IFRS 18: Bringing Discipline to Performance Reporting

New age companies and startups which uses innovative metrics will not be fool the investors specially when they are going for IPOs as IFRS 18 has streamlined the performance reporting structure where the companies has to be divide the P&L into Operating, Investing and Financing category (to large extent like Cash flow statement) and if Management want to use some other metrics which not defined by IFRS 18 then management need to justify why they are using a particular metrics and need to provide the reconciliation netween IFRS 18 defined financials subtotals and Metrics used by the Management. Let’s discuss in detail and understand few requirement proposed by IFRS18.

IFRS 18 Presentation and Disclosure in Financial Statements is a significant new standard issued by the IASB in April 2024. It replaces IAS 1 and aims to improve the comparability and transparency of companies’ performance reporting.

It is effective for annual reporting periods beginning on or after 1 January 2027, with early adoption permitted.

Here is a structured breakdown of the key changes and requirements.

1. New Structure for the Statement of Profit or Loss

The most visible change is the requirement to classify all income and expenses into one of five distinct categories. This eliminates the flexibility companies previously had to define their own “operating profit.”

New Mandatory Subtotals

You are now required to present two specific subtotals on the face of the income statement:

1. Operating Profit: A mandatory subtotal comprising all items in the Operating category.
2. Profit before Financing and Income Taxes: Effectively the operating profit plus the investing category results.

Note for Banks & Insurers: Entities that invest or provide finance as their main business activity (like banks) have specific requirements to classify interest and investment income in the Operating category rather than Investing or Financing, to reflect their business model accurately.

2. Management-Defined Performance Measures (MPMs)

IFRS 18 brings “Non-GAAP” measures (like “Adjusted Profit” or “EBITDA”) inside the financial statements, subjecting them to audit for the first time.

If a company uses a metric in its public communications (e.g., press releases, investor presentations) to communicate management’s view of performance, and that metric is not defined by IFRS, it is an MPM.

3. Aggregation and Disaggregation

The standard introduces stricter principles to prevent companies from obscuring information.

1. Grouping: Items must be grouped based on shared characteristics. If items have different characteristics, they must be disaggregated.
2. “Other” Balances: The standard explicitly discourages the use of vague labels like “Other expenses.” If an “Other” category is used, the composition of that balance must be disclosed in the notes if it is material.

4. Impact on the Statement of Cash Flows

While IFRS 18 focuses on the P&L, it makes a consequential amendment to IAS 7.

1. Indirect Method Starting Point: Companies using the indirect method to present Cash Flow from Operations must now start the reconciliation with Operating Profit.
2. Previously, many companies started with “Profit before tax” or “Net profit,” leading to inconsistency. This change aligns the cash flow statement with the new mandatory Operating Profit subtotal.

Differences (IAS 1 vs. IFRS 18)

Under IFRS 18, the Statement of Profit or Loss will look much more rigid and structured than before. The strict categorization and new mandatory subtotals are designed to stop companies from moving expenses around to make “Operating Profit” look better.

IFRS 18 Statement of Profit or Loss

Key Visual Changes & Rules

Operating Profit Anchor

Previously, companies calculated “Operating Profit” however they wanted (often excluding “one-off” restructuring costs or impairments).

Future: You cannot exclude items like restructuring costs, goodwill impairments, or losses on asset disposals from this subtotal. If it’s not investing, financing, tax, or discontinued, it must be in Operating.

The Investing Bucket

This section is now strictly for returns from assets that generate returns independently (like a stand-alone investment).

1. Big Change: For most non-financial companies, Cash & Cash Equivalents are now “Investing” assets. Therefore, interest income on your bank deposits sits here, below Operating Profit.

The “Financing” Bucket

This is strictly for transactions involving the raising of finance.

1. Includes: Interest on bank loans, bonds, and lease liabilities (IFRS 16 interest).
2. Excludes: Interest on pension liabilities (this actually defaults to Financing usually, but net interest on defined benefit liabilities is financing, service cost is operating).
3. Foreign Exchange: FX gains/losses on loans go here. FX gains/losses on trade receivables stay in Operating.

Exception for Banks & Insurers

If a company’s main business activity is providing financing (like a Bank), the structure shifts:

• Interest expense and Interest income are part of their daily business model.
• Therefore, they move these items into the Operating Category.
• They will likely not present the “Profit before financing and income tax” subtotal, as their financing is their operations.