IFRS 18: Presentation and disclosure in financial statements

IFRS 18 – Presentation and Disclosure in Financial Statements was issued by the International Accounting Standards Board (IASB) in April this year and is set to repeal the well-known IAS 1 – Presentation of Financial Statements. The standard became effective on 1 January 2027, with early adoption permitted.

Financial reporting practitioners in countries where International Financial Reporting Standards (IFRSs) apply have already started preparing for the landmark changes brought by IFRS 18. Reporting entities in Nigeria are expected to be at the forefront of these discussions. This development coincides with other significant changes, such as the adoption of sustainability standards, hyperinflationary reporting (for countries where hyperinflation exists), and regulators’ reporting requirements. Nigeria is not left out of these emerging changes.

Consequently, financial reporters in reporting entities must begin setting the modalities for implementing the new standard. In practical terms, the way financial statements are presented will change significantly with the adoption of IFRS 18.

Key objectives of IFRS 18

Paragraph 1 of IFRS 18 states that its objective is to set out requirements for the presentation and disclosure of information in general-purpose financial statements to ensure they provide relevant information that faithfully represents an entity’s assets, liabilities, equity, income, and expenses. While this aligns with the objective of IAS 1, IFRS 18 introduces new requirements in three major areas:

New required subtotals in the statement of profit or loss.

Disclosures about management-defined performance measures (MPMs).

Enhanced requirements for aggregation and disaggregation to provide more useful information.

Introducing subtotals in the statement of profit or loss

The current applicable standard, IAS 1, does not prescribe totals or subtotals for items presented in the statement of profit or loss. Companies often calculate subtotals in diverse ways. For example, an entity might have an investment in an associate generating profit, while another entity might present interest on a defined benefit plan as a separate line before arriving at profit totals. This lack of consistency hampers meaningful cross-sectional analysis of companies within the same industry or trend analysis for a single reporting entity when line items change significantly year over year.

To address this issue, IFRS 18 proposes classifying income and expenses in the statement of profit or loss into:

Operating,
Investing,
Financing,
Income tax, and
Discontinued operations.

The resulting presentation will introduce subtotals for operating profit or loss, profit or loss before financing and income tax, and overall profit or loss. This classification aims to provide a uniform format, facilitating comparability between entities and year-on-year analysis within an entity. The proposed classification is similar to the existing presentation of cash flows under IAS 7, making it familiar to reporting entities.

Entities must now present income and expenses arising from ordinary business activities as operating activities, items affecting investment as investing activities, and items affecting sources of funds as financing activities.

Special considerations in IFRS 18

Paragraph 53 of IFRS 18 emphasizes that, while investments in assets are typically classified as investing activities, if an entity invests in assets as part of its primary business activities, applicable income and expenses will be classified as operating activities. Exceptions include investments in joint ventures, associates, unconsolidated subsidiaries, and cash and cash equivalents. Additionally, foreign exchange differences arising under IAS 21 (The Effects of Changes in Foreign Exchange Rates) must be classified consistently with the category of the related income or expense. For example, foreign exchange differences from receivables classified as operating activities will also be included in the operating category.

Management-defined performance measures (MPMs)

In response to growing demand for alternative performance measures, IFRS 18 introduces disclosures for MPMs, defined as subtotals of income and expenses that:

a) are used in public communications outside financial statements.

b) reflect management’s view of an entity’s overall financial performance.

c) are not listed in paragraph 118 of IFRS 18 or specifically required by IFRS standards.
MPMs are now audited and form an integral part of financial reporting. Examples include regulatory ratios not explicitly required by IFRS but communicated to regulators as performance metrics.

Aggregation and disaggregation requirements
To improve the adequacy of information, IFRS 18 requires aggregation and disaggregation based on shared or non-shared characteristics. Entities must avoid grouping unrelated expenses under generic labels like “other expenses.” Instead, labels and descriptions should faithfully represent an item’s characteristics, providing sufficient detail to enhance users’ understanding.

The role of stakeholders in implementing IFRS 18
The Financial Reporting Council of Nigeria (FRCN), auditors, regulators like the CBN and NAICOM, and other stakeholders have a significant role in supporting reporting entities with IFRS 18 implementation. Key questions include:

What qualifies as MPMs?

What are the specific modalities for adopting IFRS 18 in Nigeria?

What level of aggregation and disaggregation is appropriate?

How will financial reporting tools and IT systems be affected?

As these issues are addressed, the FRCN continues to champion the adoption of IFRS 18 in Nigeria.

Sobur Olamilekan Bello, ACA, AAIA, aka Your IFRS Pal, Audit and Financial Reporting Expert.