Introduction to IFRS 18: Presentation and Disclosure in Financial Statements

Introduction

IFRS 18 – Presentation and Disclosure in Financial Statements, issued by the IASB in April 2024, introduces new requirements for the presentation and disclosure of financial statements, with a particular focus on improving the presentation of the statement of profit or loss. It introduces defined income and expense categories, specified subtotals, enhanced aggregation and disaggregation requirements, and disclosures relating to management-defined performance measures.

IFRS 18 replaces IAS 1 – Presentation of Financial Statements, while certain requirements previously contained in IAS 1 have been retained in IFRS 18 or moved to other IFRS Accounting Standards.

Why Was IFRS 18 Introduced?

IFRS 18 was introduced to improve the presentation and disclosure of financial performance, particularly in the statement of profit or loss. It aims to provide users with more relevant, comparable and structured information by introducing defined income and expense categories, specified subtotals, improved aggregation and disaggregation, and enhanced disclosures about management-defined performance measures.

Objective and Scope

Objective: IFRS 18 aims to establish requirements for the presentation and disclosure of information in general purpose financial statements so that they provide relevant information that faithfully represents an entity’s assets, liabilities, equity, income and expenses.

Scope: The Standard applies to the presentation and disclosure of information in financial statements prepared in accordance with IFRS Accounting Standards. It covers general requirements for financial statements, the primary financial statements and notes, while specific recognition and measurement requirements continue to be addressed by other IFRS Accounting Standards.

IFRS 18 vs IAS 1 – Key Differences

Effective Date of Application

IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted. An entity that applies IFRS 18 for an earlier period is required to disclose that fact in its financial statements.

Complete Set of Financial Statements

Under IFRS 18, a complete set of financial statements comprises:

• • Statement(s) of financial performance for the reporting period.
• • Statement of financial position as at the end of the reporting period.
• • Statement of changes in equity for the reporting period.
• • Statement of cash flows for the reporting period.
• • Notes to the financial statements.
• • Comparative information for the preceding period.
• • Statement of financial position at the beginning of the preceding period, where required.

Primary Financial Statements vs Notes

Under IFRS 18, primary financial statements provide structured summaries of an entity’s recognised assets, liabilities, equity, income, expenses and cash flows, while notes provide material information necessary to understand those statements and supplement them with more detailed information, including appropriate disaggregation.

Aggregation and Disaggregation

Under IFRS 18, entities should aggregate items based on shared characteristics and disaggregate items with different characteristics to ensure that material information is clearly presented. The presentation and disclosure should provide useful structured summaries in the primary financial statements and detailed, material information in the notes, without obscuring material information.

Five Categories in the Statement of Profit or Loss

Under IFRS 18, income and expenses presented in the statement of profit or loss are classified into five categories:

• • Operating category
• • Investing category
• • Financing category
• • Income taxes category
• • Discontinued operations category

This classification is intended to provide a more structured presentation of an entity’s financial performance.

1. Operating Category

Under IFRS 18, the operating category includes all income and expenses that are not classified in the investing, financing, income taxes or discontinued operations categories. It generally represents the income and expenses arising from an entity’s main business activities and other operating activities.

2. Investing Category

Under IFRS 18, the investing category generally includes income and expenses arising from investments in assets that generate returns individually and largely independently of an entity’s other resources, subject to the specific classification requirements of the Standard.

3. Financing Category

Under IFRS 18, the financing category generally includes income and expenses arising from liabilities that result from transactions involving only the raising of finance, as well as certain other financing-related items specified by the Standard.

4 & 5. Income Taxes and Discontinued Operations

Under IFRS 18, income and expenses related to income taxes are classified in the income taxes category, while income and expenses relating to discontinued operations are classified separately in the discontinued operations category. These categories are presented separately from the operating, investing and financing categories in the statement of profit or loss.

