IFRS 18 responds to emerging challenges in disclosure
Why introduce a new standard for the presentation and disclosure of financial statements? Many users, including investors, have voiced the need for adjustments to the standard to address various shortcomings, key among them being the difficulty investors face when comparing statements of financial performance of different companies due to variations in content and structure.
Moreover, there was no accounting standard that defined ‘operating profit,’ a widely used subtotal in the current statement of financial performance. Consequently, companies are left to apply their own definitions in the absence of clear guidance.
Furthermore, while investors appreciate alternative performance measures set by management, they face challenges due to the potential for these measures to be tailored deliberately to show positive performance, due to the lack of an audit that guarantees consistency and transparency.
Key requirements
To address these challenges, IFRS 18 introduces three new requirements designed to structure the statement of profit and loss:
The first requirement guides entities to present two new defined subtotals as a starting point for users of financial statements to analyse and compare performance across industries. To achieve this, reporters are:
- first required to present a subtotal for operating profit, which is now more clearly defined in terms of content, making it easier to compare performance across industries. Specifically, the statement of profit and loss is divided into three categories: operations, investing, and financing activities, similar to the categories in the statement of cash flows. The operating category is the default for any balances not fitting into the other two categories.
- The second subtotal will therefore be ‘Profit before financing and income tax.’
Secondly, the standard introduces Management Defined Performance Measures (MPMs); entities have in the past voluntarily presented non-GAAP KPIs in their financial statements. To support the new structure and ensure the reported balances are well corroborated, the new standard makes MPMs a mandatory disclosure requirement. This will be achieved in a single note to the financial statements, which should include, among other things, the reasons each MPM is reported and how it is calculated.
Thirdly, the new standard enhances existing guidance on aggregation and disaggregation in the financial statements. The aim is to ensure that investors receive only material information, thereby enhancing the understandability and usefulness of the reports.
It is worth noting that these three sets of requirements will have a combined effect in providing authentic information for better decision-making by improving the qualitative characteristics of financial information presented, with specific emphasis on comparability, transparency, and ensuring the usefulness of published information.
IFRS 18 in summary
The new framework under IFRS 18 significantly impacts the statement of profit and loss by introducing three new and defined categories to harmonize the report structure – Operating, Investing, and Financing. These are supported by two subtotals: Operating Profit and Profit Before Financing and Taxes.
Additionally, it mandates Management Defined Performance Measures (MPMs) as a compulsory disclosure requirement, subject to audit. This ensures transparency, consistency, and discipline in presenting alternative performance measurement data. The IASB has effectively illustrated the impact of aggregation and disaggregation of the information presented.
Call to action
This new standard is likely to impact the way entities report, similar to other standards during their initial implementation. There is a need for entities to perform a gap assessment to understand how it affects them from a people, system, and structural perspective. This will inform the decision-making process, as there is ample time before the effective date of 1 January 2027.
Early adoption is permitted starting from the release date of 1 April 2024. Join our platforms to gain insights into the single MPM disclosures, including their reconciliation back to IFRS subtotals, the reasons why and how MPMs are reported, and the necessary explanations for changes to the MPMs, among other requirements of this new standard.
By Fredrick Tito,
Senior IFRS consultant and trainer at AARO Academy
