IFRS 18: New Global Standard for Financial Statement Presentation and Disclosure

Brought to you by SA Accounting Academy: The International Accounting Standards Board (IASB) has issued a new global standard that fundamentally restructures the presentation of financial statements and introduces mandatory subtotals to eliminate reporting inconsistencies.

In terms of the release by the IASB on 9 April 2024, IFRS 18: Presentation and Disclosure in Financial Statements will replace the 27-year-old IAS 1. The new standard is mandatory for annual reporting periods beginning on or after 1 January 2027. Because the standard requires full retrospective application, reporting entities must ensure that data recorded during the 2026 financial year is structured to provide the necessary comparative figures for 2027 compliance.

Structural Changes to the Income Statement

The core of IFRS 18 is the introduction of three defined categories for income and expenses, alongside two new mandatory subtotals. Every line item must now be classified into one of the following five categories:

• Operating: Includes all income and expenses not classified elsewhere, acting as the primary category for core business activities.
• Investing: Includes returns from investments in assets that generate returns independently of other resources.
• Financing: Covers income and expenses related to the entity’s capital structure.
• Income Taxes.
• Discontinued Operations.

The standard mandates the presentation of Operating Profit and Profit before financing and income taxes. This removes the previous flexibility where companies used varying definitions for operating profit, which a recent survey indicated was calculated using nine different methodologies across 100 listed entities.

Management-defined Performance Measures (MPMs)

A significant regulatory shift involves the treatment of non-GAAP or custom metrics, such as “normalised earnings” or “core profit.” Under IFRS 18, if an entity uses management-defined performance measures in public communications (such as SENS announcements or investor presentations), these must now be included in a single, audited note within the financial statements. This note must include:

• A reconciliation between the custom metric and the most directly comparable IFRS 18 subtotal;
• An explanation of why the metric provides useful information;
• The tax effect and the effect on non-controlling interests for every adjustment made.

Aggregation and Disaggregation Rules

The standard introduces stricter principles for grouping financial data. Entities are prohibited from obscuring material information by aggregating dissimilar items or using vague labels like “Other Expenses.” If an “Other” category remains materially large, the entity must explicitly disclose the nature and amount of the largest components within the notes. Furthermore, for entities using the function method of presentation, specific disclosures for depreciation, amortisation, employee benefits, and impairment losses are now mandatory in the notes.

What this means for you, your business, or your clients

• For yourself: You must update your technical knowledge regarding the specific tax-effecting requirements for Management-defined Performance Measures (MPMs) to ensure you can provide the necessary audited reconciliations.
• For your business: Your firm must reconfigure accounting systems and the chart of accounts by the start of the 2026 financial year to capture data according to the five new categories required for retrospective 2027 reporting.
• For your clients: Advise clients that custom metrics used in market announcements will now fall under the scope of the external audit, requiring rigorous mathematical and tax-effected support to avoid audit qualifications or JSE regulatory censure.

Originally published at https://accountingacademy.co.za/news/read/ifrs-18-the-end-of-creative-profit-reporting-how-the-new-rules-rewrite-the-income-statement