IFRS 18 'Presentation and Disclosure in Financial Statements' has been published

David Baur Partner and Leader Corporate Reporting Services, PwC Switzerland May 29, 2024

What is the issue?

On 9 April 2024, the IASB issued a new standard – IFRS 18, ‘Presentation and Disclosure in Financial Statements’ ¹– in response to investors’ concerns about the comparability and transparency of entities’ performance reporting. The new requirements introduced in IFRS 18 will help to achieve comparability of the financial performance of similar entities, especially related to how ‘operating profit or loss’ is defined. The new disclosures required for some management-defined performance measures will also enhance transparency.

Key changes

1. Structure of the statement of profit or loss

IFRS 18 introduces a defined structure for the statement of profit or loss. The goal of the defined structure is to reduce diversity in the reporting of the statement of profit and loss, helping users of financial statements to understand the information and to make better comparisons between companies. The structure is composed of categories and required subtotals:

1. Categories: Items in the statement of profit or loss will need to be classified into one of five categories: operating, investing, financing, income taxes and discontinued operations. IFRS 18 provides general guidance for entities to classify the items among these categories – the three main categories are:

Not defined by IFRS 18, this is the "residual" category for income and expenses that are not classified in other categories. This will typically include the entity's results from its main business activities.

This category typically includes:

results of associates and joint ventures;
results of cash and cash equivalents; and
assets that generate a return individually and largely independently of other resources.

This category includes:

all income and expenses from liabilities that involve only the raising of finance (such as typical bank borrowing); and
interest expense and the effects of changes in interest rates from other liabilities (such as unwinding of the discount on a pension liability).

IFRS 18 includes additional requirements for entities that provide financing to customers (for example, banks) or that invest in assets with specific characteristics (for example, an investment entity) as a main business activity. Some income and expenses that might ordinarily have been classified in the investing or financing category, when applying the general principles, will be presented in the operating category for these entities. The result of this is that operating profit will include the results of an entity's main business activities.

2. Required subtotals: IFRS 18 requires entities to present specified totals and subtotals: the main change relates to the mandatory inclusion of ‘Operating profit or loss’. The other required subtotals are ‘Profit or loss’ and ‘Profit or loss before financing and income taxes’, with some exceptions (for example, where a bank has financing as a main business activity and has made specific presentation choices). Our InBrief on Viewpoint¹ illustrates these principles in examples.

2. Disclosures related to the statement of profit or loss

IFRS 18 introduces specific disclosure requirements related to the statement of profit or loss:

Management-defined performance measures: Management might define its own measures of performance, sometimes referred to as ‘alternative performance measures’ or ‘non-GAAP measures’. IFRS 18 defines a subset of these measures which relate to an entity’s financial performance as management-defined performance measures (‘MPMs’). Information related to these measures should be disclosed in the financial statements in a single note, including a reconciliation between the MPM and the most similar specified subtotal in IFRS® Accounting Standards. This will effectively bring a portion of non-GAAP measures into the financial statements.
Disclosure of expenses by nature, for entities that present the statement of profit or loss by function: Entities will present expenses in the operating category by nature, function or a mix of both. IFRS 18 includes guidance for entities to assess and determine which approach is most appropriate, based on the facts and circumstances. Where items are presented by function, an entity is required to disclose information by nature for specific expenses.

3. Aggregation and disaggregation (impacting all primary financial statements and notes)

IFRS 18 provides enhanced guidance on the principles of aggregation and disaggregation which focus on grouping items based on their shared characteristics. These principles are applied across the financial statements, and they are used in defining which line items are presented in the primary financial statements and what information is disclosed in the note.

4. Other limited changes

IFRS 18 will make some other limited changes to presentation and disclosure in the financial statements. For example, IAS 7, ‘Statement of cash flows’, is amended to:

specify ‘operating profit or loss’ as the starting point for reconciling cash flows from operating activities; and
remove the existing options for the presentation of interest and dividends paid and received.

PwC Observation

The guidance on aggregation and disaggregation has changed. This will require entities to reconsider their chart of accounts to evaluate whether their existing presentation is still appropriate or whether improvements can be made to the way in which line items are grouped and described in the primary financial statements. In addition, changes in the structure of the statement of profit or loss and additional disclosure requirements might require an entity to make significant changes to its systems, charts of accounts, mappings etc. The level of operational change required by the new standard should not be underestimated, and entities should start thinking about the operational challenges as soon as possible.

It might be difficult to identify MPMs, and extensive procedures might be required by auditors to assess completeness.

Who is impacted?

The new standard will be effective for annual reporting periods beginning on or after 1 January 2027, including for interim financial statements. Retrospective application is required, and so comparative information needs to be prepared under IFRS 18.

In the year of adopting IFRS 18, the standard requires a reconciliation between how the statement of profit or loss was presented for the comparative period under IAS 1 and how it is presented in the current year under IFRS 18. Interim financial statements in the first year of adoption include similar reconciliation requirements.

¹ Viewpoint subscription required

The IASB has issued IFRS 18, the new standard on presentation and disclosure in financial statements, with significant impact on the statement of profit or loss.

Take a look into IFRS 18 with a focus on:

Contact us

David Baur

Partner and Leader Corporate Reporting Services, PwC Switzerland

+41 58 792 26 54

Andrea Angst

Senior Manager, Corporate Reporting Sevices, PwC Switzerland

+41 58 792 14 78