IFRS 18 Explained: A Quick Guide in Under 900 Words

A new accounting standard, IFRS 18, is changing the rules for how companies report their finances. In short, it will change how businesses communicate their financial health to investors, regulators, and other stakeholders.

This quick guide aims to break down the key aspects of IFRS 18 in a nutshell. We will explore how IFRS 18 will change financial reporting, when it takes effect, and how it will affect your financial statements.

Table of contents:

I. Key changes introduced by IFRS 18

New structure for the statement of profit or loss
Management-defined performance measures (MPMs)
Enhanced principles for grouping information

II. Implementation timeline and effective date

IFRS 18 Explained

Key changes introduced by IFRS 18

New structure for the statement of profit or loss

IFRS 18 establishes a more structured statement of profit or loss. It introduces three defined categories for income and expenses: operating, investing, and financing. This new approach helps to provide a clearer picture of a company's financial performance.

One of the biggest changes is the introduction of a newly defined 'operating profit' subtotal. This gives investors a better understanding of a company's operating results. Under IFRS 18, companies must classify their income and expenses into specific groups based on their core business operations.

Furthermore, the outcomes of equity-accounted investees are now excluded from the operating profit subtotal. Instead, they are now presented in the 'investing' category. This change aims to give a more accurate representation of a company's core operations.

Management-defined performance measures (MPMs)

IFRS 18 introduces the concept of Management-Defined Performance Measures (MPMs). MPMs are subtotals of income and expenses. Companies can share numbers with the public to explain how they are doing financially.

The highlight here is that IFRS 18 requires companies to report specific 'non-GAAP' measures in their financial statements. Companies must explain every MPM shown, detailing:

Why the measure offers valuable insights
The calculation method, and
How it connects with an amount under IFRS Standards

This adjustment aims to ensure thoroughness and may require auditors to be vigilant in identifying MPMs. Thorough procedures may be necessary to ensure completeness.

Enhanced principles for grouping information

IFRS 18 also improves the guidance on how companies group information in their financial statements. The new standard emphasises classifying items based on their shared characteristics. Companies need to decide where to show information: in the primary financial statements or the accompanying notes.

Companies are now discouraged from using generic labels like 'other'. If used, they will need to provide more detailed information 1. This change pushes for greater transparency and aims to give investors better insight into a company's financial performance.

IFRS 18 also requires companies to carefully review operating expenses on the income statement - whether by nature, function or a mix of both. Companies should opt for the presentation method that offers the most practical and organised overview of these expenses.

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Implementation timeline and effective date

Preparation period

IFRS 18 is going to be effective starting from January 1, 2027. But fret not, there is plenty of time to get ready.

During this prep time, businesses should evaluate their current reporting practices and IT systems. The changes brought by IFRS 18 might mean some tweaks or even major overhauls to comply with the new standard.

Transition requirements

Here is where it gets a bit tricky. IFRS 18 is applied retrospectively. This means companies need to go back and adjust their previous financial statements.

Before IFRS 18 takes effect, companies must show how their profit or loss statement matches what they reported under the old rules. It is like creating a before and after pictures to help everyone understand the changes.

It is not just about the annual reports. Even interim financial statements in the first year of using IFRS 18 must follow the new rule.

Early adoption considerations

The exciting news is that companies do not have to wait until 2027. IFRS 18 allows for early adoption. But there is a catch.

If a company decides to adopt IFRS 18 early, it needs to announce it and disclose this fact in its financial statements.

All in all, the new categories for income and expenses and management-defined performance measures in financial statements mandated by IFRS 18 aim to boost transparency and give investors a clearer picture. Companies will need to rethink their reporting practices and possibly update their systems to comply with the new standard.

With the effective date set for January 1, 2027, companies have time to prepare for this major reporting change. The retrospective application of IFRS 18 means businesses will need to adjust their past financial statements, creating a before-and-after snapshot of their financial performance.

While early adoption is an option, companies must carefully weigh the pros and cons before jumping in. In the end, IFRS 18 is set to push for greater clarity and consistency across the board.

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