Preparing for the new IFRS 18: Presentation and disclosure in financial statements

Background

Aiming to increase comparability, transparency, and coherence in financial reporting, on 09 April 2024, the International Accounting Standards Board (IASB) published a new accounting standard: International Financial Reporting Standards (IFRS) 18 “Presentation and Disclosure in Financial Statements”. 

IFRS 18 is intended to replace International Accounting Standard (IAS) 1 “Presentation of Financial Statements”, and introduces a new structure for the presentation of the statement of profit or loss, constituting one of the key changes introduced by the new standard. The new accounting standard will apply to fiscal years beginning on or after 01 January 2027. Since retrospective application for 2026 is required, entities should become familiar with the new requirements at an early stage, because the comparative period must also be presented in accordance with the standard. Early application is possible but must be disclosed.

The changes introduced by IFRS 18 primarily concern new presentation requirements for the statement of profit or loss, the mandatory disclosure of management-defined performance measures (MPMs) in the notes, and amendments to the statement of cash flows.

Changes to the statement of profit or loss

IAS 1, the predecessor to IFRS 18, contains only limited guidance on the structure of the statement of profit or loss. The resulting diversity of formats for statements of profit or loss makes it difficult to compare the financial statements of different entities. To address this and enhance transparency, IFRS 18 introduces a mandatory structure for the statement of profit or loss, under which expenses and income must be classified into five categories. This aligns the structure of the statement of profit or loss more closely with that of the statement of cash flows.

Expenses and income in the statement of profit or loss are classified into the following five subtotals:

1. Operating category;
2. Investing category;
3. Financing category;
4. Income taxes category; and
5. Discontinued operations category.

Expenses and income attributable to the entity’s main operating activities, which do not fall into any of the other categories, are classified as operating expenses and income. Expenses and income related to assets that generate returns independently of other resources are classified as investing expenses and income. Expenses and income incurred solely to raise capital are classified as financing expenses and income.

Changes to the cash flow statement

IFRS 18 also introduces changes to the presentation of the statement of cash flows. When applying the indirect method, operating profit will be used as the initial value for the cash flow statement instead of profit for the period. Furthermore, the previous option to allocate interest and dividend payments to either operating cash flows or cash flows from investing activities will no longer apply. Interest and dividends paid will be recognised within cash flows from financing activities, while interest and dividends received will be allocated to cash flows from investing activities. 

Management-defined performance measures

The mandatory disclosure of management-defined performance measures (MPMs) is another significant new feature of IFRS 18. These financial performance indicators are intended to represent expenses or income used in communications outside the IFRS financial statements, and to reflect the entity’s performance from management’s perspective. Performance measures already required to be disclosed under IFRS are excluded. 

This means that explicitly required disclosures, such as operating profit, cannot be used as MPMs. An MPM could, for example, be adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA). The selected MPMs must be defined in the notes. In addition, the calculation of the measure, a reconciliation to the nearest IFRS measure, and the justification of its relevance must be presented. 

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Boris Michels (CPA, CVA, Tax Advisor) is Senior Partner in the Audit Department of nbs partners in Hamburg and Global Chairperson of the GGI ARC Practice Group. With more than 20 years of experience, Boris is responsible for international assignments and quality control.