Embracing the Impact: New IFRS 18 on Financial Statement Disclosures

What will financial statements look like in 2 years time? The new IFRS 18 standard brought in significant changes designed to make financial statements clearer and easier to compare across different companies. This means that financial statements will look very different under the new standard. Accountants and companies are urged to begin preparations early, as these changes are expected to fundamentally reshape financial reporting practices.

Why were the changes necessary?

• Improved information for investors

IFRS 18 arose from the necessity to provide investors with clearer, more comparable financial data. The new standard introduces structured guidelines for how financial statements should be organised and what details need to be openly disclosed. This will simplify the task for investors and analysts when assessing a company's financial health accurately.

• Better alignment of financial information

A notable advancement in IFRS 18 is the alignment of categories in the statement of profit or loss to those commonly used in the statement of cash flows, i.e. operating, investing, and financing. Such alignment fosters an intuitive link between the profit and loss statement and the cash flow statement, aiding stakeholders in understanding a company's financial performance from various angles.

Moreover, the standard mandates new subtotals such as 'Operating Profit' and 'Profit Before Financing and Income Taxes.' These additions offer a clearer snapshot of a company's operational performance before considering the impacts of financing activities and taxes.

• Clarifying Performance Measures

IFRS 18 introduces a special non-GAAP measure known as Management-Defined Performance Measures (MPMs). These measures must be disclosed comprehensively within the financial statements, detailing their calculation methods. This requirement ensures all performance measures are transparent, verifiable, and consistent across reports.

Key Changes Under IFRS 18

Although IFRS 18 replaces the older IAS 1 Presentation of Financial Statements standard, it maintains the fundamental principles of how companies recognise and measure items in their financial statements. The focus, instead, shifts to improving the presentation and disclosure of financial information. Companies will need to adjust how they compile their financial statements and what information they disclose, particularly in their profit or loss statements and accompanying notes.

Further, the IASB will also be updating other financial standards, such as the IAS 7 "Statement of Cash Flows," to ensure they align with the new requirements introduced by IFRS 18.

1. Categories in the Statement of Profit and Loss:

   • Operating: Captures all regular business activities

   • Investing: Includes returns and changes from investment activities

   • Financing: Encompasses activities related to funding the company

   • Income Taxes: Details tax-related incomes and expenses

   • Discontinued Operations: Addresses financial impacts from ceased operations.

2. New Subtotals:

• Operating Profit: Highlights earnings from core business activities.

• Profit Before Financing and Income Taxes (PBFIT): Shows earnings before the impact of financial strategies and tax obligations.

3. Enhanced Disclosure Requirements:

   Focuses on the detailed disclosure of MPMs, ensuring transparency and ease of understanding for all stakeholders.

4. Aggregation and Disaggregation:

   Guides on effectively grouping similar items to reduce complexity and breaking down grouped data to highlight important information, thus balancing simplicity with detail.

5. Minor Adjustments to the Financial Position Statement:

   While major changes focus on profit and loss presentation, limited adjustments are made to the statement of financial position to improve clarity and relevance.

   The future Statement of Profit or Loss:

The Next Steps for Accountants

Accountants preparing for the implementation of IFRS 18 should consider the following steps:

• Understand the Changes: Familiarise yourself with the new categories and subtotals for the statement of profit and loss as introduced by IFRS 18. See CIBA’s course

• Review Current Processes and Get Ready for Changes: Assess and revise current financial reporting processes to align with the new standards, especially the enhanced disclosure requirements.

• Training: Organise training sessions for accounting staff to ensure everyone understands the changes and how to implement them effectively.

• Update Systems: Upgrade financial software systems to accommodate the new reporting and disclosure requirements.

• Stay Informed: Keep abreast of any updates or additional guidance provided with CIBA.

Stay ahead of the game with CIBA’s CPD course IFRS 18: New Standard On Presentation And Disclosure In Financial Statements 2024

What you will learn

By attending this webinar you will gain the following competencies: 

• Understand the new layout and components of the statement of performance as prescribed by IFRS 18 and how the new structure aims to improve transparency and understandability for stakeholders.    

• Comprehend the principles of aggregation and disaggregation under IFRS 18 with an emphasis on why these principles are critical for accurate and fair reporting. 

• Clearly delineate the categories of operating, investing, and financing activities as classified under the new IFRS 18, including the criteria for categorising cash flows and other transactions into these three categories. 

• Know the importance of management-defined performance measures that companies might use to represent their financial health. 

• Analyse how the introduction of IFRS 18 impacts other existing financial reporting standards.