IFRS 18: What It Means and How It Affects Your Business

The International Accounting Standards Board (IASB) has introduced IFRS 18 – Presentation and Disclosure in Financial Statements, a new standard designed to bring clarity, consistency, and comparability to financial reporting. IFRS 18 introduces significant changes to the structure of the statement of profit or loss and related disclosures.

This article provides a simplified overview of IFRS 18, focusing on what’s changing, who it affects, and how you can prepare.

What Is IFRS 18?

IFRS 18 replaces IAS 1 Presentation of Financial Statements and introduces a new structure for the statement of profit or loss. It applies to all entities preparing financial statements under IFRS.

• Effective date: 1 January 2027 (early adoption permitted).

• Key change: Standardized categories and subtotals in the profit or loss statement.

While 2027 may seem far off, companies should start preparing as comparative information for prior years will also need to comply with IFRS 18.

Why Was IFRS 18 Introduced?

Stakeholders, including investors and analysts, have long requested:

• Greater comparability between companies.

• A clear structure for performance reporting.

• Transparency in management-defined performance measures (MPMs).

IFRS 18 addresses these concerns by standardizing how income and expenses are categorized, introducing mandatory subtotals, and improving the linkage between primary statements and notes.

Key Changes in IFRS 18

1. Mandatory Categories in the Statement of Profit or LossUnder IFRS 18, all entities must present income and expenses in three standardized categories:

• Operating: Core business activities and results from integral associates.

• Investing: Returns from investments that are independent of the entity’s main operations.

• Financing: Costs related to financing activities, such as interest expenses.

  
  

This replaces the flexible formats previously allowed under IAS 1.

• 2. Introduction of Standardized SubtotalsIFRS 18 defines several key subtotals, including:- Operating profit (mandatory for most entities).

• Profit before financing and income taxes.

• Profit before tax.

These subtotals aim to improve comparability between companies and reduce management’s ability to define inconsistent performance measures.

3. Framework for Management-Defined Performance Measures (MPMs)Entities often report non-GAAP metrics (e.g., Adjusted EBITDA). IFRS 18 requires:

• Clear disclosure of MPMs in the notes.

• Reconciliation to IFRS-defined subtotals.

• Explanation of adjustments and their usefulness.This ensures transparency and reduces the risk of selective reporting.

4. Aggregation and Disaggregation of InformationIFRS 18 emphasizes presenting income and expenses in a way that balances clarity and detail:

• Similar items must be aggregated, while dissimilar items require separate disclosure.

• Clear links between line items and notes are now required.

Who Will Be Affected?

The impact of IFRS 18 will depend on your business activities. Commonly affected sectors include:

• Banks and insurers: Special rules apply to reflect their business models.

• Multinational corporations: Increased reporting complexity.

• Any business using alternative performance measures (e.g., EBITDA).

How to Prepare for IFRS 18

Although IFRS 18 doesn’t take effect until 2027, organizations should start preparing now. Here’s how:

1. Assess the Impact:

• Identify changes needed in your financial statement classifications.

• Review existing performance measures and KPIs.

2. Update Systems and Controls:

• Adjust ERP systems to capture new reporting categories.

• Ensure internal controls align with the new structure.

3. Communicate Early:

• Brief stakeholders on expected changes to financial reporting.

• Provide pro-forma information to help stakeholders adjust.

How We Can Help

Navigating IFRS 18 may seem complex, but we’re here to simplify the process. Our team can assist with:

• Impact assessments tailored to your business.

• Designing new profit or loss statements.

• Reviewing and optimizing management performance measures (MPMs).

• Providing training for your finance team and key stakeholders.

Final ThoughtsIFRS 18 represents a significant shift in financial reporting, offering businesses the opportunity to improve transparency and consistency. Starting preparations now will ensure a seamless transition and help you adapt to the new requirements.If you’d like tailored assistance or have questions about IFRS 18, please contact us at m.alkhatib@consulting-ect.com or 0509690423.

This article is for general informational purposes only and does not constitute professional advice. Please consult your advisors for guidance specific to your business.