August 13, 2024
IFRS 18: Redefining Financial Statements
The International Accounting Standards Board (IASB) has introduced a new standard called IFRS 18, which brings significant changes to how companies must present and disclose their financial statements. This standard was issued in April 2024 and will be mandatory starting from January 1, 2027.
Key Changes Introduced by IFRS 18:
1) Classification of Income and Expenses:
All income and expenses during a reporting period must now be included in the statement of profit or loss.
These items must be categorized into one of five sections:
a)Operating: For regular business activities not covered by other categories.
b)Investing: Related to investments.
c)Financing: Pertaining to loans and financial activities.
d)Income Taxes: For tax-related income and expenses.
e)Discontinued Operations: For parts of the business that have been sold or shut down.
2) Presentation of Totals and Subtotals:
Companies must clearly present key financial figures, such as:
a) Operating Profit or Loss: Profit or loss from normal business operations.
b) Profit or Loss Before Financing and Income Taxes: Profit or loss before considering financial costs and taxes.
c) Overall Profit or Loss: The final profit or loss figure.
3) Allocation of Profit or Loss:
The financial statements must show how profit or loss is divided between:
a) Non-Controlling Interests: Profits belonging to shareholders who do not have a controlling stake in the company.
b) Owners of the Parent Company: Profits belonging to the main shareholders.
4) Comprehensive Income Allocation:
Similar to profit or loss, companies must also show how comprehensive income (which includes things like unrealized gains and losses) is divided between non-controlling interests and the parent company.
This includes showing the share of other comprehensive income from investments in other companies.
5) Management-Defined Performance Measures (MPMs):
a) Companies often use their own performance measures in public reports that are not defined by standard accounting rules. IFRS 18 requires these measures to be clearly identified and explained.
b) Companies must disclose these measures in a single note to the financial statements, explaining how they reflect management's view of the company’s performance.
6) Aggregation and Disaggregation:
IFRS 18 emphasizes the importance of grouping similar items together (aggregation) and separating different items (disaggregation) to provide a clearer and more detailed financial statement.
In Summary: IFRS 18 is about making financial statements more transparent and easier to understand by categorizing income and expenses, clearly showing key financial figures, and requiring explanations for any management-specific performance measures. It aims to provide a more consistent and comparable view of a company's financial health.
August 13, 2024