IFRS 18 – Presentation and Disclosure of Financial Statements
Introduction
The International Accounting Standards Board (IASB) issued IFRS 18 in April 2024, with an effective date for annual reporting periods starting on or after January 1, 2027, though early adoption is allowed with adequate disclosures. This standard replaces IAS 1 of the IFRS Accounting Standard by introducing new requirements for the statement of profit or loss, including additional defined subtotals and disclosures about management-defined performance measures to name a few.
Key reasons for the introduction of IFRS 18
IFRS 18 was introduced to improve clarity and consistency in financial statements, to improve how companies communicate their financial performance, addressing the limitations of IAS. While IAS 1 provided a solid foundation for the presentation of financial statements, it allowed too much flexibility, leading to inconsistencies in how financial information was reported and interpreted. Hence, IFRS 18 was issued aiming to provide more transparent and comparable information about companies' financial performance, enabling better investment decisions.
Significant changes in IFRS 18
1. Defined Subtotals and Categories:
This standard introduces specific categories for income and expenses (operating, investing, and financing) to provide a more structured view and improve comparability. The structure of the statement of profit and loss is based upon how items of income and expense are classified depending on the business activity of the entity.
IFRS 18 requires the entities to classify the income and expenses into one of the five categories
- The operating category
- The investing category
- The financing category
- The income tax category
- The discontinued category
2. Management-Defined Performance Measures (MPMs)
This standard requires companies to disclose management-defined performance measures, enhancing transparency and discipline over their use. An entity may have none, one, or multiple MDPMs. It is defined as a subtotal of income and expenses that:
- An entity uses in public communications outside financial statements.
- An entity uses to communicate the management’s view of an entity’s financial performance.
- Is not explicitly listed as below or specifically required to be presented or disclosed by the IFRS Accounting Standard
- Gross profit or loss or similar subtotals.
- Operating profit or loss before depreciation, amortization, and impairments.
- Profit or loss before income taxes.
- Profit or loss from continuing operations.
3. Improved Aggregation and Disaggregation
This standard sets out enhanced principles for aggregating and disaggregating information, making financial statements more informative and useful for investors. The process of grouping requires judgement as to whether items have similar or dissimilar characteristics.
- Aggregation is the process of grouping financial items, like assets or expenses, based on similar traits. It gives a simple, overall view that's easy to understand. The more similar the characteristics of items are, the more likely it is that aggregating those items will fulfil the role of the primary financial statements or the notes.
- Disaggregation is the process of breaking down grouped items into smaller parts when they have distinct characteristics. This provides more detailed financial data for stakeholders. The more dissimilar the characteristics of items are, the more likely it is that disaggregating the items will fulfil the roles of the primary financial statements or the notes.
Key Takeaways on IFRS18
IFRS 18 marks a major step forward in financial reporting by enhancing clarity, transparency, and comparability. By requiring standardized income and expense categories, mandatory disclosures of management-defined performance measures, and improved aggregation and disaggregation, the standard ensures that investors and stakeholders receive more meaningful financial information. It's the perfect time for companies to revisit their financial statements and gear up for the new disclosure requirements set to take effect in 2027.
How CLA Emirates Supports Your IFRS 18 Transition - Comprehensive IFRS 18 Readiness Assessment
Our team of IFRS specialists conducts a detailed evaluation of your current financial reporting framework to identify gaps and suggest areas for improvement as detailed below. This ensures a seamless transition while identifying risks and opportunities for improvement.
- We assess your business to identify if there is any specified main business activity
- The applicability of new categories for the entity and the classification of income and expenses under those categories.
- Identification of the current management-defined performance measures (MPMs),their compliance and effect on the financial presentation along with the preparation of reconciliation with the existing subtotals as required by the standard.
- Review all the ledgers and perform aggregation and disaggregation of income and expenses to ensure alignment with the standard.
- Training your finance team on proper classification and disclosure requirements
Position your business ahead of the curve and ensure compliance with upcoming regulations to maintain a strong and transparent financial standing. Prepare today for a successful future!
Call for Consultation
Pradeep Sai | Managing Partner
Mob: +971 556530001
Email: Pradeep.Sai@claemirates.com
