IFRS 18 Presentation and Disclosure in Financial Statements

Every accounting standard you meet in this paper tells you how to measure something. This chapter is different: it tells you how to present everything. IFRS 18 Presentation and Disclosure in Financial Statements sets out what a complete set of financial statements contains, how each statement is structured, and the minimum information that must appear. It applies to accounting periods beginning on or after 1 January 2027 and replaces IAS 1 Presentation of Financial Statements, which had done this job since 1997.

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1 A complete set of financial statements

A complete set of financial statements presents to the users of the accounts:

• Statement of financial position – assets, liabilities and equity at the reporting date

• Statement of profit or loss and other comprehensive income – financial performance for the period. Profit or loss reports the period’s performance; other comprehensive income holds the gains and losses that another IFRS Standard requires or permits to be recognised outside profit or loss, such as revaluation gains on property

• Statement of changes in equity – how each equity balance (share capital, share premium, revaluation surplus, retained earnings) moved during the year

• Statement of cash flows – cash inflows and outflows for the period (covered in Chapter 12)

• Notes to the accounts – the accounting policies applied and the supporting detail behind the figures on the face of the statements

• Comparatives – prior-period figures for every amount reported, so that users can compare performance year on year (the enhancing qualitative characteristic of comparability from Chapter 4)

To make the statements understandable the entity also discloses the name of the reporting entity, whether the statements are individual or group statements, the reporting date and period covered, the presentation currency, and the level of rounding used (for example $000).

1.1 Fair presentation

Financial statements must give a fair presentation of the entity's financial position, financial performance and cash flows. Compliance with IFRS Accounting Standards, applied properly and with any necessary additional disclosure, is presumed to achieve fair presentation. The standards are built on the conceptual framework, so following the rules delivers the framework's objective of faithful representation.

2 The statement of profit or loss: the five categories

The headline change made by IFRS 18 is structure. Before 2027, standards said very little about the order and grouping of items between revenue and profit for the year, so different companies presented very different-looking statements of profit or loss. IFRS 18 fixes this by requiring every item of income and expense to be classified into one of five categories. The three main categories – operating, investing and financing – are the new ones that restructure the statement; income taxes and discontinued operations form the other two, and sit where you already expect them:

Because operating is the residual category, you do not need a definition of ‘operations’ to use it – you simply remove anything that belongs in investing or financing, and what is left is operating. That is deliberate: it makes operating profit a complete, comparable measure of the entity's main business performance.

2.1 Two required subtotals

The categories feed two subtotals that every statement of profit or loss must now present:

1. Operating profit or loss – the total of the operating category

2. Profit or loss before financing and income taxes – operating profit plus the investing category. This shows performance before the effects of how the business is financed

Profit before tax and profit for the year then complete the statement, as before. Analysts have always calculated an ‘operating profit’ figure – the difference is that companies used to define it however they liked. Under IFRS 18 it is a defined, mandatory subtotal, so for an ordinary trading company it is calculated the same way by every entity.

2.2 Pro-forma statement of profit or loss

Statement of profit or loss for the year ended [date]:

2.3 Analysing operating expenses: by function or by nature

Within the operating category, expenses are presented in whichever way gives the most useful structured summary:

• By function – cost of sales, distribution costs, administrative expenses (the layout above, and the most common in practice). The costs are grouped by the job they do in the business.

• By nature – raw materials used, employee benefits expense, depreciation and amortisation, and so on, each as its own line. No cost of sales figure is calculated.

An airline might present by nature (fuel, staff costs, depreciation of aircraft); a retailer almost always presents by function. An entity that presents by function must still disclose certain expenses by nature (such as depreciation and employee benefits) in the notes, because users need them to forecast future costs.

3 Other comprehensive income

Profit or loss does not capture every gain or loss of the period. Some gains and losses are recognised outside profit or loss because another IFRS Standard requires or permits it; these are reported as other comprehensive income (OCI) below profit for the year. At F1 the example is the gain on revaluation of property, plant and equipment (Chapter 6). Profit for the year plus other comprehensive income gives total comprehensive income for the period.

