Early Impressions

Ind AS 118, Presentation and Disclosure in Financial Statements (Exposure Draft)

13, June 2025

Background

In April 2024, the IASB issued IFRS 18, Presentation and Disclosure in Financial Statements, aimed at enhancing the way companies communicate through their financial statements, particularly their financial performance through the Statement of Profit or Loss. Globally, IFRS 18 will be effective for annual reporting periods beginning on or after January 1, 2027.

In alignment with IFRS 18, the Institute of Chartered Accountants of India (ICAI), has issued an exposure draft of Ind AS 118, Presentation and Disclosure in Financial Statements, with a proposed effective date for annual reporting periods beginning on or after April 1, 2027. This proposed standard is based on IFRS 18, with appropriate modifications to reflect the Indian economic and regulatory environment

Ind AS 118 is intended to provide Indian companies a strong and globally aligned framework for presenting and disclosing financial performance. Although it does not change how financial performance is measured, it substantially improves the way that performance is presented and conveyed to stakeholders.

The proposed standard is built on the foundation laid by Ind AS 1, Presentation of Financial Statements, which established the principles for presenting general-purpose financial statements to ensure comparability across periods and entities. Ind AS 118 represents a major step forward in improving the transparency, structure, and consistency of financial reporting. When effective, Ind AS 118 will supersede Ind AS 1.

Ind AS 118 aims to improve financial reporting by requiring:
Presentation of new subtotals in profit or loss;
Disclosures about management-defined performance measures; and
Enhanced requirements for grouping (aggregation and disaggregation) of information.

By mandating clearer presentation formats and more meaningful disclosures, Ind AS 118 aims to empower users of financial statements to make better-informed economic decisions.

Summary of proposed changes

The new standard has wide-ranging effects, influencing numerous aspects of financial statement presentation and disclosure, with the income statement being particularly impacted.

The main effects of Ind AS 118 can be summarized as follows:

A. Introduction of new categories and subtotals in the Statement of Profit and Loss

B. Categorization of items of income and expenses

C. Classification considerations related to specific items of Income and expenses

D. Management-defined performance measures

E. Other Key Considerations

F. Consequential amendments to other Ind ASs

To read this section in detail, download PDF

Key highlights of new requirements proposed in Ind AS 118

The following summarizes the key requirements of Ind AS 118-

New Categories of income and expenses
Management-defined performance measures (MPMs)
New subtotals
Enhanced aggregation and disaggregation requirement

A. Introduction of new categories and subtotals in the Statement of Profit and Loss

Under Ind AS 1, there is no requirement to classify income and expenses into distinct ‘categories’, and presenting subtotals is not required. Notably, operating profit—one of the most commonly used performance metrics—has not previously been defined in Ind AS.
As a result, entities have applied varying definitions to the same subtotal, leading to considerable inconsistency. This lack of standardization has made it challenging for users of financial statements to interpret the information presented in the Statement of Profit and Loss and to make meaningful comparisons across entities.
To enhance consistency and improve comparability, Ind AS 118 includes the following changes in the Profit or Loss section of the Statement of Profit and Loss:a. Required subtotals:
Ind AS 118 requires two new subtotals to enable analysis:
Operating profit or loss and
Profit or loss before financing and income taxes.b. Categories for classifying income and expenses:Ind AS 118 requires all items of income and expenses to be classified into the newly defined five categories:Operating, Financing, Investing, Income taxes and Discontinued operations
To classify income and expenses in the operating, investing and financing categories, an entity shall assess whether it has a specified main business activity.

The purpose of adding a subtotal to the presentation requirement is to provide a meaningful representation of the entity’s core operating activities, while the defined categorization aims to help users assess performance independently of financing decisions. These standardized categories and subtotals are intended to enhance consistency and comparability in the Statement of Profit and Loss
It is essential to note that there is no direct alignment between the operating, investing, and financing categories used in the statement of profit or loss as required by Ind AS 118 and those in the statement of cash flows, as outlined in Ind AS 7 Statement of Cash Flows. Nonetheless, in many instances, similar classifications may be applied across both statements.
Under Ind AS 118, the classification of income and expenses into different categories may vary between entities, as it requires entities to evaluate their main business activities.For instance, a manufacturing company that invests surplus cash in publicly traded shares would not consider this a core business activity and would typically classify related income under the investing category. In contrast, a bank that actively trades a portfolio of publicly traded shares may view this activity as central to its operations and would likely classify the associated income under the operating category

Determining whether an entity engages in a specified main business activity depends on the specific facts and circumstances and involves the application of judgment. It is also possible for an entity to have more than one main business activity.

B. Categorization of items of income and expenses

Operating Category

This category is intended to include items of income and expenses related to the entity’s operations. Ind AS 118 describes it as a residual category, so the operating category will comprise all income and expenses not included within the investing, financing, income taxes, or discontinued operations categories.

