The publication of a new IFRS Accounting Standard is always a big deal, but IFRS 18 is bigger than most, because it is about the presentation of financial statements and so affects everyone who uses IFRS. This technical briefing explores the key details of the new standard and takes a look at what changes it will bring in its wake, and how those could affect you and your organisation or clients.
IFRS 18 TECHNICAL BRIEFING The publication of a new IFRS Accounting Standard is always a big deal, but IFRS 18 is bigger than most, because it is about the presentation of financial statements and so affects everyone who uses IFRS. This technical briefing explores the key details of the new standard and takes a look at what changes it will bring in its wake, and how those could affect you and your organisation or clients.
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Contents List
4 6
Why the need for IFRS 18?
The structure of the statement of profit or loss
10 11 12 14 16 18
Changes to required disclosures
Management Performance Measures
Required inclusion in the financial statements Aggregation and disaggregation of key numbers
How does this work in practice?
Summary
Why the need for IFRS 18?
As the number of the standard might suggest, IAS 1 was the very first standard in the IFRS framework. As something of an oddity, it was even published before the IFRS Conceptual Framework. Perhaps because of this it includes some references which might be regarded as conceptual in nature. IAS 1 concerns the high-level content of financial statements including the disclosure notes that form an integral part “ IFRS 18 is a really big deal, because it affects pretty much everybody who is using IFRS as a reporting framework, because it’s about the presentation of the financial statements.
of them. In fact, it could be seen as part of a trilogy of standards that collectively form high-level guidance on the general contents of financial statements:
IAS 1 Presentation of Financial Statements. IAS 7 Statement of Cash Flows. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
1.
2. 3.
This trilogy of high-level standards can be contrasted with the more detailed standards that make up the bulk of the IFRS framework. The latter tends to deal with more specific issues, such as accounting for foreign currency transactions, property, plant and equipment or intangible assets for example.
IFRS 18 | WHY THE NEED FOR IFRS 18?
4
So why the need for IFRS 18?
If you are already familiar with IAS 1, you will recognise much of what is in IFRS 18 Presentation and Disclosure in Financial Statements. However, there are some significant additions and changes which are important and these in particular are the focus of this technical briefing. IFRS 18 is being introduced in response to stakeholders asking for better information on issues within the profit or loss account.
The official justification for the introduction of IFRS 18 is that stakeholders had asked for better information on issues within the profit or loss account in particular. This in itself is interesting. Many of the IFRS Accounting Standards concentrate on the balance sheet, though of course there is an interaction between items within this particular statement, the balance sheet and the profit or loss account. However, the profit or loss account is important to investors. They stand to benefit either from the payment of dividends or capital growth which is driven by earnings. Reading between the lines we might think that there have been occasions in the past when in some cases the information in the profit or loss account was not quite as good as it should have been.
IFRS 18 | WHY THE NEED FOR IFRS 18?
5
The structure of the statement of profit or loss
There is a particular focus on the profit or loss account in IFRS 18. Before looking in detail at the changes, some important concepts have been confirmed in IFRS 18. In particular, all items of income or expense must be reported through profit or loss unless another specific IFRS requires or permits otherwise. The end result of this will be that the total of all income and expenses other than those reported “below the line” in other comprehensive income (or dealt with directly through equity) will result in the operating profit or loss for the reporting period. So far, so straightforward. Where matters become somewhat more interesting is how these should be reported in detail. IFRS 18 requires that items in profit or loss must be classified in one of five groups.
These are:
The operating category. The investing category. The financing category. The income taxes category. The discontinued operations category.
1. 2. 3. 4. 5.
The operating category is a bit of a catch-all category.
In line with IFRS practice in other areas (for example, the distinction between current and non-current assets and liabilities) if an item is not included in one of the four other categories, then it should be included in the operating category. In other words, the operating category is a residual default category.
IFRS 18 | THE STRUCTURE OF THE STATEMENT OF PROFIT OR LOSS
6
An important clarification is that it is necessary in some specific cases to think very carefully about what the main area of operations for some businesses might be. For example, a business investing in certain types of assets or providing financing to customers, would include items which might for others sit in investing or financing categories in the operating category, because the transactions involved reflect the main business activities of the entity. Context is all. The investing category is used where an organisation is investing in something outside of its main business.
There are three specific scenarios identified by IFRS 18 which may be appropriate. These are:
Income and expenditure from investments in associates, joint ventures and unconsolidated activities. Income and expenditure from cash and cash equivalents. Income and expenditure from specific assets if they generate a return that is largely separate from the entity’s main business activities.
1.
2.
3.
The kind of things you might find here are rental incomes from investment properties or the share of profits or losses from associates or joint ventures. However, things like depreciation on assets held as part of the main business activity would be regarded as operating expenses.
