IFRS 18: A Step Towards User-Friendly Financial Reporting

Author: Ali Haider
Program: CAF Student (ICAP)

This article is submitted by author as part of the Nashfact National Writing Competition. Views expressed are the author’s own.

IFRS 18 is the latest standard for financial statements that guides accountants about specific presentation and appropriate disclosures in financial statements. In this article, I shall be explaining some major and core aspects of IFRS-18 which are mandatory for an entity to comply with, and are most useful for the understanding of users of financial statements.

Background 

Before IFRS-18, IASB had advised accountants to prepare financial statements in accordance with IAS-1 which focused on the presentation of financial statements. In April 2024, IASB issued IFRS-18 presentation and disclosure in financial statements which sets overall requirements for the presentation and disclosure in financial statements.  

The IASB had not completely disqualified IAS-1 but retained some paragraphs of IAS-1 in IFRS 18. Some paragraphs of IAS-1 have been moved to IAS-8 and IFRS-7. 

Date of Implementation 

IFRS-18 is applicable from January 01, 2027 but some companies have started preparing their financial statements on presentation and disclosures as required by IFRS-18 

 The main focus of IFRS-18 is Statement of Profit or loss which I will be explaining in later paragraphs. 

General Requirements of IFRS-18 

IFRS-18 has established some rules that must be followed while presenting information in financial statements. A complete set of financial statements include: 

1. Roles of Financial Statements  

The main role of financial statements is to provide a quick and understandable overview of financial information to its users. 

2. Role of Notes in Financial Statements 

The main purpose of notes is to provide users an appropriate detail of relevant financial information. This information is very important to influence decisions of users. 

3. Aggregation and Disaggregation 

Aggregation refers to grouping similar items into one single item in financial statements.  

For-example: Depreciation expense of vehicles, machines and plants may be grouped together under single line item “depreciation expense” rather than presenting them separately. 

IFRS-18 allows aggregation of items having similar nature but it also disallows the aggregation of similar items which are material and are important for the users. 

4. Disallowance of Offsetting 

IFRS-18 states that the income and expenses must be shown separately. They cannot be set-off against each other unless required by an accounting standard. 

Moreover, the assets and liabilities of the entity must be shown separately and they cannot be set-off against each other. It means that entity should not show net assets by setting off assets and liabilities against each other. 

5. Frequency of Reporting 

The IFRS-18 requires that the entity must provide a complete set of financial statements at least once in a year. However, an entity shall disclose if it prepares financial statements for a shorter or longer period. The disclosure must include the reason and fact that these special financial statements are not entirely comparable with previous financial statements. 

This standard does not disqualify the practice of preparation of financial statements for a period of 52 weeks. 

Statement of Profit or Loss 

IFRS-18 states that the entity must include the incomes and expenses incurred during the period (whether paid or not) in statement of profit or loss unless an IFRS permits otherwise. 

Categories in Statement of profit or loss

According to IFRS-18, an entity shall classify its incomes and expenses incurred during the reporting period in following five categories: 

1. The operating category 
2. The investing category 
3. The Financing category 
4. The income taxes category 
5. The discontinued operations category 

Purpose of this classification 

IFRS-18 introduced this classification in statement of profit or loss because it is very useful to the understanding of users. Before this classification, all kinds of incomes and expenses were presented under single heading and was not enough to provide useful and relevant information to users of financial statements.  

For-example: A company having an operating loss might be showing the net profit. It is due to the other incomes earned by the entity other than its operations. It might be due to the gain on disposal or interest income earned on deposit. This may mislead user through false information. 

But IFRS-18 detected this loop-hole and now have taken appropriate steps in this regard. This Change shall help users to extract relevant information from statement of profit or loss. 

1. Operating Category  

IFRS-18 demands an entity to include all incomes and expenses in operating category which are obtained in normal course of business. It also suggests that the entity shall include every income and every expense in operating category that do not fall under any of four categories. 

For- example: An entity running a shoe business incurred salary expenses for the staff working in factory. It shall be included in cost of shoes produced and will be shown in operating category as it occurred in normal course of business. 

2. Investing Category 

According to IFRS-18, an entity shall classify in investing category the incomes and expenses arising from: 

1. Investments in associates, joint ventures and subsidiaries. 
2. Cash and Cash equivalents 
3. Other assets of entity if they generate income independently of entity’s operations. 

For-example: 

The dividend received from associate or subsidiary shall be classified in this category. Any gain or loss that occur from revaluation of investment property as well as property, plant and equipment shall also be recognized in this category. 

Moreover, the rental income and related expenses from investment property shall be classified in this category as this investment property is generating rentals independently of entity’s operations. 

Exception 

If entity’s main business is investing in associates, joint ventures and subsidiaries, then the entity shall classify any income or expense arising from these activities in operating category only if these are accounted for as equity accounting method. 

3. The Financing Category 

IFRS-18 states that before classifying any income or expense in this category, an entity must distinguish between its financing and non-financing category. Only incomes or expenses related to financial liabilities shall be classified in financing category. 

These incomes or expenses may arise due to initial or subsequent recognition and derecognition of financial liabilities. For example: Transaction costs occurred while raising finance are shown under this category. 

Moreover, interest income and expense will be shown in this category. 

Exception 

If the main activity of entity is to provide financing (loans) to customers, then entity will classify any income and expense in operating category as this arise from normal course of business. 

For-example: The banks will classify their interest income on loans and interest expense on deposits in operating category as this relates to their normal business activity. 

4. The Income Taxes Category 

IFRS-18 has also brought another category for classification of incomes and taxes arising from tax liabilities. All incomes and expenses relating to tax shall be classified in this category in accordance with the rules of IAS-12 Income Taxes.  

