In April 2024, the International Accounting Standards Board (IASB) issued IFRS 18, ‘Presentation and Disclosure in Financial Statements’. This new standard is set to replace the long-standing IAS 1 and will significantly alter how companies present their financial performance. The goal is to make financial statements more transparent and comparable for investors.
When does it take effect?
While IFRS 18 won’t change how companies measure their financial performance, it will significantly impact how they present and disclose it. Here are the main highlights:
- New Structure for the Profit or Loss Statement: IFRS 18 introduces a more structured format for the statement of profit or loss. It requires income and expenses to be classified into three new, defined categories: operating, investing, and financing. This is complemented by the existing categories for income taxes and discontinued operations.
- Mandatory Subtotals: To improve comparability between companies, the new standard requires the presentation of two new subtotals in the profit or loss statement:
- Operating profit or loss.
- Profit or loss before financing and income taxes.
- Transparency on Management-Defined Measures: The standard introduces new disclosure requirements for “Management-defined Performance Measures” (MPMs). These are subtotals of income and expenses, often referred to as non-GAAP measures (like “adjusted operating profit”), that companies use in public communications. Under IFRS 18, companies must provide details in a single note about how these measures are calculated and why management believes they are useful.
- Better Grouping of Information: IFRS 18 provides enhanced principles for how companies should group (aggregate) and separate (disaggregate) information throughout their financial statements. This aims to ensure that financial statements provide a useful, structured summary without obscuring important details.
Why it Matters
For investors, IFRS 18 promises a clearer and more consistent view of a company’s financial performance, making it easier to compare different companies and make informed decisions. For businesses, while net profit won’t change, the implementation will require a detailed analysis of how income and expenses are classified and may necessitate changes to internal systems and processes.
