IFRS 18 Presentation and Disclosure in Financial Statements was issued by the International Accounting Standards Board (IASB) in April 2024, superseding IAS 1 Presentation of Financial Statements. This new IFRS Accounting Standard is examinable in the Strategic Business Reporting (SBR) 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 (alongside other resources), while also helping them to understand how it may feature in the SBR exam.

In relation to the statement of profit or loss, what are the five categories required by IFRS 18 and what are they used for?

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

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

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

The principles governing which items are presented in the investing and financing categories are more complicated and are discussed in greater detail below.

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, joint ventures and unconsolidated subsidiaries
• 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, and investment properties.

This means that income and expenses such as interest and dividends in relation to investments, rental income, depreciation on investment properties, gains or losses on the disposal of investment properties, and gains or losses on the remeasurement of an investment in an associate in a step acquisition scenario will all be included in the investing category (with some exceptions, discussed later).

The financing category
Some liabilities arise from transactions which only involve the raising of finance. These include bank loans and the issue of loan notes or debentures. 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, fair value gains and losses on liabilities designated at fair value through profit or loss, and dividends declared on issued shares which are classified as liabilities.

Some liabilities arise from transactions which do not only involve the raising of finance. These include contract liabilities, lease liabilities, decommissioning provisions and defined benefit pension liabilities. Interest income and interest expenses from these liabilities, including the unwinding of discounting, are reported in the financing category. However, other types of income and expenses arising on these liabilities are classified in the operating category. An example of this is the current and past service costs arising on a defined benefit pension plan.

Where should candidates report foreign exchange differences in the exam?

IFRS 18 states that foreign exchange differences are included in the statement of profit or loss in the same category as the income and expenses from the items which gave rise to the foreign exchange differences. This means that foreign exchange gains and losses on receivables would be presented in the operating category, and a foreign exchange gain or loss arising on a loan liability would be presented in the financing category.

What are main business activities and how do they affect classification in the statement of profit or loss?

When classifying income and expenses in the operating, investing or financing categories, IFRS 18 states that an entity must assess whether it has a specified main business activity. In other words, a main business activity which is either:

• investing in particular types of assets, such as debt and equity investments, and investment properties, or
• providing financing to customers.

If an entity has either of these specified main business activities, then it will classify some income and expenses in the operating category which would otherwise have been included in the investing or financing category.

A company may determine that investing in properties is a main business activity. In this case the company should present income generated from its investment properties in the operating category, as well as any income or expenses arising from the initial and subsequent measurement of the investment properties, and any gain or loss on derecognition.

Note that income and expenses arising from assets accounted for by applying the equity method, such as investments in associates, are always presented in the investing category regardless of whether investing in these assets is a main business activity or not.

Examples of entities which might provide financing to customers as a main business activity include banks, but also other companies which routinely offer their customers long-term finance. These entities should present interest income generated from the loans provided to customers in the operating category, as well as any income or expenses arising from the initial and subsequent measurement of these loans, including on derecognition. If these entities take out loans in order to provide their customers with finance, then income and expenses relating to these loans would also be presented in the operating category.

When relevant, exam questions will either state the main business activity of the entity or explicitly state that a particular activity (eg purchasing investment properties) is not a main business activity.

You have given examples about how the categories impact presentation in the statement of profit or loss. How else might these categories impact more discursive answers in the SBR exam?

As a result of the issue of IFRS 18, we are expecting more detail from candidates in their narrative answers.

One example relates to defined benefit pension schemes. Previously, when explaining the accounting treatment of a defined benefit pension plan, we would have expected candidates to write that the service cost component and the net interest component are reported in the statement of profit or loss. We are now expecting candidates to provide detail about the relevant categories of the statement of profit or loss, namely that the service cost component should be presented in the operating category and that the net interest component should be presented in the financing category.

How much detail should candidates know about the presentation of gains and losses arising on derivatives?

Gains and losses included in the statement of profit or loss on a financial instrument designated as a hedging instrument are reported in the same category as the income and expenses affected by the risks the financial instrument is used to manage. The same is true for derivatives which are used to manage identified risks, but which have not been designated as hedging instruments. For example, if an entity enters a futures contract to buy inventories at a set price in the future, then any gains or losses arising on that futures contract which are reported in the statement of profit or loss will be presented in the operating category, whether or not the entity applies hedge accounting rules.

With some exceptions, gains and losses arising on derivatives which are not used to manage identified risks are reported in the operating category of the statement of profit or loss.

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

A key change introduced by IFRS 18 is that certain subtotals in the statement of profit or loss are now mandatory. These are:

• operating profit or loss
• profit or loss before financing and income taxes, and
• profit or loss.

All of these subtotals should always be presented, even if they show the same figure.

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.

An example of a statement of profit or loss, showing how subtotals help to distinguish income and expense categories is presented below:

In the SBR exam, candidates might be asked to evaluate a draft financial statement for compliance with IFRS 18. This might require candidates to identify mandatory information which the entity has omitted, incorrect subtotals, or incorrect classification of income and expense items.

Another important change is that entities are required to determine whether the statement of profit or loss should classify and present expenses by function, by nature, or by both. When an entity presents some expenses by nature and other expenses by function, it should label line items clearly to identify what has been included or not included. For example, labelling a line item ‘depreciation costs other than those included in cost of sales’.

