IFRS 18: A New Era of Financial Reporting

In the ever-evolving world of financial reporting, the introduction of IFRS 18 marks a significant milestone. Effective for annual reporting periods beginning on or after 1 January 2027, this new standard aims to enhance the transparency and comparability of financial statements by setting out comprehensive requirements for the presentation and disclosure of financial information. Although IFRS 18 has not yet been endorsed for use in the EU, it is set to replace IAS 1.

IFRS 18 will introduce key changes that will impact how companies across all industries report their financial performance, ensuring that stakeholders receive relevant and faithfully represented data. As businesses prepare for this transition, understanding the nuances of IFRS 18 will be crucial for maintaining compliance and fostering investor confidence. 

Enhancements Under IFRS 18

IFRS 18 aims to enhance how companies present their financial performance in the statement of profit or loss, ultimately benefiting investors. By providing clearer and more consistent information, it supports efficient and resilient capital markets, enabling better investment decisions. Furthermore, IFRS 18 will bring significant changes to the statement of profit or loss and the accompanying notes. Additionally, IFRS 18 will introduce adjustments to the statement of financial position, the statement of comprehensive income, the statement of changes in equity, and the statement of cash flows.

To achieve these goals, IFRS 18 introduces three main requirements:

1. Defined Subtotals in the Statement of Profit or Loss: Offering a consistent framework for investor analysis, including operating profit and profit before financing and income taxes.

2. Disclosure Requirements for Performance Measures: For performance measures that meet the definition of management-defined performance measures, IFRS 18 requires disclosure of the reconciliation of those measures and subtotals listed in IFRS 18 or IFRS Accounting Standards.

3. Principles for Detail in Financial Statements: Detailing the required level of detail in the primary financial statements and notes, including the presentation of operating expenses in the statements of profit or loss, and additional information on items labelled ‘other’.

Key Changes Under IFRS 18

Defined subtotals in the Statement of Profit or loss:

IFRS 18 introduces a structured approach to classifying all income and expenses into five distinct categories: operating, investing, financing, income taxes, and discontinued operations. The first three categories are new, and the standard provides detailed guidance to help companies accurately classify items, especially those involved in asset investment or customer financing. These categories are complemented by the requirement to present specific subtotals and totals, such as “operating profit or loss,” “profit or loss before financing and income taxes,” and “profit or loss.”

Disclosure requirements for Management-Defined Performance Measures

Often referred to as ‘alternative performance measures’ or ‘non-GAAP measures,’ these are metrics defined by management to reflect an entity’s financial performance. IFRS 18 identifies a subset of these as management-defined performance measures (“MPMs”). Companies must disclose information about these measures in a single note within the financial statements, including a reconciliation to the most comparable subtotal specified by IFRS Accounting Standards. This inclusion effectively integrates some non-GAAP measures into the financial statements.

Principles for Detail in Financial Statements

IFRS 18 offers enhanced guidance on the principles of aggregation and disaggregation, emphasizing the grouping of items based on shared characteristics. These principles are applied throughout the financial statements, influencing which line items are presented in the primary financial statements and the information disclosed in the notes.

The standard also emphasises the importance of aggregation and disaggregation based on shared characteristics. This means companies must group or separate items to present clear and useful summaries in the primary financial statements. In the notes, companies are required to provide detailed information without obscuring material facts.

For entities that present the statement of profit or loss by function, IFRS 18 requires the presentation of expenses in the operating category by nature, function, or a combination of both. The standard provides guidance for entities to determine the most appropriate approach based on their specific circumstances. When items are presented by function, entities must also disclose information by nature for certain expenses.

Other Limitation Changes

IFRS 18 introduces several additional changes to the presentation and disclosure in financial statements. For instance, amendments to IAS 7, ‘Statement of Cash Flows,’ include:

• Specifying ‘operating profit or loss’ as the starting point for reconciling cash flows from operating activities.

• Eliminating the existing options for presenting interest and dividends paid and received.

Next Steps

Although the transition from IAS 1 to IFRS 18 is over three years away, it is prudent to proactively anticipate and prepare for the necessary adjustments. These changes include:

• Redesigning Financial Statements: Entities need to redesign their income statements and cash flow statements to align with the new categories and subtotals required by IFRS 18.

• Re-evaluating Disclosures: It’s essential to re-evaluate the disclosures included in the notes to the financial statements to ensure they meet the new requirements.

• Restating Comparatives: Companies must restate comparative information for both annual and interim financial statements to provide a consistent basis for comparison.

• Preparing Reconciliations: Preparing reconciliations for transition disclosure purposes will be crucial to explain the changes from IAS 1 to IFRS 18.

• System and Process Changes: Implementing system and process changes to accommodate the new reporting requirements will be necessary.

Conclusion

IFRS 18 supersedes IAS 1, Presentation of Financial Statements, as the main standard for financial statement presentation in IFRS accounting. This change aims to provide users with better information. Key updates include new presentation requirements for the statement of profit or loss, introducing three categories for income and expenses: operating, financing, and investing.

Additionally, IFRS 18 mandates improvements in the labelling, aggregation, and disaggregation of information within financial statements. Companies are also required to disclose management-defined performance measures in the notes to the financial statements.

How We Can Help

At Cafico International we have the expertise to provide you with high quality financial reporting and administration solutions, tailored to meet your internal and external reporting obligations and corporate governance needs, thereby ensuring that all your company's statutory obligations are met.

We have extensive expertise in International IFRS, US GAAP and Irish GAAP and can guide you through the implementation of complex new financial reporting standards.

Our Luxembourg team have extensive expertise in LUXGAAP and IFRS and can guide you through the implementation of complex new financial reporting standards, upload of relevant data to the online platform (eCDF) and filing with the Luxembourg Trade and Company Register.

We have significant fiduciary experience in compliance with statutory regulatory reporting obligations and have developed efficient management processes for the financial administration functions that are critical to the success of our clients' businesses.

For more information on IFRS18, or to learn how Cafico International can help your business, please reach out to Rolando Ebuna, Chief Accounting Officer.