Think carefully about the main area of operations before classifying items
IFRS 18 | THE STRUCTURE OF THE STATEMENT OF PROFIT OR LOSS
7
The structure of the statement of profit or loss (continued)
The financing category includes income and expenses from things like bank loans or bonds, indeed any interest charges arising from liabilities of this general nature. IFRS 18 provides general guidance on which categories items should be included in, though in common with IAS 1 there is not too much prescription on how to report items at the detailed level. However, there is a list of items that must be shown as line items in the statement of profit or loss to be found in paragraphs 75 to 77 of IFRS 18. IFRS 18 also makes mention of other comprehensive income, those gains or losses which for whatever reason do not go to profit or loss, in line with previous requirements as per the soon to be redundant IAS 1.
IFRS 18 provides general guidance on which categories items should be included in, though in common with IAS 1 there is not too much prescription on how to report items at the detailed level.
IFRS 18 | THE STRUCTURE OF THE STATEMENT OF PROFIT OR LOSS
8
You might recognise the categories of operating, investing and financing as be - ing consistent with those already used by IAS 7 on cash flow statements; and there is indeed a tweak to IAS 7 as a result of the release of IFRS 18. Previously there was more flexibility in terms of which group to put cash flows from dividends and interest paid and received in. Interest payments for example would now go under the financing category in the profit or loss category, whereas IAS 7 previously permitted inclusion in any of the operating, investing or financing activities, depending on the context, provided that the entity reported them consistently when comparing one period to the next.
There are also important differences to the way in which sub-totals are presented in the income statement.
Two new sub-totals are required:
Operating profit. Profit before financing and income taxes.
1. 2.
Press releases which accompany the publication of IFRS 18 make a bold claim: “ IFRS 18 will improve communication in the financial statements
IFRS Press Release April 2024
IFRS 18 | THE STRUCTURE OF THE STATEMENT OF PROFIT OR LOSS
9
Changes to required disclosures
Disclosures are a key part of all financial statements prepared under IFRS. IFRS 18 specifically mentions what should be included in what is called the primary financial statements.
Comparative information in respect of the previous period. A statement of financial position at the beginning of the preceding period if the entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements. This is generally quite similar to the previous guidance, but there is one significant change… mentions what should be included in what is called the primary financial statements. “ IFRS 18 specifically
These are:
A statement of financial performance for the reporting period with profit or loss and other comprehensive income separately shown. A statement of financial position at the end of the reporting period. A statement of changes in equity for the reporting period. A statement of cash flows for the reporting period. Notes for the reporting period.
IFRS 18 | CHANGES TO REQUIRED DISCLOSURES
10
Management Performance Measures
IFRS 18 includes a new requirement to include disclosures of management- defined performance measures in the financial statements. Management should identify such management-defined performance measures (MPMs). Specifically, these are a subtotal of income and expenses that is used in any public communication and is used to communicate to investors management’s view of an aspect of the financial performance of the entity as a whole. Information on MPMs should be included in a single note in the financial statements.
It should involve an explanation of why management believes it provides useful information, a description of how it is calculated, a reconciliation between the MPM and the most directly comparable subtotal required by IFRS 18 and a description of how the entity manages the income tax effect. Management-defined performance measures should be identified.
IFRS 18 | MANAGEMENT PERFORMANCE MEASURES
11
Required inclusion in the financial statements
The requirement to include revenue and expenditure in operating, investing or financing activities is a new development when compared to the requirements of IAS 1. Below that though the reporting entity has a wide range of flexibility in terms of the classifications it uses in the breakdown of items included in the profit or loss account. It is up to the reporting entity to use its judgment to decide what is most appropriate in the context of their own particular environment. That said there are some items which must be specifically disclosed in the financial statements. These are covered in paragraphs 75 to 77 of IFRS 18. They are as follows:
Operating expenses, using either the functional or nature of expenses approach. Paragraph 82 further states that if the function of expenses approach is used then a cost of sales figure must also be shown and there should be a qualitative explanation of the nature of the items involved. The share of the profit or loss of associates and joint ventures accounted for using the equity method. Income tax expense or income. A single amount for the total of discontinued operations (see IFRS 5). There are then some disclosures required which cross-refer to specific other IFRS Standards, specifically IFRS 9 and IFRS 17. Whilst IFRS 17 deals specifically with the fairly niche area of insurance contracts, IFRS 9 which deals with financial instruments might have more general application.
IFRS 18 | REQUIRED INCLUSION IN THE FINANCIAL STATEMENTS
12
With regard to IFRS 9 specific disclosures are required as follows: Interest revenue calculated using the effective interest method. Impairment losses (including reversals of impairment losses or impairment gains) determined in accordance with Section 5.5 of IFRS 9. Gains and losses arising from the derecognition of financial assets measured at amortised cost. Any gain or loss arising from the difference between the fair value of a financial asset and its previous amortised cost at the date of reclassification, from amortised cost measurement to measurement at fair value through profit or loss.
Any cumulative gain or loss previously recognised in other comprehensive income that is reclassified to profit or loss at the date of reclassification of a financial asset, from measurement at fair value through other comprehensive income to measurement at fair value through profit or loss. Once again there is a strong focus on the profit or loss account and also to some extent the statement of other comprehensive income. Again the concern of the standard setters is to achieve greater transparency in reporting profit or loss becomes apparent.
