IFRS 18 Presentation and Disclosure in Financial Statements
The IASB’s newly issued standard IFRS 18 mainly deals with the presentation of the income statement, balance sheet and certain footnotes. At the same time, certain aspects of the cash flow statement are modified. IFRS 18 does not change the recognition and measurement of the components of financial statements; therefore, the amounts reported as shareholders’ equity and net income are both unchanged. However, it will have a significant impact on the presentation and disaggregation of what is reported (primarily in the income statement and footnotes), including what subtotals companies must provide and how these are defined.
There are five main areas where we think the new standard will help investors as users of IFRS Financial Statements:
Operating–Investing–Financing classification
IFRS 18 aims to establishes a structured statement of profit or loss by implementing the following measures:
- It introduces three defined categories for income and expenses: operating, investing, and financing.
- Operating – income/expenses resulting from the company’s main business operations.
- Investing – income/expenses from:
- investments in associates, joint ventures and unconsolidated subsidiaries;
- cash and cash equivalents;
- assets that generate a return individually and largely independently (e.g. rental income from investment properties).
- Financing – consisting of:
- income/expenses from liabilities related to raising finance only (e.g. interest expense on borrowings); and
- interest income/expenses and effects of changes in interest rates from other liabilities (e.g. interest expense on lease liabilities).
- It mandates to present new defined totals and subtotals, including operating profit, thereby enhancing the clarity and consistency of financial reporting.
Entities primarily engaged in investing in assets or providing finance to customers are subject to specific categorisation requirements. This entails that additional income and expense items, which would typically be classified as investing or financing activities, are instead categorised under operating activities. Consequently, operating profit reflects the outcomes of an entity’s core business operations. Identifying the main business activity involves exercising judgment based on factual circumstances.