Required Subtotals

Under IFRS 18, the statement of profit or loss is required to present specific subtotals to improve the understanding and comparability of an entity’s financial performance. The key required subtotals are:

• • Operating profit or loss
• • Profit or loss before financing and income taxes
• • Profit or loss

These subtotals provide a structured view of operating performance, performance before financing and tax effects, and the entity’s overall profit or loss.

Illustrative format of Statement of Financial Performance

(For Educational purposes only)

Operating Expenses — Nature / Function Presentation

Under IFRS 18, operating expenses are classified and presented in the statement of profit or loss in a way that provides the most useful structured summary of the entity’s expenses. For this purpose, an entity uses one or both of the following characteristics:

• • Nature of expenses
• • Function of expenses within the entity

Expenses by Nature

When expenses are classified by nature, the entity provides information about the operating expenses based on the nature of the economic resources consumed to accomplish its activities, without reference to the activities for which those resources were consumed. Examples include raw material expense, employee benefit expense, depreciation and amortisation.

Expenses by Function

When expenses are classified by function, the entity allocates and aggregates operating expenses according to the activity to which the consumed resource relates. For example, cost of sales is a function line item that combines expenses relating to an entity’s production or other revenue-generating activities, such as raw material expense, employee benefit expense, depreciation and amortisation.

Accordingly, the same type of expense may be allocated to different function line items. For example, employee benefit expenses may be allocated between cost of sales and research and development expenses. Similarly, a single function line item may include expenses of different natures, such as raw material expense, employee benefit expense, depreciation and amortisation.

Use of Both Nature and Function

In some circumstances, an entity may determine that presenting some expenses by nature and other expenses by function provides the most useful structured summary. Where both methods are used, the entity should label the resulting line items clearly so that users can understand which expenses are included in each line item.

The entity should also apply the chosen classification consistently from one reporting period to the next, unless a change is justified by the requirements of IFRS 18.

Management-Defined Performance Measures (MPMs)

Under IFRS 18, Management-Defined Performance Measures (MPMs) are subtotals of income and expenses used in public communications to communicate management’s view of an aspect of the entity’s financial performance that are not specifically required by IFRS Accounting Standards. Entities are required to disclose information about such measures in a single note, including their calculation and a reconciliation to the most directly comparable IFRS-defined subtotal or total.

Statement of Financial Position

Under IFRS 18, entities generally present current and non-current assets and liabilities separately, unless a presentation based on liquidity provides a more useful structured summary. The Standard specifies key line items to be presented, while allowing entities to add, combine or modify line items based on their nature and transactions to provide a useful structured summary of assets, liabilities and equity.

Items to be Presented in the Statement of Financial Position or Disclosed in the Notes

An entity shall present in the statement of financial position line items for:

• • Property, plant and equipment.
• • Investment property.
• • Intangible assets.
• • Goodwill.
• • Financial assets.
• • Portfolios of contracts within the scope of IFRS 17 that are assets.
• • Investments accounted for using the equity method.
• • Biological assets within the scope of IAS 41 Agriculture.
• • Inventories.
• • Trade and other receivables.
• • Cash and cash equivalents.
• • Assets classified as held for sale and assets included in disposal groups classified as held for sale.
• • Trade and other payables.
• • Provisions.
• • Financial liabilities.
• • Portfolios of contracts within the scope of IFRS 17 that are liabilities.
• • Current tax assets and liabilities.
• • Deferred tax assets and liabilities.
• • Liabilities included in disposal groups classified as held for sale.

The entity shall also present separately in the statement of financial position:

• • Non-controlling interests.
• • Issued capital and reserves attributable to owners of the parent.

Statement of Changes in Equity

Under IFRS 18, the statement of changes in equity presents total comprehensive income and provides a reconciliation of each component of equity between the beginning and end of the reporting period. It separately presents changes arising from profit or loss, other comprehensive income, and transactions with owners, including contributions, distributions and certain changes in ownership interests.

