New IFRS 18 Issued
The International Accounting Standards Board (IASB), on 9 April 2024, issued the new Accounting Standard, IFRS 18 Presentation and Disclosure in Financial Statements, which will replace IAS 1 Presentation of Financial Statements. IFRS 18 is effective 1 January 2027.
The International Accounting Standards Board (IASB) has recently concluded a significant initiative aimed at enhancing the usefulness and transparency of the information presented in financial statements. The new accounting standard, known as IFRS 18 Presentation and Disclosure in Financial Statements, is designed to provide investors with more consistent and comparable data regarding companies' financial performance. This, in turn, is expected to enable better-informed investment decisions. The standard will be applicable to all entities that prepare their financial statements in accordance with IFRS Accounting Standards.
IFRS 18 introduces three key sets of new requirements to improve the reporting of companies' financial performance and give investors a more robust foundation for analysis and comparison:
Standardized Structure for the Income Statement
Currently, there is no prescribed format for the income statement, allowing companies to choose their own subtotals and presentation approaches. This has led to variability in the calculation and reporting of measures such as operating profit, reducing the comparability of financial information across entities.
IFRS 18 establishes three defined categories for income and expense items - operating, investing, and financing. This standardized structure, along with the requirement for companies to provide new defined subtotals (including operating profit), will give investors a consistent starting point for analyzing and comparing the financial performance of different companies.
Enhanced Transparency of Alternative Performance Measures
Many companies supplement their IFRS-compliant financial statements with company-specific performance measures, often referred to as alternative performance measures. While investors find this additional information useful, the current lack of disclosure around the calculation and relationship of these measures to the income statement has limited their usefulness.
IFRS 18 introduces new requirements for companies to provide explanations of the alternative performance measures that are related to the income statement, referred to as "management-defined performance measures." These enhanced disclosures are intended to improve the transparency and auditability of these supplementary metrics.
Improved Organization and Presentation of Financial Information
Investor analysis can be hindered when companies present financial information that is either overly summarized or excessively detailed. IFRS 18 provides enhanced guidance on how to organize and present information, specifying whether it should be included in the primary financial statements or disclosed in the notes. These changes are expected to result in financial statements that are more useful and informative for investors. The standard also mandates increased transparency around the categorization of operating expenses, further improving the accessibility of relevant information.
IFRS 18 will be effective for annual reporting periods beginning on or after 1 January 2027, although early adoption is permitted. The specific changes in companies' financial reporting will depend on their current practices and information systems.
The new IFRS 18 standard replaces the previous IAS 1 Presentation of Financial Statements, while carrying forward many of its unchanged requirements. IFRS 18 represents the culmination of the IASB's Primary Financial Statements project.
