IFRS 18

International Financial Reporting Standard 18 – Presentation of Financial Statements

In April 2024 the IASB issued IFRS 18, a new IFRS accounting standard that will become effective in 2027. This landmark standard introduces significant and unprecedented changes to the presentation of financial statements, replacing IAS 1. Its main objective is to enhance transparency, comparability and usefulness of financial reporting for investors.

IFRS 18 reshapes the structure of the statement of profit or loss, dividing it into three main categories:

1. Operating activities
2. Investing activities
3. Financing activities

This structure mirrors the layout of the statement of cash flows and aims to provide a clearer understanding of the sources of income and expenses. It should be noted that the clear separation of the three categories, operating, investing and financing, provides a more transparent depiction of how an entity generates income and incurs expenses.

The standard also introduces three mandatory subtotals:

• Operating profit
• Profit before financing and income taxes
• Net profit

Operating Activities

Under the new definition, the operating activities category is a residual category, that is, it includes all income and expenses not classified as investing or financing activities. This residual approach prevents entities from excluding “unfavorable” items from operating profit and thereby enhances comparability across entities. For example, retail companies that previously presented credit card fees as financing costs will now be required to classify them as selling expenses, reducing their reported operating profit.

Investing Activities

The investing category includes income and expenses that represent a return on assets that operate independently of the reporting entity’s main business resources. Examples include:

• Rental income
• Fair value gains on investment property
• Interest income
• Changes in fair value of financial assets
• Share of profit from equity-accounted investments (associates and joint ventures)

This change will particularly affect holding companies, which must now present results from investments accounted for using the equity method below the operating profit line, potentially lowering their operating performance measures.

Financing Activities

The financing category includes all income and expenses related to raising debt or equity, such as:

• Interest expense on bank loans and bonds
• Interest expense on lease liabilities
• Unwinding of the discount on present value-based obligations, e.g., liabilities for post-employment benefits

However, financial institutions shall classify income and expenses from credit provision to customers as operating activities, reflecting their core business nature.

Management-Defined Performance Measures

A groundbreaking feature of IFRS 18 is the requirement to disclose “Management-defined Performance Measures” (MPMs) in the notes. These include non-GAAP metrics like Adjusted Operating Profit or Adjusted EBITDA, which entities often disclose outside the financial statements. For each MPM, entities shall disclose:

• A statement that the MPM reflects management’s view of performance
• A clear explanation of how the measure is calculated, and
• A reconciliation to a defined line item in the statement of comprehensive income.

This aims to increase transparency, consistency and reliability of performance measures and to give investors a fuller and more accurate picture of the entity’s performance.

Changes to the Statement of Cash Flows (IAS 7)

IFRS 18 also amends IAS 7, aligning the statement of cash flows with the new presentation model:

• The starting point for the indirect method shall be operating profit (rather than profit before tax or net profit).
• Interest and dividends received shall be classified as investing cash flows.
• Interest and dividends paid shall be classified as financing cash flows.

These changes promote consistency across financial statements and enhance users’ understanding of cash flow sources and uses.

A Milestone in IFRS Evolution

IFRS 18 represents a historic milestone. It significantly improves the relevance, transparency and comparability of financial information and helps investors better assess entities’ financial performance.
The standard provides entities with an opportunity to improve communication with investors and to create more reliable cross-industry comparisons, aligning financial reporting more closely with modern business realities.

International Financial Reporting Standard 19 – Subsidiaries without Public Accountability: Disclosures

IFRS 19 provides significant relief from disclosure requirements for subsidiaries without public accountability that prepare their financial statements in accordance with IFRS Accounting Standards.
Effective from 2027 (with early application permitted), the standard allows such entities to apply a reduced disclosure framework, while still ensuring that users of financial statements receive useful and relevant information.

The objective of IFRS 19 is to simplify financial reporting for subsidiaries and reduce reporting costs, without compromising the quality, transparency or usefulness of the information presented to users of financial statements.

An entity is eligible to apply IFRS 19 only if all of the following conditions are met:

1. The entity is a subsidiary.
2. The entity does not have public accountability, i.e., its debt or equity instruments are not traded in a public market, and it does not hold assets in a fiduciary capacity for a broad group of outsiders.
3. The parent entity (ultimate or intermediate) produces consolidated financial statements that are publicly available and prepared in accordance with IFRS Accounting Standards.

The disclosure requirements in IFRS 19 represent a condensed version of the disclosure requirements found in other IFRS Accounting Standards. A subsidiary applying IFRS 19 must still comply with the recognition, measurement and presentation requirements of all other IFRS Accounting Standards. However, if the information resulting from specific disclosures is not material, the entity is not required to provide such disclosures.
At the same time, management shall consider whether to include additional disclosures, when necessary, to ensure a complete and transparent understanding of the subsidiary’s financial position and performance. In essence, IFRS 19 strikes a balance between cost-efficiency and transparency, providing a practical reporting solution for subsidiaries that apply IFRS accounting standards but do not have public accountability.