Background
The IASB has been receiving feedback from investors that the comparability of reporting entities’ income statements was reduced due to inconsistencies in how the financial performance was being disclosed. For example, two entities may have similar operations in a similar sector, however, they may be presenting “operating profit” in the statement of profit & loss in a different manner, as currently there is no specific requirement to present operating profit sub- total in IAS 1, Presentation of Financial Statements.
We have presented in the PDF, extracts of the statement of profit & loss of three entities which have similar operation in a similar sector (Oil & Gas) i.e. Entity A, Entity B and Entity C and noted that all three entities have adopted different practices to present the operating profit in statement of profit & loss. Entity A and Entity B have not specifically presented the line item of operating profit as it is not specifically required by IAS 1 as discussed above.
Transition and effective date
The IASB is expected to issue IFRS 18 in the first half of 2024, which will be effective for annual reporting on or after January 01, 2027, with restatement to the comparative period presented.
What are the proposed changes
- New required subtotals in the statement of profit & loss, including operating profit.
- Enhanced requirements on grouping of information (aggregation and disaggregation).
- Disclosures about Management defined Performance Measures (MPMs).
- Each of the above changes have been explained in detail in the latter part of this publication.
What will be the impact of the proposed changes
- The proposed changes are expected to have the following implications:
- How a company presents and discloses information.
- The quality of information, including digital information, available to the investors.
- The scope of information subject to assurance by auditors and enforcement by regulators.
Proposed changes explained in detail
New required subtotals in statement of profit & loss, including operating profit
Under IAS 1, there is currently no requirement to classify income and expenses into ‘classes’ or ‘categories’, which leads to difficulty in comparing financial performance since a reporting entity’s statement of profit or loss varies in content and structure. To enhance consistency and to permit consistent line item and sub-total presentation (see below) we expect to see changes in the way income and expenses are classified in statement of profit or loss.
IFRS 18 will require income and expenses to be classified into five categories:
- Investing
- Financing
- Income tax
- Discontinued operations
- Operating (this is a residual category if income and expenses are not classified into any of the above categories).
It should be noted that there is no explicit alignment between the investing, financing, and operating categories stated above for the statement of profit or loss and the corresponding categories in the statement of cash flows as required by IAS 7 Statement of Cash Flows. However, they may be classified similarly for both statements in many cases. The classification of income and expenses may also not be identical for all entities because IFRS 18 will require entities to assess their ‘main business activities.’ For example, a manufacturer investing excess cash in publicly traded shares is not a main business activity, and it will likely classify any income received under the investing category. Contrast this with a bank actively trading a portfolio of publicly traded shares. This may be a main business activity for the bank, and it is likely to classify such income under ‘Operating.’
IFRS 18 will require income and expenses to be classified into five categories:
It should be noted that there is no explicit alignment between the investing, financing, and operating categories stated above for the statement of profit or loss and the corresponding categories in the statement of cash flows as required by IAS 7 Statement of Cash Flows. However, they may be classified similarly for both statements in many cases. The classification of income and expenses may also not be identical for all entities because IFRS 18 will require entities to assess their ‘main business activities.’ For example, a manufacturer investing excess cash in publicly traded shares is not a main business activity, and it will likely classify any income received under the investing category. Contrast this with a bank actively trading a portfolio of publicly traded shares. This may be a main business activity for the bank, and it is likely to classify such income under ‘Operating.’
Enhanced requirements on grouping of information (aggregation and disaggregation),
To address investors’ concern that companies do not provide detailed information or important information is obscured from financial statements, IFRS 18 proposes to expand the requirements for labeling, aggregation, and disaggregation as follows:
- The purpose of disaggregation should be explained more clearly in financial statements.
- Entities must be transparent about the meaning of the terms used and the methods applied to the disaggregation.
- The items shall be disaggregated if the resulting disaggregated information is material.
- IFRS 18 requires disclosures about items labeled as ‘others.’
- Require an entity to use the ‘other’ label only if it cannot find a more informative label.
Uniqus’ perspective
Through this upcoming standard, the IASB has taken a significant step to streamline financial reporting across the reporting entities and providing greater insight to the stakeholders with transparency in reporting.
IFRS 18 will improve the comparability of financial performance between the entities as entities will publish the financial statements on the same categories provided by IFRS 18, including defining the MPMs and categories/subtotal in the statement of profit or loss.
To address the requirements of IFRS 18, the reporting entities may need to adjust their accounting systems to appropriately ‘tag’ and categorize income and expenses into the new IFRS 18 categories. This process may be complex for groups with diverse operations (various main business activities) and multiple reporting systems. Entities may also need to put in place the process and controls for how they aggregate and, disaggregate, and label information based on the revised requirement as per IFRS 18. Entities will also need to introduce the process and controls for identifying MPMs and determining the reporting requirement as per IFRS 18. We also draw reference to Uniqus Point of View on Use of non-GAAP measures.
IFRS 18 will lead to changes in presentation of statements of profit & loss (major tweaks), statements of cash flow (minor tweaks), and notes to financial statements (major tweaks). The extent of change will be based on an entities sector of operation, existing reporting practices, and operating jurisdiction(s).
We are expecting changes to other accounting standards in the meantime including IAS 7 ”Statement on Cash flow Statement” to align the categories with IFRS 18, IAS 21, “The effect of change in foreign exchange rates” for classification of foreign exchange gain & losses and IAS 34 “Interim financial reporting” for aligning the classification in condense financial statement, etc.
IFRS 18 will also invoke standard setting changes in jurisdictions such as India, which are aligned to IFRS, however, where an IFRS 18 equivalent update may not have been initiated.
Meanwhile, until the standard becomes effective, the management and those charged with governance may educate the stakeholders, employees, investors, and other relevant users of the financial statement about the changes in the reporting requirements as per IFRS 18 for their reporting entity.
