IFRS 18: upcoming changes in Presentation and Disclosure in Financial Statements

published on 14 October 2024 | reading time approx. 4 minutes

The IASB (‘International Accounting Standards Board’) has published the new accounting standard IFRS 18 ‘Presentation and Disclosure in Financial Statements’, which aims to improve companies' financial statement disclosures with a focus on the statement of profit or loss. This standard responds to the needs of stakeholders, who need comparable, transparent and consistent information about company performance.

The new standard will come into force on 1 January 2027, replacing the current IAS 1 ‘Presentation of Financial Statements’. Earlier application is, however, possible.

In a nutshell, IFRS 18 aims to improve financial reporting through:

New defined subtotals in the statement of profit or loss;
Disclosure of “Management-defined Performance Measures” (MPMs);
New principles for grouping (aggregation and disaggregation) of information.

In this way, IFRS 18 addresses the needs of stakeholders for more comparable and transparent information. In particular:

currently, the statement of profit or loss can vary in structure and content from company to company. The new standard, however, provides for defined subtotals in the statement of profit or loss in order to make companies' results easier for investors to compare;
many companies provide information about MPMs without explaining how they are calculated and why they are used. IFRS 18 requires companies to disclose certain information about MPMs in order to increase transparency as to how they are calculated and why they are used;
in order to ensure comparability and disclosure of financial statements, investors would like the information to be grouped more appropriately (aggregated or disaggregated). The new standard, therefore, defines which data should be included in the ‘primary’ financial statements or notes and which level of detail should be provided.

The first change of IFRS 18 concerns the subdivision of the statement of profit or loss into subtotals. IFRS 18 requires that the profit or loss be subdivided into three categories:

Operating;
Investing;
Financing

plus income taxes and discontinued operations.

In addition to this classification, the company has to present two defined subtotals in the statement of profit or loss:

Operating profit;
Profit before financing and income taxes.

These new requirements respond to investor feedback that variation in the structure and content of the statement of profit or loss makes it difficult to analyse and compare companies’ financial performance.

The second change of the new standard aims to improve transparency as to MPMs, the so-called alternative or non-GAAP performance measures (i.e. measures not defined by IFRS Accounting Standards) that are related to the statement of profit or loss.

In particular, MPMs are subtotals of income and expenses other than those listed by IFRS 18 or specifically required by IFRS Accounting Standards, that a company uses in public communications outside financial statements to inform investors about management’s view of an aspect of the financial performance of the company as a whole.

Some examples of MPMs may be adjusted profit, adjusted operating profit or adjusted EBITDA.

Under the new IFRS 18, companies will have to provide information on MPMs such as:

a reconciliation between MPMs and the most directly comparable subtotal under IFRS 18 or other IFRSs;
a description of how the MPM reflects management’s view and how the MPM is calculated;
an explanation of any changes in the company’s MPMs or in how it calculates its MPMs;
a statement that the measure reflects management’s view of an aspect of financial performance of the company as a whole and is not necessarily comparable to measures sharing similar labels or descriptions provided by other companies.

The third change of IFRS 18 provides for the adoption of new guidance on the grouping (aggregation and disaggregation) of information to be included in ‘primary’ financial statements and notes. According to investors, the way companies group information in financial statements does not always provide the information they need for their analysis — for example, some information is not shown in sufficient detail while other information is obscured with too much detail.

For this reason, IFRS 18 provides guidance on how transactions should be grouped together in each ‘primary’ financial statement line item and on the information to be disclosed in the notes, stating that companies should:

aggregate items with the same characteristics and disaggregate items with different characteristics;
group items so as not to obscure relevant information or reduce understanding of the information;
arrange items in the primary financial statements and the notes in such a way as to ensure a complementary and integrated reading of financial statement disclosures.