The third set of requirements introduced by the new IFRS 18 is detailed below:
More useful grouping of information in the financial statements (aggregation and disaggregation)
Investor analysis of companies’ performance is hampered if the information provided by companies is too summarised or too detailed. IFRS 18 sets out enhanced guidance on how to organise information and whether to provide it in the primary financial statements or in the notes.
IFRS 18 introduces:
- Guidance on whether information should be in the primary financial statements or the notes;
- Enhanced requirements for aggregating and disaggregating information and using meaningful labels for items presented or disclosed; and
- Specific requirements for presenting and disclosing operating expenses.
- Guidance on whether information should be in in the primary financial statements (PFS) or the notes
IFRS 18 explains the roles of the PFS and the notes. Companies will use these roles to decide if information should be presented in the PFS or in the notes.
PFS comprise the statement of financial position, statement of profit or loss, statement of comprehensive income, statement of changes in equity and the statement of cash flows. The role of the PFS is to provide useful structured summaries of a company’s assets, liabilities, equity, income, expenses and cash flows whereas the role of the notes is to provide further material information to enable investors to understand the line items in the PFS and to supplement the PFS.
Structured summaries are useful for:
- Obtaining an understandable overview
- Making comparisons between entities, and reporting periods for the same entity; and
- Identifying items/areas about which users wish to seek additional information in the notes.
- Aggregation, disaggregation and meaningful labels
The general requirement is to aggregate items that share characteristics and disaggregate items that have different characteristics. IFRS 18 provides examples of characteristics that should be considered. Items should be grouped in a way that does not obscure material information or reduce the understandability of the information presented.
Items should be described in a way that faithfully represents the characteristics of the item by using meaningful labels. The label “other” should only be used when companies cannot find a more informative label and if so, it should use a label that describes the aggregated item as precisely as possible for example “other operating expenses”.
- Specific requirements for presenting and disclosing operating expenses
IFRS 18 requires a company to present expenses in the operating category in a way that provides the most useful structured summary of its expenses. To do so, a company will present in the operating category expenses classified based on nature or function. IFRS 18 permits companies to classify some expenses by nature and other expenses by function if this classification provides the most useful structured summary of their expenses.
For companies that present expenses classified by nature, IFRS 18 requires disclosure of the amounts included in each line item in the operating category of the statement of profit or loss, in a single note, for:
- Depreciation
- Amortisation
- Employee benefits
- Impairment of non-financial assets; and
- Write-down of inventories
Changes to IAS 7 statement of cash flows
The IASB has made limited changes to the statement of cash flows:
- Requiring companies to use the operating profit subtotal as the starting point for reporting cash flows from operating activities using the indirect method; and
- Removing the presentation alternatives for interest and dividend cash flows. For most companies, interest and dividends received should be classified in cash flows from investing activities, while interest and dividends paid should be classified in cash flows from financing activities.
- For entities with specified main business activities (i.e. companies whose main business comprise providing financing to customers and investing in assets), interest and dividends received, and interest paid should be classified in a single category (either operating, investing or financing activities), while dividends paid should be classified in cash flows from financing activities.
Effective date and transition
IFRS 18 is effective for annual periods beginning on or after 1 January 2027, but earlier application is permitted. Restatement of comparative information for prior years are required in accordance with IAS 8.
EU endorsement status
The European Commission (EC) issued its endorsement advice request for IFRS 18 to EFRAG (European Financial Reporting Advisory Group) on 29 April 2024. EFRAG is on the way to assess the endorsement criteria and to publish a draft endorsement advice by the end of 2024. EFRAG’s final endorsement advice to the EC is expected Q2 of 2025. If the EC decides to endorse the new standard it prepares a draft regulation and submits it to the ARC (Accounting Regulating Committee) in all EU official languages. If the ARC’s opinion is positive, the EC submits the draft regulation to the European Parliament and the Council for a 3-month scrutiny period. If there are no objections from the European Parliament or the Council, the EC adopts the endorsing regulation and publishes it in the Official Journal.
Implementation Support
The IASB undertook activities to support implementation and consistent application of the Standard and educational materials, webcasts and webinars are available at the following link:
https://www.ifrs.org/supporting-implementation/supporting-materials-by-ifrs-standards/ifrs-18/
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