Regulatory updates

Currently, financial statement presentation under IFRS accounting is based on IAS 1, Presentation of Financial Statements. Considering that IAS 1 does not prescribe a specified structure for the income statement, the financial statements (majorly, the statement of profit and loss) of companies are not comparable.

With an aim to improve how companies communicate in their financial statements, with a focus on information about financial performance in the statement of profit or loss, in April 2024, the International Accounting Standards Board (IASB) issued IFRS 18 Presentation and Disclosure in Financial Statements. IFRS 18 would be effective from 1 January 2027 (however, early application is permitted). IFRS 18 would replace IAS 1. Though IFRS 18 will not affect how companies measure financial performance, it will affect how companies present and disclose financial performance. It is expected that IFRS 18 would impact all companies in all industries.

IFRS 18 aims to improve financial reporting by:

• Requiring additional sub-totals in statement of profit and loss – IFRS 18 requires a company to classify income and expenses into operating, investing and financing activities, including income taxes and discontinued operations. Companies are required to report the newly defined ‘operating profit’ subtotal which is an important measure for investors’ understanding of a company’s operating results, (i.e. investing and financing activities are specifically excluded) and an important starting point for forecasting future cash flows. The standard also requires companies to analyse their operating expenses directly on the face of the income statement – either by nature, by function or using a mixed presentation. This presentation provides a ‘useful structured summary’ of those expenses. If any items are presented by function on the face of the income statement (e.g., cost of sales), then a company provides more detailed disclosures about their nature. Another sub-total required to be disclosed includes profit before financing and income taxes.

• Management Performance Measures - IFRS 18 now requires some of the ‘non-GAAP’ measures to be reported in the financial statements. It introduces the concept of MPMs14 as:

• Subtotals of income and expenses (other than that listed in IFRS 18 or any other IFRS standard);
• That a company uses in public communications outside the financial statements; and
• That reflects management’s view of financial performance.

For each MPM presented, companies will need to explain in a single note to the financial statements why the measure provides useful information, how it is calculated and reconcile it to an amount determined under IFRS Accounting Standards.

• Management Performance Measures - IFRS 18 now requires some of the ‘non-GAAP’ measures to be reported in the financial statements. It introduces the concept of MPMs¹⁴ IFRS 18 defines management performance measures (MPMs); these measures are currently commonly known as non-GAAP measures, alternative performance measures (APMs) or key performance indicators (KPIs). as:

• Grouping of information in financial statements - IFRS 18 sets out enhanced guidance on how to organise information and whether to provide it in the primary financial statements or in the notes and sets out principles for determining the level of detail needed for the information. IFRS 18 also requires companies to provide more transparency about operating expenses, helping investors to find and understand the information they need. Companies are discouraged from labelling items as ‘other’ and will now be required to disclose more information if they continue to do so.

• Transitional provisions: Companies would be required to apply the new requirements of INRS 18 in the interim financial statements in the initial year of application, and to restate comparative information for the prior year (‘apply IFRS 18 retrospectively’).

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To access the text of the standard, please click here