IFRS 18 | REQUIRED INCLUSION IN THE FINANCIAL STATEMENTS
13
Aggregation and disaggregation of key numbers
Classification which is the sorting of assets, liabilities, equity, income, expenses and cash flows based on shared characteristics. The guidance here is more conceptual than practical. Whoever is preparing the financial statements needs to think carefully about which material items share characteristics and can therefore be aggregated and those which do not, which should therefore be disaggregated.
For clarification, a definition or two might be useful here. Aggregation is the adding together of assets, liabilities, equity, income, expenses or cash flows that share characteristics and are included in the same classification in the financial statements. Disaggregation is pretty much the opposite of this, the separation of items into component parts with characteristics that are not shared. To this we might add a third connected feature...
IFRS 18 | AGGREGATION AND DISAGGREGATION OF KEY NUMBERS
14
Within IFRS 18 there is a reminder of what is meant by material. Information is material if omitting, misstating or obscuring it could impact on the decisions made by users of the financial statements. There is of course a large element of judgement involved here, judgement that must be exercised judiciously. Taking into account the need to avoid obscuring information it is important to pay attention to the labelling of line items, totals and sub-totals. Failing to do so and obscuring the true situation via misleading labels can potentially mislead readers of the financial statements.
This in turn inhibits effective transparency, one of those qualities which some entities might understand very well in theory but find it more difficult to apply in practice. Information is material if omitting, misstating or obscuring it could impact on the decisions made by users of the financial statements.
IFRS 18 | AGGREGATION AND DISAGGREGATION OF KEY NUMBERS
15
How does this work in practice?
Here is a scenario that brings it all together and enables you to see how it works in practice.
Paradise Cruising is a company that provides cruise holidays in the Caribbean.
During the year, the following financial transactions occurred:
$75m
$4m
Total revenues
Interest payments and accruals
$40m
$5m
Staff expenses
Loss on unsuccessful joint venture
$5m
$10m
Depreciation on the assets owned by the company
Tax liabilities incurred during the year
$15m
$20m
Cost of closing down part of the company’s operations during the year
Other operating expenses
IFRS 18 | HOW DOES THIS WORK IN PRACTICE?
16
The solution
How should these transactions be presented in the profit or loss account as per the requirements of IFRS 18?
The first issue to consider is how these should be divided into different categories. There are five in IFRS 18: operating, investing and financing categories, and income and expenditure from tax, and costs relating to discontinued operations. The operating category would include the following:
Then there is the investing category to consider, which in this case is the loss from the joint venture of $5 million. The loss before financing and tax should then be shown which is going to give a profit before financing and tax of $5 million. The other categories would need to be shown separately, as follows:
$4m
Financing category would include interest costs
$75m $40m $20m $5m
Total revenues
Income tax costs
$10m $15m
Staff expenses
Other operating expenses Depreciation costs
Discontinued operations
Taking all these other items into account results in an overall loss for the year of $24 million.
This results in an operating profit of $10 million which should be shown as a separate sub-total in the profit or loss account.
IFRS 18 | HOW DOES THIS WORK IN PRACTICE?
17
Summary
IFRS 18 is an important new standard, replacing the foundational standard IAS 1. It will affect pretty much everybody who is using IFRS as a reporting framework. It is being introduced in response to stakeholders asking for better information on issues within the profit or loss account. IFRS 18 requires that all items of income or expense must be reported through profit or loss unless another specific IFRS requires or permits otherwise. IFRS 18 requires that items in profit or loss must be classified in one of five groups.
IFRS 18 specifically defines which disclosures should be included in what is called the primary financial statements. Unlike under IAS 1, revenue and expenditure must be included in operating, investing or financing activities. IFRS 18 requires that the preparer of financial statements must consider which material items share characteristics, and can therefore be aggregated, and which do not, and should therefore be disaggregated.
IFRS 18 | SUMMARY
18
About the author
After 7 years in the NHS in the UK, Wayne joined the UK Home Office as Head of Accountancy Advice. He has since worked as a consultant both in the UK and internationally, working with the World Bank, the IMF, the European Union, AusAid and DFID. He has been instrumental in the establishment of the audit profession in Kosovo and has helped develop auditing in many countries, from Romania to the Philippines. He has taken lead roles in the development of new professional bodies and the accounting profession in Mozambique and Rwanda and in recent years has been extensively involved in developing financial reporting in many countries across the globe. Wayne is the author of accountingcpd’s suite of courses on IFRS as well as our annual IFRS Update. He is also the author of a suite of thematic auditing courses.
This technical briefing is based on material written by Dr Wayne Bartlett, taken from his accountingcpd.net course, IFRS 18. Dr Wayne Bartlett, Fellow of ACCA and an MBA is Managing Director of Phoenix Management Consultancy Ltd. He is an internationally acclaimed speaker and trainer on all aspects of public and private sector accounting and auditing standards. He has worked extensively for the World Bank and IMF in over 40 countries, helping to develop the profession.
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