To improve the comparability and transparency of companies' performance reporting, the IASB is anticipated to release IFRS 18, a new Standard, in 2024. Scheduled to take effect in 2027, IFRS 18 will supersede IAS 1 Presentation of Financial Statements and establish guidelines for the presentation and disclosure of financial statements. The changes, primarily affecting the income statement, entail the following requirement:
- Categorize
income and expense items into classifications (i.e., operating, investing,
and financing).
- Present
subtotals for operating profit or loss, and profit or loss before
financing and income tax.
Furthermore, IFRS 18 introduces enhanced requirements
for the aggregation and disaggregation of expenses, new disclosure requirements
for management-defined
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 will no longer be a
specific requirement to disclose unusual income and expenses
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.
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.
To learn more about the upcoming IFRS changes, please
contact us.
