IFRS 18 Presentation and Disclosure in Financial Statements was issued by the International Accounting Standards Board (IASB) in April 2024. This new Accounting Standard is examinable in the Financial Reporting (FR) exam from September 2025 onwards.

This article takes the form of a series of questions and answers about IFRS 18. The aim of this is to assist candidates when learning the technical content of this new IFRS Accounting Standard, while also helping them to understand how it may feature in the FR exam.

IFRS 18 has introduced categories into the statement of profit or loss. What are these categories and what are they used for?

There are five categories in the statement of profit or loss:

• the operating category
• the investing category
• the financing category
• the income taxes category, and
• the discontinued operations category.

Operating, income taxes and discontinued operations categories
The operating category is used for income and expenses which are not classified in one of the other four categories.

The income taxes category is used for tax income and expenses which arise from applying IAS 12 Income Taxes.

The discontinued operations category is used for income and expenses arising from discontinued operations as defined by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

Investing category
The investing category is used for income and expenses arising from:

• investments in associates
• cash and cash equivalents, and
• other assets if they generate a return individually and largely independently of the entity’s other resources. This would typically include debt or equity investments (‘simple’ or ‘trade’ investments) and investment properties.

This means that income and expenses such as interest and dividends in relation to investments, rental income, depreciation and gains or losses on disposal in relation to investment properties (ie, not property, plant and equipment), fair value gains and losses and the share of profit (or loss) of associate will all be included in the investing category.

Financing category
Some liabilities arise from transactions which only involve the raising of finance. These include bank loans and the issue of loan notes. Income and expenses from the initial and subsequent measurement of these liabilities, including derecognition, are reported in the financing category. These income and expenses include items such as interest expenses and, also, dividends declared on issued shares which are classified as liabilities (ie, redeemable preference shares or preference shares with a fixed dividend).

Some liabilities arise from transactions which do not only involve the raising of finance; for example, lease liabilities and decommissioning provisions. Interest expenses from these liabilities, including the unwinding of discounting, are also reported in the financing category.

What is the impact of these new categories on the answers you are expecting from candidates?

As a result of the issue of IFRS 18, the statement of profit or loss will most likely be more detailed and include additional line items. However, it is not considered a significant impact to prepare or be presented with IFRS 18 financial statements in the FR exam.

You should be especially aware of guidance given in the scenario as to where income or an expense is to be presented; this is not a new concept and exists in historical exams.

What other important changes have been made to the statement of profit or loss which are relevant to the FR exam?

One of the most important changes in IFRS 18 is the introduction of mandatory subtotals in the statement of profit or loss. These are:

• Operating profit (or loss)
• Profit (or Loss) before financing and income taxes, and
• Profit (or Loss) (ie, what was previously referred to as Profit for the year).

Note that both Operating profit (or loss) and Profit (orLoss) before financing and income taxes will be presented even if they are the same amount.

Gross profit and Profit before income taxes are not mandatory subtotals. However, many entities will present these as additional subtotals because they are necessary for the statement of profit or loss to provide a useful structured summary of income and expenses. In the FR exam, you will see these presented and are expected to present these when preparing financial statements.

A pro forma, consistent with IFRS 18, is shown below (click image to enlarge):

Are the principles in IFRS 18 around aggregation and disaggregation examinable in FR?

Yes.

IFRS 18 is clear that entities should aggregate items in financial statements based on shared characteristics. Similarly, entities should disaggregate items based on characteristics which are not shared. This process is vital so that the primary financial statements provide useful structured summaries to their primary users.

For example, an entity might have various activities, such as human resources, information technology, legal and accounting. They have shared characteristics and so might be aggregated into a single line in the statement of profit or loss and labelled as ‘general and administrative expenses’.

A goodwill impairment loss, for example, does not share characteristics with the human resources, information technology, legal and accounting costs included within general and administrative expenses. If the goodwill impairment loss is material (by magnitude or nature), then aggregating it with these other expenses would not be appropriate because material information would be obscured. It is most likely, in FR, that there will be an instruction to present a goodwill impairment loss as a separate line item.

As previously noted, the FR exam scenario has historically provided guidance on where some specific items of income or expense should be presented. If an (operating) expense is to be disaggregated, this will be stated in the scenario and credit will be awarded for this.