Information to be Presented in the Statement of Changes in Equity

An entity shall present a statement of changes in equity as required by paragraph 10 of IFRS 18. The statement of changes in equity shall include:

1. total comprehensive income for the reporting period, showing separately the total amounts attributable to owners of the parent and to non-controlling interests;
2. for each component of equity, the effects of retrospective application or retrospective restatement recognised in accordance with IAS 8; and
3. for each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately (as a minimum) presenting changes resulting from:
   1. profit or loss;
   2. other comprehensive income; and
   3. transactions with owners in their capacity as owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control.

Notes and Disclosure Requirements

Under IFRS 18, the notes to the financial statements provide material information that is necessary to understand the primary financial statements. They include additional details and disaggregation of information presented in the primary financial statements, along with other disclosures required by IFRS Accounting Standards. The notes should be presented in a systematic manner, with cross-references between related information to improve understandability.

An entity shall disclose in the notes:

1. information about the basis of preparation of the financial statements (see paragraphs 6A–6N of IAS 8) and the specific accounting policies used (see paragraphs 27A–27I of IAS 8);
2. information required by IFRS Accounting Standards that is not presented in the primary financial statements; and
3. other information that is not presented in the primary financial statements, but is necessary for an understanding of any of them (see paragraph 20 of IFRS 18).

Comparative Information and Reclassification

Under IFRS 18, entities are generally required to present comparative information for the preceding period for amounts reported in the current financial statements.

Transition and Effective Date

IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted. An entity applying IFRS 18 early is required to disclose that fact. The Standard is generally applied retrospectively, with comparative information for the preceding period restated in accordance with the specific transition requirements of IFRS 18.

Key Takeaways

• IFRS 18 replaces IAS 1 and aims to improve the presentation and disclosure of financial performance.
• 1. It introduces five categories for income and expenses in the statement of profit or loss.
• 2. It requires specified subtotals, including operating profit or loss.
• 3. It strengthens requirements for aggregation and disaggregation of information.
• 4. It introduces specific disclosure requirements for Management-Defined Performance Measures (MPMs).
• 5. It provides clearer requirements for the presentation of operating expenses by nature or function.
• 6. It enhances the role of notes in providing material and detailed information to users.
• 7. IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted.

Frequently Asked Questions (FAQs)

1. What is IFRS 18?

IFRS 18 is the Accounting Standard that sets requirements for the presentation and disclosure of information in financial statements, with particular focus on improving the presentation of financial performance.

2. Does IFRS 18 replace IAS 1?

Yes. IFRS 18 replaces IAS 1 – Presentation of Financial Statements and introduces new requirements for presentation and disclosure.

3. When will IFRS 18 become effective?

IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted.

4. What are the five categories of income and expenses under IFRS 18?

The five categories are operating, investing, financing, income taxes and discontinued operations.

5. What are the key new subtotals required under IFRS 18?

The key required subtotals include operating profit or loss and profit or loss before financing and income taxes, along with profit or loss.

6. What are Management-Defined Performance Measures (MPMs)?

MPMs are subtotals of income and expenses used in public communications to communicate management’s view of an aspect of the entity’s financial performance that are not specifically required by IFRS Accounting Standards.

7. How does IFRS 18 address operating expenses?

Operating expenses are presented using nature, function, or both, based on which provides the most useful structured summary of the entity's expenses.

8. What is the purpose of aggregation and disaggregation under IFRS 18?

The requirements aim to ensure that material information is clearly presented by aggregating items with shared characteristics and disaggregating items with different characteristics.

9. Is IFRS 18 applied retrospectively?

Yes. IFRS 18 is generally applied retrospectively, subject to its specific transition requirements.

10. What is the main objective of IFRS 18?

The main objective is to provide users with more relevant, structured and comparable information about an entity’s financial performance and position through improved presentation and disclosure requirements.

Disclaimer

This article is intended solely for educational and informational purposes and provides a general overview of IFRS 18 based on the applicable requirements of the Standard. While reasonable care has been taken to present the information accurately, the article should not be considered a substitute for the official IFRS Accounting Standards or professional advice. Readers should refer to the latest applicable standards, amendments and official guidance and seek appropriate professional advice based on their specific circumstances before making any accounting or reporting decisions.