IFRS 18 Presentation and Disclosure in Financial Statements was issued by the International Accounting Standards Board (IASB) in April 2024.

This article takes the form of a series of questions and answers about IFRS 18. The aim of this is to assist in learning the technical content of this new IFRS Accounting Standard.

IFRS 18 has introduced categories into the statement of profit or loss. What are these categories and what are they used for?

There are five categories in the statement of profit or loss:

• the operating category

• the investing category

• the financing category

• the income taxes category, and

• the discontinued operations category.

Operating, income taxes and discontinued operations categories

The operating category is used for income and expenses which are not classified in one of the other four categories.

The income taxes category is used for tax income and expenses which arise from applying IAS 12 Income Taxes.

The discontinued operations category is used for income and expenses arising from discontinued operations as defined by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

Investing category

The investing category is used for income and expenses arising from:

• investments in associates

• cash and cash equivalents, and

• other assets if they generate a return individually and largely independently of the entity’s other resources. This would typically include debt or equity investments (‘simple’ or ‘trade’ investments) and investment properties.

This means that income and expenses such as interest and dividends in relation to investments, rental income, depreciation and gains or losses on disposal in relation to investment properties (ie not property, plant and equipment), fair value gains and losses and the share of profit (or loss) of associate will all be included in the investing category.

Financing category

Some liabilities arise from transactions which only involve the raising of finance. These include bank loans and the issue of loan notes. Income and expenses from the initial and subsequent measurement of these liabilities, including derecognition, are reported in the financing category.

These income and expenses include items such as interest expenses and, also, dividends declared on issued shares which are classified as liabilities (i.e. redeemable preference shares or preference shares with a fixed dividend).

Some liabilities arise from transactions which do not only involve the raising of finance; for example, lease liabilities and decommissioning provisions. Interest expenses from these liabilities, including the unwinding of discounting, are also reported in the financing category.

One of the most important changes in IFRS 18 is the introduction of mandatory subtotals in the statement of profit or loss. These are:

• Operating profit (or loss)

• Profit (or Loss) before financing and income taxes, and

• Profit (or Loss) (ie what was previously referred to as Profit for the year).

Note that both Operating profit (or loss) and Profit (or Loss) before financing and income taxes will be presented even if they are the same amount.

Gross profit and Profit before income taxes are not mandatory subtotals. However, many entities will present these as additional subtotals because they are necessary for the statement of profit or loss to provide a useful structured summary of income and expenses.

IFRS 18 is clear that entities should aggregate items in financial statements based on shared characteristics. Similarly, entities should disaggregate items based on characteristics which are not shared. This process is vital so that the primary financial statements provide useful structured summaries to their primary users.

For example, an entity might have various activities, such as human resources, information technology, legal and accounting. They have shared characteristics and so might be aggregated into a single line in the statement of profit or loss and labelled as ‘general and administrative expenses’.

A goodwill impairment loss, for example, does not share characteristics with the human resources, information technology, legal and accounting costs included within general and administrative expenses. If the goodwill impairment loss is material (by magnitude or nature), then aggregating it with these other expenses would not be appropriate because material information would be obscured.

What impact has the issue of IFRS 18 had on the statement of cash flows?

The issue of IFRS 18 has led to consequential amendments to IAS 7 Statement of Cash Flows.

Previously, when presenting Cash generated from operations using the indirect method, an entity would start the reconciliation with the Profit before income taxes figure from the statement of profit or loss. Now that IFRS 18 requires entities to disclose a figure for Operating profit, this has changed.

IAS 7 does not refer to Cash generated from operations – this has been replaced with Cash from operating activities before income taxes.

Before the issue of IFRS 18, IAS 7 permitted entities to choose whether to present Interest paid and Dividends paid as cash flows from operating activities or as cash flows from financing activities. As a result of the amendments made to IAS 7, Dividends paid must be presented as a financing activity and most entities (unless you are told otherwise in a scenario) must also show Interest paid as a financing activity.

Under IFRS 18, indirect method now starts with Operating profit and not Profit before income taxes. Also, you must remember that Dividends paid and Interest paid are presented in financing activities.

When interpreting financial statements, it is important to recognise the information presented in IFRS 18 formats. Care should be taken in selecting line items to use in the calculation of ratios:

1. When calculating Return on capital employed and Interest cover, the numerator is Profit before financing and income taxes. Previously, this was referred to as Profit before interest and taxes (PBIT). Be careful not to confuse this with Profit before income taxes, which has the same initialism.

2. When calculating asset turnover, you may only use Operating profit margin in your calculations if Operating profit is equal to Profit before financing and income taxes (i.e. there is no Investment income).

3. Similarly, when calculating Return on capital employed and Interest cover, the use of Operating profit is not appropriate where there is Investment income.

4. Both Operating profit and Profit before financing and income taxes will be presented, even if they are the same amount, in accordance with IFRS 18.

Aggregation and Disaggregation

Entities must aggregate items that share similar characteristics and disaggregate items that are dissimilar, to avoid obscuring material information. For example, general administrative expenses may be aggregated, but material goodwill impairment should be separately disclosed.

Consequential Amendments to the Statement of Cash Flows

IFRS 18 introduces consequential amendments to IAS 7:

• Under the indirect method, reconciliation now begins with Operating profit rather than Profit before income taxes.

• Dividends paid are now mandatorily classified as financing cash flows.

• Interest paid is generally presented as a financing cash flow (unless instructed otherwise).

• “Cash generated from operations” has been replaced with Cash from operating activities before income taxes.

Other Consequential Amendments

• Going concern requirements have been moved from IAS 1 into IAS 8, which has been retitled Basis of Preparation of Financial Statements.

Conclusion

• IFRS 18 fundamentally reshapes the presentation and disclosure framework of financial statements without changing recognition or measurement:

• The five categories in the statement of profit or loss,

• The new mandatory subtotals,

• Aggregation/disaggregation principles, and

• The updated cash flow presentation.