Implementation matters:

If an entity’s specified main business activity involves investing in assets, the related income and expenses will be included in the operating category. For example, real estate companies would be required to present rental income within the operating category.

The expense in the operating category may be presented either by:

Nature (raw materials, salaries, advertising costs), or
Function (cost of sales, distribution costs, administrative expenses) or
On a mixed basis (i.e. some expenses by nature and other expenses by function) on the face of the income statement.

Note- The standard also mandates that companies classifying expenses by function must disclose the amounts of depreciation, amortization, employee benefits, impairment losses, and inventory write-downs included within each line item in the operating category of the statement of profit or loss.

The aforesaid is a significant change from the current requirements under Ind AS 1.

Investing Category

This category includes-

Income and expenses from assets that generate returns separately from a company’s business activities.
Income and expenses from cash and cash equivalents and investments in associates and joint ventures.

Implementation matters

Example of items of income and expenses included in the Investing category

Rental income arising from investment property.
Dividends from shares in other companies.
Share of profits from associates and joint ventures.
Income and expenses from unconsolidated subsidiaries (such as investments in subsidiaries held by an investment entity that are measured at FVTPL, investments in subsidiaries in separate financial statements that are accounted for at cost)
Income and expenses resulting from the initial and subsequent measurement of those assets, including any gains or losses recognized upon their derecognition (such as Impairment losses and reversals of impairment losses, fair value gains and losses).
Additional expenses that are directly related to the acquisition or disposal of those assets, such as transaction fees and selling costs.

Financing Category

This category includes-

Income and expenses on liabilities arising from financing transactions.
Interest expenses on any other liability

Implementation matters

Liabilities arising from financing transactions include-

Issue of bonds or debentures redeemable in cash or the entity’s equity shares.
Liability under a supplier finance arrangement when the payable for goods or services is derecognised.
Obligation for an entity to purchase its own shares.
Loans raised by the company.

Items of income and expenses related to these liabilities, such as interest expense on debt instruments issued, fair value gain or loss on liability designated as FVTPL, income or expense on derecognition of liability, and dividend on issued shares classified as liabilities, shall be classified under the financing category

Income taxes

This category includes income tax expense (or income tax income) in the statement of profit or loss per the principles of Ind AS 12 Income Taxes.

Implementation matters

Example of items of income and expenses included in the Income taxes category-

Current tax expense
Deferred tax expense/ (Credit)

C. Classification considerations related to specific items of Income and expenses

Classifying all items of income and expenses into one of the five defined categories can be difficult, especially for items that may fall into more than one category such as foreign exchange gain or loss.

To address this, Ind AS 118 provides specific guidance for the classification of certain specific types of income and expenses, as summarized below-

1. Classification of foreign exchange differences:

Foreign exchange differences are classified within the same category as the income and expenses related to the underlying items that caused those differences.

2. Classification of fair value gains and losses on derivatives and designated hedging instruments

Gains and losses arising on “derivatives designated as hedging instruments”

General rule- Gains and losses associated with derivatives designated as hedging instruments are presented within the same category as the income and expenses that are subject to the risks being hedged by the derivative.

Gains and losses on an undesignated component of a designated hedging instrument in the same category as gains and losses on the designated component. Similarly ineffective portions of a gain or loss shall also be classified in the same category as the effective portions.

Exception to General rule– If a presentation in the same category requires grossing up gains and losses, which is prohibited, an entity will classify all gains and losses on the derivative in the operating category.

3. Classification of income and expenses from hybrid contracts containing a host that is a liability

The classification of income and expenses from a hybrid contract with a host liability depends on whether the embedded derivative is separated from the host contract.

D. Management-defined performance measures (MPMs)

Management-defined performance measures are defined as subtotal of income and expenses (other than those specifically excluded by the Standard or required to be disclosed or presented by Ind ASs), that a company uses in public communications outside financial statements to communicate to investors, management’s view of an aspect of the financial performance of the company as a whole.

For example, measures that adjust a total or subtotal specified in Ind ASs, such as adjusted profit or loss, are management-defined performance measures, provided a company uses them in public communications outside its financial statements, such as press releases or investor presentations.

If a reportable segment contains a single main business activity of the entity and a subtotal of income and expenses relating to that segment is presented in the profit or loss, that would indicate that the subtotal provides information about an aspect of the financial performance of the entity as a whole. In such cases, a subtotal of income and expenses related to that reportable segment would meet the definition of MPMs if it met the other parts of the definition of MPMs.
It is clarified in the application guidance to Ind AS 118 that a financial ratio, on its own, does not qualify as MPMs because it is not a subtotal of income and expenses. However, suppose the numerator or denominator of a financial ratio is itself a subtotal of income and expenses that would meet the definition of an MPMs independently of the ratio. In that case, it is considered as MPMs. Consequently, the entity must apply the disclosure requirements applicable for MPMs to such a numerator or denominator.

