The International Accounting Standards Board (IASB) published IFRS 18 in April 2024, which deals with the presentation and disclosure requirements in financial statements. This new standard will replace the current IAS 1 and is required to be applied for financial statements beginning on or after January 1, 2027. Comparative information must also be presented in accordance with IFRS 18.
The elements of IAS 1 have mostly been carried over to IFRS 18, but the new standard provides additional guidance regarding mainly three areas:
- The structure of the income statement;
- Management-defined performance measures;
- The classification of items in the financial statements.
The primary objective of these new requirements is to standardize the presentation of financial statements, making it easier for investors and other stakeholders to compare them.
Income Statement Structure
IAS 1 provided limited specific rules for presenting the income statement, leaving each company to decide what items to present, resulting in significant differences between groups and making comparisons difficult. IFRS 18 provides clear guidance on the structure of the income statement, which must be presented following these three categories:
- Operating category;
- Investing category;
- Financing category.
Two existing categories from IAS 1 are also retained:
- Income taxes category;
- Discontinued operations category.
IFRS 18 also introduces new subtotals that must be presented:
- Operating result: presents the result related to the entity’s operating activities;
- Result before financing and income taxes: presents the result related to the entity’s operating and investing activities;
- Profit or loss (already presented in IAS 1).
Operating, Investing, and Financing Categories
The main change introduced by IFRS 18 is the requirement to group income statement items into three distinct categories. These categories will include the following transactions:
- Operating category: all transactions not related to the investing or financing categories must be presented in this category. This includes all revenues and expenses related to operations, regardless of whether they are volatile or unusual.
- Investing category: all revenues and expenses arising from assets that generate returns individually and independently of the business and other resources of the group. This includes rental income, income and expenses related to equity investments or to cash.
- Financing category: this category primarily includes interests related to the company’s financing activities.
Allocating transactions to these three categories may seem straightforward at first glance. However, it can have significant implications and raise important questions about many transactions. For example, a foreign exchange difference must be allocated to the operating category if it relates to a simple sale, or to the financing category if it relates to a loan in a foreign currency. This may require significant changes to the consolidation and reporting system, and to the ERP.
Management-defined Performance Measures
IFRS 18 introduces the requirement to present an appendix regarding management-defined performance indicators (also called MPM – Management Performance Measures). The appendix must include, among other things, for each indicator:
- A description of the information provided by the performance indicator;
- How it is calculated;
- A reconciliation with the income statement.
This appendix should enable investors to better understand how management measures the company’s performance.
Granularity of Items to be Presented in the Financial Statements or in the notes
The third area where IFRS 18 provides more detailed guidance concerns the granularity of items to be presented in the financial statements or in the notes. The new standard defines the items that can be aggregated and the labels for the lines and subtotals to be presented. The purpose of these new requirements is to prevent important information from being hidden and to present information in a faithful and consistent manner.
Additional Information:
We are at your disposal for any further information. If you need help for the implementation of IFRS 18, don’t hesitate to contact us and we will be pleased to analyze your situation together. Contact us: https://www.gaapex.ch/contact/
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