Introduction
The International Accounting Standards Board (IASB) has taken a significant leap towards enhancing transparency and comparability in financial reporting with the issuance of IFRS 18 – Presentation and Disclosure in Financial Statements, replacing the longstanding IAS 1. The new standard, issued in April 2024 and effective from 1 January 2027, is not merely a cosmetic overhaul. Instead, it addresses structural shortcomings in financial statements and aligns financial reporting more closely with the needs of users—particularly investors and analysts.
Why a New Standard Was Needed
Over the years, global stakeholders consistently raised concerns that financial statements lacked comparability, particularly in the income statement. While companies had considerable latitude in structuring their statements, this freedom inadvertently undermined uniformity across sectors. More importantly, key performance subtotals such as “operating profit” were neither defined nor consistently applied.
IFRS 18 responds directly to these issues by redefining how entities present their financial performance, bringing in more rigour, discipline, and comparability.
Key Highlights of IFRS 18
1. Introduction of New Income Statement Categories
IFRS 18 mandates a reorganization of the income statement into three defined categories:
This classification aims to provide clarity on an entity’s performance from its main business, an area where stakeholders often find the most decision-useful insights.
2. Mandatory Subtotals Including Operating Profit
The standard introduces mandatory subtotals such as “operating profit” and “profit before financing and income taxes”, closing the gap left by IAS 1, which allowed wide discretion in such disclosures. This change brings much-needed consistency, enabling like-for-like comparison across companies and industries.
3. Management-Defined Performance Measures (MPMs)
IFRS 18 introduces disclosure requirements around MPMs—non-GAAP measures that management uses to explain financial performance (e.g., adjusted EBITDA). These measures must now be reconciled to the nearest IFRS-compliant subtotal and accompanied by an explanation of their purpose, ensuring they are no longer left unregulated or inconsistently presented.
4. Enhanced Aggregation and Disaggregation Requirements
Entities are now required to present information at a level of detail that is neither too aggregated nor excessively granular. Judgement must be applied carefully, with clear disclosure of the nature and function of expenses—classified either by nature or function, but with reconciliation if the functional method is used.
5. Statement of Cash Flows – Minor but Meaningful Changes
While IFRS 18 does not overhaul the cash flow statement, it aligns terminology and classification principles with those of the income statement. The aim is to improve internal coherence across primary financial statements.
Potential Impact on Indian Companies
Although India has not yet formally adopted IFRS 18 into Ind AS, one must anticipate that similar amendments may be introduced in the future. Companies preparing for IPOs or operating globally may consider early voluntary alignment to meet investor expectations. The emphasis on consistent subtotals and transparency in performance measures will be particularly beneficial in investor presentations, M&A due diligence, and credit assessments.
Challenges in Implementation
Transitioning to IFRS 18 will not be free from challenges:
- System and Process Changes: Finance teams must reassess ERP configurations, reporting templates, and consolidation processes.
- Training and Change Management: Auditors, preparers, and analysts will need to be trained in the new framework to ensure consistent application.
- Judgement in Classification: Entities will need to exercise professional judgement, especially in demarcating operating and investing components—a possible area of contention during audits.
Conclusion
IFRS 18 replaces IAS 1 Presentation of Financial Statements as the primary source of requirements in IFRS accounting standards for financial statement presentation which will provide better information to users. Some of the changes it introduces include new presentation requirements related to the statement of profit or loss, including three new categories for items of income and expense – operating, financing, investing.
IFRS 18 requires companies to improve labelling, as well as aggregation and disaggregation of information in financial statements. Companies will also need to disclose management-defined performance measure in the notes to the financial statement.
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