IFRS 18 replaces IAS1 effective 1 January 2027, introducing significant change to how IFRS preparers report their financial statements.
This article summarises the key considerations affecting the Income statement, which are most likely to present difficulties for IFRS preparers.
The notable changes affecting the Income statement are:
1.A new structured format for the Income statement to be presented along the following categories:
2.Mandatory presentation on the face of the Income Statement of sub-totals for:
3.Disclosure of management performance measures (Non-GAAP) – Where non-GAAP measures (e.g. adjusted EBITDA) are used, these must be explained and reconciled to IFRS numbers in the notes to the financial statements.
Specified Main Business Activity
An entity must first assess whether any of its main business activities qualify as a ‘Specified Main Business Activity’, as defined by IFRS 18.
If the ‘Specified Main Business Activity’ involves investing in particular types of assets or providing financing to customers, an entity reports its income and expenses as Operating. For example, an investment property company reports its rental income and expenses as Operating, whereas a trading company earning sub-letting rental income reports such item as investing.
Where an entity has more than one Main Business Activity, judgement will need to be exercised to determine which activity is the predominant one.
If an entity does not have a Specified Main Business Activity, it will need to review which income and expenses are first to be classified in the financing category, as opposed to operating.
Investing category
IFRS 18 sets out three types of assets whose income and expenses would be classified as investing (other than where it is part of their specified main business activity):
i. Investments in associates, joint ventures and unconsolidated subsidiaries
ii. Cash and cash equivalents
ii. Other assets if they generate a return individually and largely independently of the entity’s other resources.
This classification should include the income generated by the assets, income and expenses on initial/ subsequent measurement, derecognition of the assets and the incremental expenses directly attributable to the acquisition and disposal of the assets.
Financing category
IFRS 18 distinguishes between two types of liability:
i. Those arising from transactions that involve only the raising of finance
ii. Any other liabilities
Items arising from transactions that involve only the raising of finance are treated as Financing, e.g. interest expense on debt instruments.
Items arising from any other liabilities may be classified as either Financing or Operating.
Additionally, interest income or expense arising from the application of other areas of IFRS are classified as Financing, e.g. interest on lease liabilities recognised under IFRS16. Any other interest items are classified as Operating.
Operating category
The operating category is a residual category, for items which are not classified as either investing or financing, or as income taxes or discontinued.
Note:
Foreign exchange differences
Under IFRS 18 foreign exchange differences are classified in the same category as the income and expenses from the items that gave rise to such exchange difference. For example, an exchange difference arising from a foreign currency trade receivable is classified as Operating. An exchange difference arising from a foreign currency bank loan is classified as Financing.
Presentation of lines of operating items
An entity presents income or expenses based on their nature or their function.
In contrast to the requirements of IAS 1, IFRS 18 permits entities to have a mixed presentation of by nature and by function only if that provides the most useful information about the business.
Application and transition
IFRS18 is effective for reporting periods beginning on or after 1 January 2027, with earlier application permitted.
The amendments relating to IFRS18 have also been reflected in the 2024/2025 amendment cycle of FRS101.
Because IFRS18 will be applied retrospectively, entities must disclose a reconciliation for each prior period line item in the Income statement between:
Early preparation for IFRS18 is therefore critical. Entities should review and document their data mapping, performance metrics and key judgements. Our HW Fisher reporting specialists are on hand to support you.
Changes to filing financial statements from April 2028
The government has finally confirmed that the requirement for small and micro company companies to file their Profit and Loss account at Companies House will be mandated from April 2028.
However an “opt-out of publication” option will be available to such companies; these details have yet to be published.
Other points to note:
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