On April 9, 2024, the International Accounting Standards Board (IASB) issued IFRS 18, the new accounting standard for the Presentation and Disclosure of Financial Statements. IFRS 18 is effective for annual periods beginning on or after Jan. 1, 2027, and will replace IAS 1, Presentation of Financial Statements.
The objective of IFRS 18 is to set out requirements for the presentation and disclosure of information in general-purpose financial statements to help ensure they provide relevant information that faithfully represents an entity’s assets, liabilities, equity, income, and expenses.
IFRS 18 applies to all financial statements prepared and presented in accordance with International Financial Reporting Standards (IFRS). It will impact all entities reporting under IFRS accounting standards. The same requirements apply to public and private entities.
The IASB issued the new standard in response to the clamor of the investors requiring preparers of financial statements to produce comparable and transparent reporting on the financial performance of the entity. Adoption of IFRS 18 will lead to the following key changes in the entity’s financial reporting by: requiring additional defined subtotals in the statement of profit or loss; presenting specified categories in the statement of profit or loss; requiring disclosures about management-defined performance measures; and adding new principles for grouping (aggregation and disaggregation) of information.
The first notable key change is that IFRS 18 now requires additional defined subtotals in the statement of profit or loss. Companies are now required to report two defined subtotals: (1) operating profit and (2) profit before financing and income taxes. These two subtotals will provide better information and improve the comparability of financial statements, particularly the statement of profit or loss. Users of the financial statements who need relevant and reliable information for decision-making purposes will benefit from these changes.
For the second key change, an entity is now required to classify income and expenses included in profit or loss into the following categories: (1) operating, (2) investing, (3) financing, (4) income taxes, and (5) discontinued operations.
For the operating category, it provides information regarding the entity’s operations. Investors can now use the operating profit subtotal to measure how an entity is performing in its business activities and as a starting point for predicting future cash flows.
The investing category will provide information regarding returns on investments. Examples are rentals received from investment properties or dividends received from investments in equity securities.
The financing category comprises income and expenses from liabilities arising from transactions that involve raising finance, whether the transaction involves only raising of finance or not.
The income taxes category consists of income tax expense (or tax income) included in profit or loss.
The discontinued operations category consists of income and expenses from discontinued operations.
The third key change requires an entity to disclose information about management-defined performance (MPMs) measures as a separate note in the financial statements. The new disclosure requires a statement that the MPMs provide management’s view of an aspect of the entity’s financial performance as a whole and are not necessarily comparable with measures sharing similar labels or descriptions provided by other entities.
For each MPM, an entity is required to disclose the following: a description of the aspect of financial performance that it communicates, including why management believes the MPM provides useful information about the entity’s financial performance; a description of how the MPM is calculated; a reconciliation between the MPM and the most directly comparable subtotal listed in IFRS 18 or total or subtotal required by IFRS Accounting Standards, including for each item disclosed in the reconciliation—the income tax effect the effect on non-controlling interests; a description of how the entity determined the income tax effect.
If an entity changes the calculation of an MPM, introduces a new MPM, or ceases to use a previously disclosed MPM, it is required to disclose: an explanation of the change, addition or cessation and its effects; the reasons for the change, addition or cessation; restated comparative information to reflect the change, addition or cessation unless it is impracticable to do so.
The fifth significant change being introduced by IFRS 18 is setting out the requirements to help entities determine whether information about items should be in the primary financial statements or in the notes and provides principles for determining the level of detail needed for the information. IFRS 18 also includes requirements for the presentation of operating expenses in the statement of profit or loss, disclosure of specified expenses by nature, and further information on items grouped together and labelled “other”.
IFRS 18 once approved for adoption in the Philippines will be renamed to PFRS 18 and will replace PAS 1. Several principles and provisions in PAS 1 will retained. The new standard will not impact the recognition or measurement of items in the financial statements particularly the statement of profit or loss, but it might change what an entity reports as its ‘operating profit or loss’.
Entities should be ready for the adoption of IFRS 18 as this would require changes in the financial reporting process and accounting system. Preparers of the financial statements should also be trained as to the requirements of the new accounting standards.