Presentation and Disclosure in Financial Statements

Although the application date for this standard is still over two years away, it is important to understand some of the changes that will be coming through. There are four main changes that have been brought into IFRS 18.

-        Statement of financial performance¹

• New mandatory categories, totals and subtotals have been introduced… a notable one is that operating profit is now an IFRS Accounting Standard-defined concept.
• The statement is now required to be split into three well-defined and explained categories, operating, investing and financing, with tax and discontinued operations still presented separately. The items included within the default operating category are all revenue and expenses from the main business activity, even where volatile or unusual.
• Foreign exchange gains or losses will follow the income or expense giving rise to it, ie sale of goods – operating; cash and cash equivalents – investing; foreign debt – financing, unless the classification will involve undue cost or effort.
• Interest paid or received will be included in investing or financing activities, except for financing entities. Lease expenses are to be included in financing activities.

The subtotals may be the same as those for the cash flows, but the two statements are not aligned.

-        Management Defined Performance Measures (MPMs)

• MPMs are subtotals of income and expenses that is communicated outside of the financial statements reflecting management’s view of an aspect of the entity’s financial performance. It is not specified by the IFRS Accounting Standards. Examples could include ‘adjusted profit or loss’, ‘free-cash flow’ or ‘return on equity’.
• Entities that use MPMs must include details in a note in the financial statements defining the MPMs and how they are calculated, explaining that it represents management’s view without necessarily being comparable to other entities, why it is useful to understanding the entity’s performance and reconciling it to the most direct total in the statement of financial performance.

-        New principles for aggregating and disaggregating information in financial statements and

• Entities are required to label their line items in the annual financial statements as precisely as possible, items can only be grouped together in the same line item when they share at least one common characteristic, but a single dissimilar characteristic is enough to disaggregate information if material.
• The primary financial statements must provide a useful structured summary of the information, with the notes providing the detail of the material information.
• Entities are now permitted to present their statement of financial performance by function, by nature, or a combination of the two, with an analysis in the notes for depreciation, amortisation, employee benefits, impairment losses and inventory write-downs where the statement is not presented by nature.

-  Changes to the statement of cash flows

There are two main changes to the statement of cash flows:

• The starting point for the statement using the indirect method must be “operating profit” instead or “profit or loss”. A small change, but, as always, the devil is in the detail… are all entities in the group properly allocating their operating incomes and expenses within operating profit?
• Entities with specified main activities must disclose interest and dividends received as well as interest paid in a single category as appropriate, with dividends paid included within financing activities. Where no main activities are specified as expected for most entities not in the insurance or banking industries, interest and dividends received are to be included within investing activities and interest paid within financing activities.

These changes are required to be applied retrospectively by all entities preparing their financial statements in accordance with the IFRS^® Accounting Standards with certain transitional provisions. IFRS 18 is effective for years beginning on or after 1 January 2027 and may be early adopted.

^{1You’re still permitted to use other titles, or terms to label the totals, subtotals and line items required by IFRS  18 if they faithfully represent the characteristics of the items.}

Author:

Justine Combrink, Partner