Statement of profit or loss and other comprehensive income (extract, continuing from profit for the year):

4 The statement of financial position

The statement of financial position reports assets, equity and liabilities as at the reporting date, with assets and liabilities each split between current and non-current:

Statement of financial position as at [date]:

4.1 What makes an asset or liability current?

An asset is classified as current when any of the following applies:

• it is expected to be realised (turned into cash), sold or consumed in the entity's normal operating cycle;

• it is held primarily for trading;

• it is expected to be realised within twelve months of the reporting date; or

• it is cash or a cash equivalent, unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date.

A liability is classified as current when any of the following applies:

• it is expected to be settled in the entity's normal operating cycle;

• it is held primarily for trading;

• it is due to be settled within twelve months of the reporting date; or

• the entity does not have, at the reporting date, the right to defer settlement for at least twelve months after the reporting date.

Everything else is non-current. Note the operating-cycle test: it can make an asset current even when realisation is more than a year away. A construction company's work in progress, or maturing inventory such as timber left to season, may take well over twelve months to sell – but selling it is the normal operating cycle of that business, so the inventory is still a current asset. A loan repayable in instalments is split: the instalments due within twelve months are a current liability, the remainder non-current.

5 The statement of changes in equity

The statement of changes in equity reconciles each equity balance from the start of the year to the end. The movements you meet at F1 are profit for the year (into retained earnings), other comprehensive income (into the revaluation surplus), dividends paid (out of retained earnings), share issues, and the transfer of excess depreciation from the revaluation surplus to retained earnings (Chapter 6):

Statement of changes in equity for the year ended [date]:

Total comprehensive income splits across the columns: the profit for the year lands in retained earnings and the revaluation gain lands in the revaluation surplus. The closing balances must agree to the equity section of the statement of financial position.

6 Aggregation and disaggregation

Financial statements summarise thousands of transactions, so preparers constantly choose what to add together (aggregate) and what to show separately (disaggregate). IFRS 18 gives this judgement explicit principles:

• group items that share characteristics, and show separately items that do not;

• the primary financial statements provide a useful structured summary; the detail behind each line belongs in the notes;

• do not obscure material information by burying it in a larger total; and

• label every line meaningfully – vague labels such as ‘other’ or ‘sundry’ must be avoided where the amount is material, and if an ‘other’ line is used its contents must be explained in the notes.

This replaces the much thinner ‘structure and content’ guidance in IAS 1 and is aimed squarely at a real-world problem: large, unexplained ‘other operating expenses’ lines that users could not analyse.

7 Management-defined performance measures (MPMs)

Companies love to quote their own performance measures – ‘adjusted operating profit’, ‘underlying earnings’, ‘EBITDA before exceptional items’ – in press releases and investor presentations. These are often called alternative performance measures, and before IFRS 18 they sat entirely outside the financial statements, calculated however management wished.

IFRS 18 brings them inside the audited accounts. A management-defined performance measure is a subtotal of income and expenses that the entity uses in public communications outside the financial statements to communicate management's view of performance, and that is not a subtotal defined by IFRS. For each MPM the entity must give, in a single note:

• why the measure is used – what view of performance it communicates;

• how it is calculated;

• a reconciliation between the MPM and the most directly comparable IFRS-defined subtotal (for example operating profit); and

• the income tax effect and the effect on non-controlling interests of each reconciling item.

8 Knock-on effects of IFRS 18

Two consequential changes matter for the rest of this paper:

• Statement of cash flows (IAS 7) – the indirect method now starts the reconciliation from operating profit (the new required subtotal) rather than profit before tax. Chapter 12 uses this starting point throughout.

• IAS 8 – renamed Basis of Preparation of Financial Statements, and now the home of the general features of preparation (going concern, the accrual basis, materiality, offsetting, comparatives) that used to sit in IAS 1. Chapter 4 covers IAS 8 with the conceptual framework; nothing further on it is needed here.

For awareness only: IFRS 18 arrived alongside IFRS 19 Subsidiaries without Public Accountability: Disclosures, which lets eligible subsidiaries apply IFRS with reduced disclosure. You will not be asked to apply IFRS 19 at F1.

9 Test your knowledge

Two quick checks before you move on: work through the flashcards to fix this chapter’s terms and definitions, then sit the objective questions for exam-style practice. Both mark themselves and explain the answers as you go.