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From IAS 1 to IFRS 18: Key Changes in Corporate Reporting You Should Know – Part 1
Introduction and background:
There was a continuous demand from the investors for more relevant information and transparency in the presentation of companies’ financial statements. Investors also want greater comparability between financial statements and more consistency in financial measures presented. In response, in April 2024, the International Accounting Standards Board (IASB) issued IFRS 18 – Presentation and Disclosure in Financial Statements, a new standard that replaces IAS 1 after nearly two decades. The introduction of IFRS 18 marks one of the most significant reforms in how entities present their financial performance, aiming to make financial statements more comparable, transparent, and decision-useful for investors and other stakeholders.
IFRS 18 has impact on companies across different industries. Although net profit will remain unchanged, entities will see changes to the structure of their statement of profit or loss. For some, the changes will be significant, depending on their current presentation practice under IAS 1. The new standard is effective for annual periods beginning on or after 1 January 2027.
The IASB did not reconsider all aspects of IAS 1 while developing IFRS 18 but instead focused on the statement of profit and loss. As a part of this blog series, we will focus on the presentation of income statement and other important changes. Part 1 of the blog will cover overview of major changes in IFRS 18 from IAS 1, including classification criterion for operating category.
Major changes introduced in IFRS 18 compared to IAS 1:
The IASB did not reconsider all aspects of IAS 1 when developing IFRS 18 but instead focused on the statement of profit or loss.
1. New category-based structure for the statement of profit and loss: IFRS 18 provides more structured income statement with three newly defined categories (total 5 categories) of income and expenses.
An entity shall classify income and expenses included in the statement of profit or loss in one of five categories:
- Operating category (new category)
- Investing category (new category)
- Financing category (new category)
- Income taxes category
- Discontinued operations category
2. IFRS 18 also provides for two newly required profit subtotals:
- Operating profit or loss
- Profit or loss before Financing and Income Taxes
3. Explicit requirements with respect to Management-Defined Performance Measures (MPMs)
4. Enhanced guidance on aggregation and disaggregation including role of ‘primary financial statements’ and ‘notes to accounts’.
5. Changes in cash flow statements and balance sheet.
Income statement structure:
Presentation – Items of income and expense recognised in the period can be presented either:
- in a single statement of profit or loss and other comprehensive income; or
- in two statements:
- Separate statement of profit or loss and
- Statement of other comprehensive income (OCI).
An entity shall classify income and expenses included in the statement of profit or loss in one of five categories:
- Operating category (new category) - Income and expenses from an entity’s main business activities and that are not classified in other categories.
- Investing category (new category) - Income and expenses from investments made individually and largely independently of the entity’s main business activities.
- Financing category (new category) - Income and expenses relating to obtaining finance to fund the entity’s main business activities and/or investing activities.
- Income taxes category - Tax expense or tax income and any related foreign exchange differences.
- Discontinued operations category - Income and expenses from discontinued operations.
Key premise of the classification is that the operating category i.e. operating profit provides a complete picture of an entity’s operations. Thus, operating category typically includes income and expenses from the entity’s main business activities. Consequently, classification of income and expenses depends on the main business activities of an entity. Such, classification may vary between different industries – e.g. manufacturers, banks, insurers and investment property companies etc.
Illustrative statement of profit or loss (without specified main business activities):
In order to provide a complete picture of entity’s operations through operating profits, IFRS 18 requires an entity to determine whether it has either or both of the following business activities as main business activities:
- investing in particular types of assets or
- providing financing to customers
These business activities are called as “specified main business activities”. Entities with these ‘specified main business activities’ – e.g., banks, insurers or investment property companies – are required to classify additional income and expenses in the operating category that they would otherwise classify in the investing or financing category.
An entity may have more than one main business activity. For example, an entity that manufactures a product and also provides financing to customers may determine that both its manufacturing activity and customer-financing activity are main business activities. Whether an entity has specified main business activities is a matter of fact and thus requires judgement based on the entity’s individual facts and circumstances.
There is no symmetry for classifying items in the income statement and the statement of cash flows. For e.g. gain or loss on sale of PPE for the purpose of classification in the statement of P&L is operating activity, however for cash flow statements is investing activity.
Classification of income and expenses under operating category:
The operating category includes income and expenses from an entity’s main business activities. The operating category is a ‘default’ or ‘residual’ category. This means that an entity classifies income and expenses in the operating category unless, they are classified in another category. An entity does not exclude from the operating category income and expenses that are volatile, unusual or non-recurring.
Examples of income and expenses from operating assets:
- Revenue from the sale of goods or services
- Depreciation / amortisation, impairment and impairment reversals of PPE / intangible assets
- Gains and losses on the disposal of PPE or intangible assets
- Current and past service cost from a defined benefit plan
- the cost of repairs expensed
Additional income and expenses by entities with specified main business activities
- Rental income from investment property and FV gain or loss on the same
- Dividends on financial assets
- Interest income from loans to customers and interest expenses from borrowings
Analysis of expense:
Expenses can be shown in the operating section of profit or loss on the basis of:
- Nature of expense; or
- Function or
- Mix method
This classification should provide information that is reliable and more relevant. It should highlight component of financial performance that may differ in terms of frequency, potential for gain or loss and predictability.
We hope this blog helps to understand the basic changes from IAS to IFRS 18, the broad level categories to be presented in the income statement, classification criteria for operating category etc. In the subsequent blog, we will evaluate how expenses by nature or by function are presented along with classification criteria for investing and financing category.
Thank you for reading this article. Stay tuned for more simplified insights on accounting standards!
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