IFRS 18 - PRESENTATION AND DISCLOSURE IN FINANCIAL STATEMENTS

What’s new in IFRS 18

Three sets of new requirements are introduced by IFRS 18 to enhance financial performance reporting by entities and provide investors (or users) with a more solid foundation for entity analysis and comparison. These requirements include;
• the structure of the statement of profit or loss;
• required disclosures in the financial statements for certain profit or loss performance measures that are reported outside an entity’s financial statements (that is, management-defined performance measures); and
• enhanced principles on aggregation and disaggregation which apply to the primary financial statements and notes in general.

In simpler terms, the standard aims to achieve improved comparability in the statement of profit or loss, enhanced transparency of management-defined performance measures, and more useful grouping of information in the financial statements.

1. Improved comparability in the statement of profit or loss
Under the IAS 1, the income statement does not have a defined format. Entities decide which subtotals to include on their own. The entities frequently report operational profits, but there is less comparability because different entities calculate operating profits differently. In order to improve the income statement's structure, IFRS 18 creates five distinct categories for revenue and expenses: operating, investing, financing, income taxes and discontinued operations. It also requires that all entities give newly defined subtotals, such as operational profit. Investors will have a consistent starting point for evaluating the performance of entities thanks to the updated structure and new subtotals, which will also facilitate company comparison.

Entities must disclose certain totals and subtotals in accordance with IFRS 18; the primary modification is the requirement to include "Operating profit or loss." With a few exceptions (for instance, where a bank has financing as a primary business activity and has chosen to report certain information in a particular way), the other necessary subtotals are "Profit or loss" and "Profit or loss before financing and income taxes."

2. Enhanced transparency of management-defined performance measures
Known as alternative performance measures, several entities offer company-specific metrics. This information is helpful to investors, but at the moment, the majority of entities don't give investors enough details about how these metrics are determined and how they connect to the necessary metrics in the income statement. As a result, IFRS 18 requires that entities provide justifications for the management-defined and company-specific performance measures that are connected to the income statement. The new rules would subject management-defined performance measures to audit and enhance their transparency and discipline.