IFRS 18 Presentation and Disclosure in Financial Statements was issued by the International Accounting Standards Board (IASB) and will be effective for annual reporting periods beginning on or after January 1, 2027, with early adoption permitted. This standard aims to enhance transparency, comparability, and usability in financial reporting for investors and other stakeholders. It replaces IAS 1 Presentation of Financial Statements but retains many of its principles.
IFRS 18 will affect ALL companies in all industries. Although IFRS 18 will not affect how companies measure financial performance, it will affect how companies present and disclose financial performance.
IFRS 18 aims to improve how companies communicate in their financial statements, with a focus on information about financial performance in the statement of profit or loss. IFRS 18 is accompanied by limited amendments to the requirements in IAS 7 Statement of Cash Flows.
Source: IFRS Foundation (2024) Project Summary: IFRS 18 Presentation and Disclosure in Financial Statements
IFRS 18 introduces 3 sets of requirements:
Statement of profit or loss
- Classify income and expenses into 3 standardised categories: Operating (core business activities); Investing (income and expenses from investment assets); and Financing (income and expenses from financial liabilities)
- Present 2 new defined subtotals – operating profit and profit before financing and income taxes
Source: IFRS Foundation (2024) Project Summary: IFRS 18 Presentation and Disclosure in Financial Statements
Disclosure of management-defined performance measures (MDPM) in the notes to financial statements
- Requires disclosure of management’s specific performance metrics only (subtotals of income and expenses other than those listed by IFRS 18 or specifically required by IFRS) – for example:
- Adjusted profit
- Adjusted operating profit
- Adjusted earnings before interest, tax, depreciation and amortisation (Adjusted EBITDA)
- Mandates reconciliation between MDPM and IFRS-compliant totals
- Requires other disclosures, including how each MDPM is calculated, what the MDPM communicates about the entity’s financial performance, and any changes made to the MDPMs in the year.
Enhanced requirements for grouping (aggregation and disaggregation) of information
- Entities can classify operating category expenses by
- function (e.g. cost of goods sold, distribution costs, administrative expenses, etc.); or
- nature (e.g. employee benefits, raw materials, asset impairments, advertising costs, etc.)
- Entities may decide that presenting some expenses by nature, and other expenses by function, provide the most useful information to users; for example, the statement of profit or loss (P/L) may feature “cost of sales” and “goodwill impairment” as line items.
- Entities that classify operating categories expenses by function are required to disclose in the notes to the financial statements, the amount of depreciation, amortisation, employee benefits, impairment losses and write-downs of inventories included in each line item in the operating category.
- Disclosure requirements prioritise material information to users while reducing unnecessary details.
- Entities must provide clear documentation of assumptions and methodologies underlying key figures.
Other changes introduced by IFRS 18
The IASB has made limited changes to the statement of cash flows as defined in IAS 7, notably:
- Requiring companies to use the operating profit subtotal as the starting point for reporting cash flow from operating activities using the indirect method; and
- Removing the presentation alternatives for interest and dividend cash flows for most companies – dividends and interest paid are generally classified in cash flows from financing activities, and dividends and interest received are generally classified in cash flows from investing activities.
Implementation Challenges
While IFRS 18 presents significant advantages, its adoption will require:
- System upgrades: Companies need robust systems to capture, analyse, and present financial data in the prescribed format.
- Staff training: Finance teams must be trained to align reporting processes with IFRS 18 requirements.
- Cost implications: Initial compliance costs may rise due to the need for systems, training and consulting services for allocating foreign exchange differences to each of the categories in P/L; and calculating the income tax effect for each adjusting item in the MDPM reconciliation.
The Road Ahead
IFRS 18 marks a significant milestone in the evolution of financial reporting, introducing a higher standard for presentation and disclosure. With its emphasis on transparency and standardisation, the Standard aims to enhance the quality and comparability of financial information, benefiting investors, stakeholders, and the broader financial community. This global alignment in financial reporting practices also contributes to fostering trust and elevating the credibility of organisations worldwide.
Despite the effective date of January 1, 2027, appearing to be distant, companies effectively have only two years from today to prepare for compliance. A critical aspect of IFRS 18 is its requirement for restating comparative financial information for the first year of application. This stipulation means that companies must begin capturing and organising data in alignment with the new framework as early as 2026.
To ensure a smooth transition, companies should start assessing their readiness for the new Standard, including making any accounting systems changes and educating internal and external stakeholders, as early as possible.