Preparing for IFRS 18

This column has previously discussed the incoming IFRS Accounting Standard, IFRS 18, Presentation and Disclosure in Financial Statements. This is scheduled to be issued in 2024 and will replace IAS 1, Presentation of Financial Statements. As mentioned, a significant change will be the introduction of new subtotals, and recording income and expenses into newly specified categories.

Cashflows

In addition to these new subtotals and categories, IFRS 18 will have an impact on the statement of cashflows. As a result of specifying that operating profit will now be a subtotal in the statement of profit or loss, this will change the statement of cashflows for many entities. Those entities using the indirect method for reporting cashflows from operating activities will now be required to use the operating profit subtotal as its starting point.

There is also further clarification on cashflow items where judgment previously existed. For businesses without a specified main business activity, such as providing finance to customers, interest and dividends paid will now be classified as a financing activity, while interest and dividends received will be classified as an investing activity.

Disclosures

A change from IAS 1 is that there is no longer the requirement to present separately each material class of similar items, with no reference to material classes in IFRS 18. The primary aim of disaggregating the information in the statement of profit or loss by introducing the new categories is to ensure useful information is produced and potentially to improve comparability between entities.

While the requirement of presenting material classes of items separately is no longer stated, there are two requirements that it is hoped will achieve the same outcome. These are requirements to disclose any disaggregation of items if the resulting information is material, and to present items to ensure the primary financial statements give a useful structured summary of an entity’s assets, liabilities, equity, income and expenses.

An item initially proposed under the Exposure Draft that has since been removed relates to ‘unusual income and expenses’, which proposed that all entities disclosed such items in a single note. There will no longer be a specific requirement to disclose these, but the characteristic of non-recurrence will be listed as a characteristic that could lead to separate presentation or disclosure.

Management performance

The IASB has been looking closely at management performance measures to make the primary financial statements and associated disclosures more useful to the stakeholders. The proliferation of alternative performance measures within annual reports is a significant issue, leading to confusion as to which figures users should focus on as the ‘correct’ or ‘important’ ones.

IFRS 18 will define management-defined performance measures as measures of subtotals of income and expenses that communicate management’s view of an aspect of an entity’s financial performance. It will be made clear that totals and subtotals specified by IFRS Standards (including operation profit before depreciation, amortisation and specified impairments) are not management-defined performance measures.

There is a rebuttable presumption that subtotals used in communications outside of financial statements is covered by this, as it represents management’s view of an aspect of the entity’s financial performance. The scope of these communications has been narrowed and oral communications, transcripts and social media posts are not included in these communications.

Specific disclosures

Under IFRS 18, entities will be required to disclose information about management-defined performance measures in a single note to the financial statements. If the measures are the same as part of the operating segment information disclosed under IFRS 8, Operating Segments, then this can be included within the same note as the operating segment information.

The note should include an explanation of how the measure is calculated and how it provides useful information about the entity’s performance. The entity will also be required to provide a reconciliation between the measure and the most directly comparable subtotal, or total specified in IFRS Standards.

This reconciliation will disclose the income tax effect and any effect on non-controlling interests of items within this reconciliation. As the tax impact of this could become complex, there will be application guidance provided on this.

If an entity changes the calculation of the measure, introduces a new measure or removes a previously disclosed measure, there must be an explanation to understand the change and the reasons behind this. Comparative information should be provided unless it is impracticable to do so. If this is the case, the entity must disclose this.

IFRS 18 is projected to be applicable for annual periods beginning on or after 1 January 2027 and will require entities to apply the principles retrospectively.