For example, you may be told to present (material) research expenditure as a disaggregated expense (ie, a separate line item) within operating expenses. Credit would be awarded for following this instruction. Failure to do so, therefore, would mean not achieving the full credit available.

How might management-defined performance measures be examined in FR?

These will not be examined in FR.

What impact has the issue of IFRS 18 had on the statement of cash flows?

The issue of IFRS 18 has led to consequential amendments to IAS 7 Statement of Cash Flows.

Previously, when presenting Cash generated from operations using the indirect method, an entity would start the reconciliation with the Profit before income taxes figure from the statement of profit or loss. Now that IFRS 18 requires entities to disclose a figure for Operating profit, this has changed.

As can be seen (click image to enlarge), the reconciliation now starts with Operating profit. Moreover, IAS 7 does not refer to Cash generated from operations – this has been replaced with Cash from operating activities before income taxes.

Before the issue of IFRS 18, IAS 7 permitted entities to choose whether to present Interest paid and Dividends paid as cash flows from operating activities or as cash flows from financing activities. As a result of the amendments made to IAS 7, Dividends paid must be presented as a financing activity and most entities (unless you are told otherwise in a scenario) must also show Interest paid as a financing activity.

In the FR exam, you may be required to prepare extracts from the statement of cash flows or may be asked to interpret the financial information presented in a statement of cash flows. This should not change significantly with the introduction of IFRS 18.

Has the issue of IFRS 18 had any other consequential amendments which are relevant to the FR exam?

The principles relating to the going concern assumption were previously found in IAS 1 Presentation of Financial Statements. This content has been moved over to IAS 8 Basis of Preparation of Financial Statements. The name of IAS 8 has also changed; previously, this was called IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. This has an insignificant impact on the FR exam.

What impact will IFRS 18 have on Sections A and B in the FR exam?

The impact on Sections A and B, containing solely objective test questions, is insignificant. Information, on the most part, will be presented in IFRS 18 formats and IFRS 18 terminology will be used.

Care should be taken, for example, in any questions on the statement of cash flow or (more generally) on the format of financial statements – both are impacted by IFRS 18 as discussed above.

The interpretation of financial statements is also examinable in Sections A and B; however, we will discuss IFRS 18 impact on this area in Section C, below.

What impact will IFRS 18 have on Section C in the FR exam?

In Section C, you must answer two questions, one in each area, on:

1. Preparation of financial statements (for an individual company or group of companies, and
2. Interpretation of financial statements (for a group of companies or an individual company).

Remember that, in each exam, you will have one question on an individual company and one on a non-complex group of companies.

1. Preparation of financial statements
You will be required to prepare a statement of financial position, a statement of profit or loss (which may include other comprehensive income) and/ or a statement of changes in equity. You may also be required to prepare extracts from a statement of cash flows for an individual company, using the indirect method only.

Whereas there are minimal changes to the statement of financial position and the statement of changes in equity, IFRS 18 formats should still be followed. For extracts from the statement of cash flows, you must remember that the indirect method now starts with Operating profit and not Profit before income taxes. Also, you must remember that Dividends paid and Interest paid are presented in financing activities.

The statement of profit or loss has the most change – you should be aware of the pro forma and all its subtotals (shown above) and be able to prepare financial statements in this format. Remember to follow any guidance on the presentation of disaggregated items within operating expenses, which will be included in the scenario.

2. Interpretation of financial statements
When interpreting financial statements, it is important to recognise the information presented in IFRS 18 formats. Be careful when selecting line items to use in the calculation of ratios:

1. When calculating return on capital employed and interest cover, the numerator is Profit before financing and income taxes. Previously, this was referred to as Profit before interest and taxes (PBIT). Be careful not to confuse this with profit before income taxes, which has the same initialism.
2. When calculating asset turnover, you may only use operating profit margin in your calculations if Operating profit is equal to Profit before financing and income taxes (ie, there is no investment income). “Return on capital employed ÷ Operating profit margin” will give the incorrect answer if a question includes investment income.
3. Similarly, when calculating return on capital employed and interest cover, the use of operating profit is not appropriate where there is investment income.
4. Both operating profit and profit before financing and income taxes will be presented, even if they are the same amount, in accordance with IFRS 18.

Written by a member of the FR examining team