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

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 ‘administrative expenses’. A goodwill impairment does not share characteristics with the human resources, information technology, legal and accounting costs included within administrative expenses, and so aggregating it with these in the ‘administrative expenses’ line would not be appropriate

In the SBR exam, candidates may be required to evaluate whether the level of aggregation or disaggregation proposed by an entity is in accordance with the principles in IFRS 18.

What does IFRS 18 say about the labelling of line items, and is this relevant to SBR?

IFRS 18 states that the use of the term ‘other’ – eg ‘other income’ - is not useful because it does not provide users with information about the nature of items included within it. As such, entities should use terminology which describes the nature of the characteristics which the items within that line share, or which describes the material items included within that line – eg ‘income from debt investments’. If the entity cannot find a more informative word than ‘other’, then the aggregated items should be described as accurately as possible – eg ‘other investing income’.

In the SBR exam, candidates may be required to apply these principles to evaluate the proposed presentation of one or more of the primary financial statements.  

How might management-defined performance measures (MPMs) be examined in SBR?

In the SBR exam, candidates may need to identify whether a performance measure meets the definition of an MPM. Candidates need to know the disclosure requirements for MPMs and should be prepared to discuss why these disclosures will provide useful information to financial statement users.

The disclosure requirements in IFRS 18 only apply to measures which meet the definition of an MPM. An MPM is a subtotal of income and expenses which:

• the entity uses in public communications outside financial statements
• is used to communicate management’s view of an aspect of the financial performance of the entity as a whole, and
• is not specifically required to be presented or disclosed by IFRS Accounting Standards.

In other words, subtotals of assets and liabilities, or measures of cash flow, are not MPMs, even though these might still be disclosed by entities both within and outside of the financial statements. In contrast, the disclosure of an ‘adjusted profit’ figure, which removes the impact of non-recurring income and expenses, does qualify as an MPM as long as it is used in public communications outside financial statements (such as press releases and investor presentations).

If a performance measure qualifies as an MPM, IFRS 18 specifies the disclosure requirements. These disclosures should be included in a single note in the financial statements, and include:

• a description of the aspect of financial performance which is communicated by the MPM, as well as explanation of why the MPM provides useful financial information
• how the MPM is calculated, and
• a reconciliation between the MPM and the most directly comparable subtotal required by IFRS Accounting Standards, including the income tax effects and the effect on non-controlling interests for each reconciling item.

The IASB believes that these reconciliations will provide users of financial statements with information to help them understand how the MPM compares with similar measures provided by other entities.

If an entity changes the method of calculating an MPM, or stops disclosing an MPM, it must explain the change and the reasons behind it. In the case of a change in the method of calculation, it must also restate comparative information unless impracticable to do so. This ensures transparency, as well as the ability for users of the financial statements to compare MPMs from one reporting period to the next.

Does this mean that additional performance measures are no longer examinable in SBR?

Additional performance measures (APMs) have been on the SBR syllabus for many years. The topic has often been tested in ‘investor focus’ questions, with candidates being asked to evaluate whether the disclosure of APMs provides users of the financial statements with useful financial information.

APMs are not necessarily MPMs. For example, ‘free cash flow’ is not an MPM because it is not a subtotal of income and expenses. This means that the disclosure requirements in IFRS 18 relating to MPMs would not apply if an entity presents ‘free cash flow’ in its financial statements. However, it is still important that any APMs presented in the financial statements are useful to financial statement users – in other words, that they are relevant, and that they offer a faithful representation of the entity’s underlying performance. For this reason, questions on APMs may still appear in the exam.

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 tax’ 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, the reconciliation now starts with ‘operating profit’. Moreover, IAS 7 does not use the term ‘cash generated from operations’ – this has been replaced with ‘cash from operating activities before income taxes’.

It should be remembered that adjustments for non-cash items should only be made in this reconciliation if those items are included in the operating category, and therefore within operating profit, in the statement of profit or loss. The following items would NOT require adjustment: depreciation on investment properties measured using the cost model; gains and losses on financial instruments where investing in financial instruments is not a main business activity; and the share of profit or losses from associates.

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 arising from financing activities.

Most entities must show interest paid as arising from financing activities, and interest and dividends received as investing activities. Note that entities which invest in assets or provide financing to customers as a main business activity classify interest paid, interest received and dividends received in the statement of cash flows by referring to how it classifies interest expenses, interest income and dividend income in the statement of profit or loss

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

Some principles previously found in IAS 1 Presentation of Financial Statements have been moved over to IAS 8 Basis of Preparation of Financial Statements. This includes content on:

• going concern
• accruals accounting
• fair presentation
• disclosure of selection and application of accounting policies, and
• disclosure of sources of estimation uncertainty.

The name of IAS 8 has also changed; previously, this was called IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. However, no marks are awarded in SBR for the use of accounting standard names.

What impact will IFRS 18 have on question 1 in the SBR exam?

One of the requirements in question 1 will ask candidates to adjust the draft financial statement in the pre-populated spreadsheet response option to correct it for various errors and omissions. Candidates will be awarded marks for correcting the draft financial statement for presentation errors – for example, by moving ‘interest paid’ from ‘cash flows from operating activities’ to ‘cash flows from financing activities’.

Conclusion

The purpose of this article is to aid SBR candidates’ knowledge and understanding of IFRS 18 and how it could impact the SBR exam. The examining team have given several examples of how IFRS 18 could impact various areas of the SBR exam. The impact of the standard is wide ranging, and this article should be used alongside other resources on this topic.