In the Deller household, we are awaiting the arrival of our first child, which is an exciting and terrifying moment. It’s amazing how quickly the discussion turns from acquiring all of the required nappies and equipment to preparing for saving for their future before they’re even born. I am often told that the time will go quickly and soon enough our first-born will be 18, all grown up and ready to leave home.
A similar coming of age is approaching in the world of financial reporting, with the first-born about to go through a similar change. IAS 1, Presentation of Financial Statements, is about to become an IFRS and turn 18, as it is being replaced by IFRS 18, Presentation and Disclosure in Financial Statements, likely to be issued in early 2024.
A major change relates to two new subtotals in the statement of profit or loss
The replacement standard is going to usher in some significant changes in terms of the statement of profit or loss and disclosures for many entities. This first of two articles will focus on some of the major changes proposed to the statement of profit or loss.
It is important to note that while there is not likely to be any significant changes made at this stage to the current draft of IFRS 18, the proposals are still classed as tentative until the final standard is issued.
A major change relates to two new subtotals that are to be included in the statement of profit or loss, namely ‘operating profit’ and ‘profit before financing and income tax’. These subtotals would also mean that an entity would present income and expenses recorded in several specified categories: operating, investing, financing, income taxes and discontinued operations. The allocation of items between operating, investing and financing will be one of the key changes that entities will have to be prepared for.
Some items could be difficult to assess, as they could fit in several categories
The operating category is really seen as the default category for income and expenses. It comprises all income and expenses relating to an entity’s main business activities, whether they are volatile and unusual or not.
This could mean that income or expenses from investments or from providing finance to customers are included here if that is the main business activity of the entity.
An entity will need to use its judgment in assessing whether it invests in assets or provides financing to customers as a main business activity. The decision should be based on factors such as the operating performance measures used in public communications, and information about segments if IFRS 8, Operating Segments, is applied.
Entities will continue to be required to present operating expenses based on either their nature or function, or a mixed presentation, whichever provides the most useful information. Entities presenting expenses by function will be required to disclose what types of expenses (based on their nature) are included in each functional line item. They will also be required to produce information about operating expenses by nature in a single note. Entities will be required to disclose the amounts of depreciation, amortisation, employee benefits, impairments and write-downs of inventories included in each function line item.
Entities that present cost of sales will be required to include within cost of sales the carrying amount of inventories recognised as an expense.
The investing category will include income or expenses from assets that generate returns individually and largely independently from other resources held by the entity. Such assets would include associates or joint ventures, and any income or expenses from cash and cash equivalents would also be included.
Any income or expenses arising from the disposal of individual assets or disposal groups (including items held for sale) would not be classified here unless the income or expenses from the assets were also recorded in the investing category. The income or expenses arising from the disposal would be recorded in the same category as the income and expenses from the item while it was being used by the entity prior to the decision to dispose of it.
The financing category will include income or expenses from liabilities that arise in the raising of finance. As stated earlier, entities providing finance to customers as a main activity are unlikely to use this category. As a result, these entities would also not present the subtotal ‘profit or loss before financing and income tax’ if they classify these items in the operating category.
Some items could be difficult to assess, as they could potentially fit in several categories. One such item relates to foreign exchange differences. The tentative decision is to record the foreign exchange difference in the same category as the income or expenses from the items that gave rise to the differences, unless doing so would involve undue cost or effort. This means that foreign exchange differences on liabilities used to raise finance would go in the financing category, and foreign exchange differences on tax balances would go into the income tax category.
In year one, a reconciliation between each line item in IAS 1 and IFRS 18 will have to be disclosed
IFRS 18 is currently projected to be applicable for annual periods beginning on or after 1 January 2027. An entity will be required to apply IFRS 18 retrospectively.
In the first year of application, an entity will be required to disclose a reconciliation between each line item in the statement of profit or loss presented by applying IAS 1, and each line item presented by applying IFRS 18. This would be required for the comparative period immediately preceding the period in which IFRS 18 is first applied. It is permitted, but not required, for the first period in which IFRS 18 is first applied.
Watch and learn
Watch Adam Deller’s series of videos explaining the fundamentals of IFRS