E. Other key considerations

1. Enhanced requirements for aggregation & disaggregation of information

Ind AS 118 specifies that primary financial statements (PFSs) consist of the statement of profit or loss, balance sheet, statement of changes in equity, and statement of cash flows. It outlines criteria to help entities decide whether information should be presented in the PFSs or disclosed in the notes and it establishes principles for determining the appropriate level of detail.

2. Consequential amendments to other Ind ASs

Following summarizes key changes to other Ind ASs-

Ind AS 7 Statement of Cash Flows

As per the amendment-

All entities will be required to use the operating profit subtotal as the starting point when reporting cash flows from operating activities using the indirect method.

All entities whose main business activities include investing in assets or providing financing to customers to present each type of cash flow—dividends received, interest paid, and interest received—within a single category in the statement of cash flows, even if the related income and expenses are reported across multiple categories in the statement of profit or loss as per the requirements of Ind AS 118.

In our view using the operating profit subtotal as a consistent starting point will enhance the comparability and consistency of the Statement of Cash Flows, making it easier for investors to analyze and compare companies’ operating cash flows. Additionally, this change simplifies the presentation by eliminating certain reconciling items currently used in the indirect method.

It is important to note that, in most cases, the classification of interest and dividends in the statement of cash flows will be consistent with their classification in the profit or loss. However, complete alignment is not achieved, as this was not the intended objective of the standard

To read this section in detail, download PDF

Effective date and transition

Ind AS 118 supersedes Ind AS 1 and is effective for annual reporting periods beginning on or after April 1, 2027.

An entity is required to apply Ind AS 118 retrospectively. However, it is not obligated to disclose the quantitative information outlined in paragraph 28(f) of Ind AS 8—specifically, the adjustments to each affected line item in the financial statements and the corresponding impact on basic and diluted earnings per share for the current and each comparative period presented.

Reconciliation disclosure requirements for

i. Annual financial statements:
In its annual financial statements an entity shall disclose, for the comparative period immediately preceding the period in which this Standard is first applied, a reconciliation for each line item in the profit or loss between:

a. The restated amounts presented applying this Standard; and

b. The amounts previously presented applying Ind AS 1, Presentation of Financial Statements.

ii. Interim financial statements
In its interim financial statements prepared under Ind AS 34, in the first year of applying Ind AS 118, the entity shall, as part of the information required by paragraph 16A(a) of Ind AS 34, disclose reconciliations for each line item presented in the profit or loss for the comparative periods immediately preceding the current and cumulative current periods. The reconciliations are required between:

a. The restated amounts presented applying the accounting policies for the comparative period and the cumulative comparative period when the entity applies this Standard; and

b. The amounts previously presented applying the accounting policies for the comparative period and the cumulative comparative period when the entity applied Ind AS 1.

An entity is permitted, but not required, to disclose the reconciliations for the current period or earlier comparative periods

Uniqus’ Perspective

Through this upcoming standard, the standard setters have taken a significant step to streamline financial reporting across the reporting entities and provide greater insight to the stakeholders with transparency in reporting.

Ind AS 118 will improve how companies communicate in their financial statements, with a focus on information about their financial performance through the Statement of Profit or Loss. The standard will impact all companies. While Ind AS 118 will not impact how companies measure their financial performance, but it will affect how companies communicate, present, and disclose their financial performance.

The standard is expected to enhance comparability between entities, as entities will publish their financial statements on the same categories provided by Ind AS 118, including defining the MPMs and categories/subtotals in the statement of profit or loss.

To address the requirements of Ind AS 118, reporting entities may need to adjust their accounting systems to appropriately ‘tag’ and categorize income and expenses into the new Ind AS 118 categories. Further, the standard is expected to further enhance reporting by allowing companies to present expenses by their nature or the function, depending upon the most relevant basis.

This process may be complex for groups with diverse operations (various main business activities) and multiple reporting systems.

Entities may also need to adjust or put in place the process and controls for

How they aggregate, disaggregate, and label information based on the revised requirement as per Ind AS 118.
Identify MPMs and determine the reporting requirement as per Ind AS 118.

Ind AS 118 will lead to changes in the presentation of statements of profit and 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 and existing reporting practices.

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 Ind AS 118 for their reporting entity.

With the introduction of new categorization for items of income and expenses, mandatory subtotals, and more stringent disclosure requirements, companies must prepare for substantial changes in their financial reporting structures. These changes will have a broad impact across entities in all industries, affecting processes, systems, IT infrastructure, personnel, and crucially strategic communication with investors. As the effective date draws nearer, organizations should evaluate their system capabilities, revise financial models, and update internal controls to ensure compliance with the evolving regulatory requirements.

For more information on the Exposure draft of Ind AS 118, see the press release on the ICAI’s Web site.

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