IFRS 18 Presentation and Disclosure in Financial Statements was issued by the International Accounting Standards Board (IASB®) in April 2024. This new IFRS® Accounting Standard is examinable in the DipIFR exam from December 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 DipIFR 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.
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 on income and expenses which arise from applying IAS 12 Income Taxes and any related foreign exchange differences.
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 from debt investments, dividends from equity investments, rental income and fair value gains and losses from investment properties will all be included in the investing category.
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 would be the current and past service costs arising on a defined benefit pension plan.
Exceptions
Note that there are some exceptions from the investing and financing categories above. These relate to entities with a specified main business activity that relates to financing or investing
What does the statement of profit or loss look like in accordance with IFRS 18?
An example of a statement of profit or loss is presented below, highlighting the sections related to the various designated categories:
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.
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.
The category in which an income or expense is included in the statement of profit or loss is dependent on whether an entity has a specified main business activity. How much detail do candidates need to know about this?
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, 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.
An example of an entity which invests in assets as a main business activity is an investment property company. The investment property company would account for 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, including on derecognition.
Note that income and expenses arising from assets accounted for by applying the equity method, such as investments in associates in the consolidated financial statements, are always presented in the investing category.
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 would account for 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.
When relevant, exam questions will either state the main business activity of the entity or explicitly state that a particular activity (i.e. buying investment properties) is not a main business activity.
What is the impact of these new categories on the answers you are expecting from candidates?
Where the statement of profit or loss (or extracts) are included as part of any question, these will be based on the new IFRS 18 proformas. Any pre-populated templates used in question 1 will also be in the new format. Candidates will be expected to include any new statement of profit or loss line items into the correct category of the statement of profit or loss.
For questions 2, 3 and 4, in the past we have expected answers simply to state ‘this will be recognised as an income/expense in profit or loss’. We will now expect answers to specify the correct category in order to obtain full credit. For example, ‘this will be recognised in the investing category of the statement of profit or loss’ or ‘this will be recognised as an operating expense in the statement of profit or loss’ etc.
Where a question requires explanations regarding the suggested accounting treatment proposed by a senior colleague, candidates may need to identify items in the statement of profit or loss which have not been accounted for in accordance with IFRS 18. This could include items being misclassified into the wrong category or errors relating to over aggregation and offsetting.
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. Therefore, foreign exchange gains and losses on receivables would be presented in the operating category. A foreign exchange gain or loss arising on a loan liability would 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. In other words, 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.
Gains and losses arising on derivatives which are not used to manage identified risks are generally reported in the operating category of the statement of profit or loss.
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. If the goodwill impairment is material, then aggregating it with these other expenses within ‘administrative expenses’ would not be appropriate because material information would be obscured. Some entities will therefore choose to present the goodwill impairment as a separate line item.
IFRS 18 also provides principles around the labelling of line items in the financial statements. For instance, IFRS 18 states that the use of the term ‘other’ – i.e. ‘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 – i.e. ‘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 – i.e. ‘other investing income’.
In the DipIFR exam, candidates may be required to apply these principles to evaluate the proposed presentation of one or more of the primary financial statements.
Are management-defined performance measures (MPMs) examinable in DipIFR?
No, management-defined performance measures (MPMs) are not examinable in DipIFR.
Has the issue of IFRS 18 had any other consequential amendments which are relevant to DipIFR?
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. However, no marks are awarded in DipIFR for the use of accounting standard names.
