IFRS 18 Primary Financial Statement Standard Announced

On April 9, 2024, the International Accounting Standards Board (IASB) issued IFRS 18 Presentation and Disclosure in Financial Statements standard, effective for periods beginning on or after January 1, 2027, with early adoption permitted.

IFRS 18 is a significant update from the IASB and will replace IAS 1, Presentation of Financial Statements. IFRS 18 aims to improve how information is communicated in financial statements. The IASB prioritized the project of revamping the presentation and disclosures guidance in IFRS, with a focus on the statements of profit or loss, after investors voiced concerns around the transparency and comparability of company performance reporting.

IFRS 18 should be applied retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. This requires companies to go back and re-cost their prior year financials. It is essential that companies account for this and effectively modify their systems and processes to adequately implement and appropriately capture the required information of the new standard. Significant judgement will be involved in determining the classification of expenses based on the requirements of the new standards.  

Highlighted requirements of the new standard include:  

• Improved disaggregation of information in primary financial statements.
  • Aggregation should be done with reference to similar items, with dissimilar items being disaggregated and presented separately.
  • This discourages aggregation of items into large, single numbers as this may lead to material information being “hidden” or “missed” by users of the financial information.
• Providing an analysis of operating expenses on the face of the income statement. 
  • This requires a company to use the single method that provides the most useful information. 
  • This prohibits “mixed presentation” of operating expenses on the face (where it is no longer presented in the notes only). 
  • When determining whether to present expenses by nature or function, companies should consider internal management reporting requirements and how their industry peers are presenting information, among other factors.
    
• Providing disclosures about unusual items. 
  • Companies are required to provide more information in the notes section relating to unusual items.
• Providing disclosures about management performance measures. 
  • Include in a single note, with additional disclosures relating to management performance measures (i.e., non-GAAP information) including why/how the measure provides useful information, how they are calculated and a reconciliation between the measure and the most comparable subtotal in the income statement.
• Certain amendments to cash flow statements. 
  • This change would eliminate the policy choice for the classification of cash flows from interest and dividends; dividend and interest received would be investing cash flows for non-financial companies, and dividend and interest paid would be financing cash flows.
    
• Introduction of categories and subtotals in the income statement. 
  • The new standard would require companies to allocate their income and expenses between four major categories: operating, integral associates and joint ventures, investing and financing. 

Critical details of the four major income and expense categories being introduced are outlined below: 

1. The operating category includes:  
   1. Items directly related to an entity’s main business activities, or operations, as discussed in paragraph 48 of the Exposure Draft.
   2. Items including revenues, direct expenses, depreciation and amortization, and inventory related costs are included in this category.
   3. Items in this section will vary based on a company’s industry. For example, a bank providing financing to customers as its core business activity will show income generated from those loans in the operating section. However, a company whose main business activity does not involve providing financing will classify income or expenses related to such activities as financing items
2. The integral associates and joint ventures category includes any operating profits or losses and income and expenses from any integral associates and joint ventures.
3. The investing category includes: 
   1. Returns from investments, such as income and expenses from assets that generate a return individually and largely independently of other resources held by the entity.  
   2. Related incremental expenses.
4. The financing category includes:  
   1. Income and expenses from cash and cash equivalents. 
   2. Income and expenses on liabilities resulting from financing activities.  
   3. Interest income and expenses on other liabilities like unwinding discounts on pension liabilities and provisions. 

It is important to note that there is no current standard in place from FASB that directly aligns with IFRS 18. MorganFranklin Consulting also recently held a webinar discussion, “Navigating common differences between IFRS and US GAAP.” The recording is available here. 

How MorganFranklin Can Help

MorganFranklin Consulting’s team of technical accounting and internal audit experts are here to assist with early adoption opportunities and are ready to help your organization prepare for the updated IFRS 18 standard requirements. To get started, contact us today.