash flows. The notes provide further material information necessary to understand the quantified information in the primary financial statements.  

To ensure that the financial statements fulfil their role, IFRS 18 introduces new principles for presenting information within the primary financial statements and the notes. These principles include rules for locating information within the financial statements, for aggregating and 

disaggregating information and for providing guidance to the informative labelling of the aggregates. Additional requirements are set out for the presentation and nature of operating expenses.

Minor amendments to the statement of cash flows  

In the case of the statement of cash flows, the standard focuses on certain targeted improvements:  

• where a company opts for the indirect method, the standard defines a single starting point: operating income. This is a significant change insofar as a majority of preparers uses net profit as the starting point, as provided for in paragraph 18b of IAS 7; 
• the elimination of the choices previously available to issuers in terms of the classification of cashflows in respect of interests and dividends, with precise classification rules that depend on the entity’s main activity. 

Transition and first application  

Application of IFRS 18 is mandatory for reporting periods commencing on or after 1 January 2027. The standard will be applied retrospectively. Early application is possible (in Europe, subject to endorsement by the European Union).