This standard also states that any foreign exchange gain or loss shall also be categorized in this category. 

5. The Discontinued Operations Category 

An entity preparing statement of profit or loss shall also show the gains or loss from discontinued operations in this category. The profit or gains arising from such operations shall be in accordance with IFRS-5 Non-current Assets Held for Sale and Discontinued Operations.

Presentation of Totals and Subtotals in Statement of Profit or Loss 

IFRS-18 states that the entity shall include totals and subtotals in the statement of profit or loss for: 

• Operating Profit or Loss: The operating profit or loss comprises of all income and expenses classified in the operating category. 

• Profit or loss before financing and taxes: The profit or loss before financing and income taxes includes operating profit or loss and all incomes or expenses occurring in investing category. 

• Net profit or loss: The net profit or loss is the total of all incomes less expenses occurring in statement of profit or loss. 

IFRS-18 also states that if an entity wants to include additional subtotal in statement of profit or loss, it shall include it in such a way that it does not mislead the users and it must be presented in clear way. 

Line items required by IFRS-18 

IFRS-18 requires an entity to include following line items in its statement of profit or loss: 

1. Revenue of the entity earned during current period. 
2. Operating expenses.  
3. Share of Profit or loss from associates and joint ventures accounted for as equity method. 
4. Income tax expense or income. 
5. Net loss or profit from discontinued operations. 
6. Interest revenue calculated through IRR. 
7. Impairment losses or their reversal (if any). 
8. Gains or loss arising from disposal of assets. 
9. Any gain or loss on revaluation of assets. 

Also, an entity is required to include allocated share of profit or loss for non-controlling interests (NCI) and owners of parents. This inclusion shall not be made in any of above category. 

Presentation and disclosure of expenses classified in operating category 

IFRS-18 requires an entity to present expenses in operating category in a way which provides most useful and relevant information to users of financial statements. The entity may classify expenses on basis of: 

1. Nature of expenses 
2. Functions of expenses within entity 

For-example: An entity involved in manufacturing may classify depreciation expense on basis of function of expense. In the light of function basis, the depreciation expense of machines involved in manufacturing shall be allocated to cost of sales while depreciation expense from other assets not involved in manufacturing (PPE of Head office) shall be included in administration expense. 

On the other hand, the entity may choose to club together the total overall depreciation under a single line item named “depreciation expense”. 

IFRS-18 strongly requires an entity to clearly show Cost of sales as a separate line item in statement of profit or loss. Moreover, the entity shall also disclose in notes what kind of expenses are included in cost of sales. The entity is not required to disclose amount wise break-up of cost of sales, instead it can give a qualitative disclosure. 

Compulsory disclosures for entity opting function basis of expenses 

The following are compulsory disclosures for an entity following function-based allocation of expenses: 

1. The total for depreciation, amortization, employee benefits, impairment losses and their reversals and any write-down of inventory. 
2. The amount relating to depreciation, amortization, employee benefits, impairment losses and inventory write downs that are appearing in operating category. 

Statement of comprehensive income 

The standard requires an entity to prepare statement of comprehensive income which consists of: 

1. Profit or loss 
2. Other comprehensive income 
3. Comprehensive income, total of profit or loss and other comprehensive income 

Other comprehensive income 

IFRS-18 states that the entity preparing financial statements shall present incomes and expenses in other comprehensive income which: 

1. Will be reclassified to profit or loss after fulfilment of certain conditions 
2. Will not be reclassified to profit or loss 

It also explains that the entity should reclassify the portion of unrealized gains in profit or loss that were recorded in other comprehensive income in current or in prior years as per the requirements of relevant standards. The entity shall also disclose such reclassification in notes.

Statement of financial position 

IFRS-18 requires an entity to show separately its current and non-current assets as well as current and non-current liabilities. The entity shall display the portion of non-current assets that will be realized in next 12 months. Similarly, an entity shall also display the portion of non-current liabilities that is payable in next 12 months. Both these portions shall be shown in current sections.

Items to be presented in statement of financial position 

Following items shall be shown in statement of financial position as per IFRS-18: 

1. Property, plant and equipment 
2. Investment property 
3. Intangible assets 
4. Goodwill 
5. Investments accounted for as equity method  
6. Biological assets 
7. Inventories 
8. Trade and other receivables  
9. Cash and cash equivalents 
10. Total of assets held for sale  
11. Trade and other payables 
12. Liabilities and assets for current tax 
13. Deferred assets and liabilities 

An entity is also required to present the non-controlling interests and capital reserves that are attributable to owners of parent company. 

Statement of changes in equity 

The statement of changes in equity shall present total comprehensive income, any changes according to IAS-8 and a reconciliation which tally the closing balances of each component of equity with their respective opening balances. 

In notes to the financial statements, the entity shall also disclose amount of dividend recognized and dividend per share. This disclosure enables users to derive return information as most of users are concerned for dividend per share. 

Other disclosures 

The entity is required by IFRS-18 to disclose following information to help users of financial statement make their decision. 

1. The number of shares authorized  
2. The number of shares issue; showing separately the number fully paid and partially paid shares 
3. Face value of share 
4. A reconciliation between opening and closing number of shares 
5. Shares reserved to be issued in future or share options given

Final Conclusion about IFRS-18 

IFRS-18 brings the structure for presentation and disclosures that enable users to analyze financial information in more comprehensive and effective way. The restructured information style help users and investors of non-financial background to understand the core operations, profitability of main operations and other gains in more comprehensive way. 

The application of IFRS-18 is the step towards the presentation of more reliable, user specific and accurate information.