Before the Philippines embraced the International Financial Reporting Standards (IFRS) in 2005, the foundation was laid decades earlier with the inception of the International Accounting Standards (IAS) in the 1970s. Notably, the pioneering standard among these, "IAS 1: Presentation of Financial Statements," marked the initial stride towards international financial reporting consistency.
As we bid farewell to the legendary International Accounting Standard (IAS) 1 in 2027, echoing the timeless refrain of Frank Sinatra's classics, it marks the end of an era in financial reporting. Welcoming the future, we prepare for the advert of “IFRS 18: Presentation and Disclosure in Financial Statements”. This is going to be issued in 2024 gracefully taking stage as the successor to the legendary IAS 1. The forthcoming standard promises to improve how information is communicated in the financial statements, with a focus on information in the statement of profit or loss.
Here are a few modifications that will be introduced through the implementation of IFRS 18:
Structuring of income and expenses. IFRS 18 will require income and expenses to be classified into five categories namely investing, financing, income tax, discontinued operations and operating. It's important to highlight that the categorization of investing, financing, and operating activities outlined in the statement of profit or loss may not explicitly align with the equivalent categories in the statement of cash flows, as mandated by IAS 7 Statement of Cash Flows. Nevertheless, in numerous instances, these activities might be classified in a similar manner across both financial statements.
Aggregation, disaggregation, and labelling. IFRS 18 will impose more stringent guidelines on the consolidation and detailed breakdown of financial information. Aggregation should be based on common characteristics, and disaggregation is required if the resulting breakdown holds material significance. The use of the generic term 'other' to describe a grouping will be limited in specific situations, emphasizing the preference for more descriptive labels. When categorizing expenses by function, a comprehensive note must also include additional details on expenses by nature, encompassing elements like depreciation, amortization, employee benefits, impairment, and others.
Revision to PAS 7: Statements of Cash Flows. In using the indirect method, the starting point for operating cash flows will be the newly introduced mandatory subtotal, operating profit or loss. As a general rule, the classification of interest and dividend cash inflows, designated as investing activities, and interest cash outflows, designated as financing activities, will no longer be a discretionary accounting policy choice.
Increased line items and additional subtotals within the statement of profit or loss. Two new mandatory sub-totals will be introduced such as operating profit lor loss (a sub-total of all income and expenses classified as operating) and profit or loss before financing and income tax (a sub-total of operating profit or loss, and all income and expenses classified as investing.
New Disclosures on Management Performance Measures. The inclusion of earnings before interest, taxes, depreciation and amortization (EBITDA) in the statement of profit or loss will further enhance public information about management performance measures.
As our article, focused on changes, we would be delighted to know that certain topics from IAS 1 were brought forward to IFRS 18 without significant changes such as the four primary financial statements to be included in the financial statements, frequency of reporting, comparative information, offsetting, classification of assets and liabilities as current and non-current, capital disclosures and most statement requirements for the financial position, comprehensive income and cash flows.
As we gear up to welcome this substantial transformation in our financial reporting, participating in seminars and training sessions becomes indispensable for accountants tasked with financial statement preparation. It is imperative that accounting systems undergo necessary adjustments, aligning with the updated format, especially in the statement of profit or loss. While alterations in accounting standards are not unfamiliar to accountants, they represent a routine yet crucial exercise aimed at advancing the reliability and faithful representation of financial statements.
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Floyd C. Paguio, CPA, MBA is the Chairman of Paguio, Dumayas & Associates, CPAs (PDAC), the Philippine Member Firm of PrimeGlobal International and Philippine Review Institute for Accountancy (PRIA), a CPA review school in the southern part of Metro Manila. He is a member of the PICPA Quality Assurance Review (QAR) and Media Affairs committees. The views and opinions of the author do not reflect in any way those of these organizations.