New presentation of the income statement in financial reporting in accordance with IFRS 18
In the new standard IFRS 18, the International Accounting Standards Board (IASB) - a standard setter - has addressed the criticism from stakeholders that financial reporting under IFRS is only insufficiently comparable and is lacking in transparency. In particular, an income statement structure has thus been specified; moreover, IFRS 18 requires the disclosure and reconciliation of so-called management-defined performance measures (MPMs). Businesses should conceptualise this measurement and ensure that it has been functionally implemented, at the latest, by the end of 2026.
1. Implementation of the ‘Primary Financial Statements’ project
As a result of the ‘Primary Financial Statements’ project, in April 2024, the IASB published IFRS 18 Presentation and Disclosure in Financial Statements. The new standard replaces IAS 1 with effect from financial years beginning on or after 1.1.2027. Its application will be retrospective in accordance with the requirements of IAS 8; for the prior period, a reconciliation has to be created between the amounts for each item in the income statement reported in accordance with IFRS 18 and those previously presented in accordance with IAS 1. Voluntary early application is permitted insofar as this is authorised by the EU through its endorsement procedure, which is still pending.
2. An overview of the changes
The new IFRS 18 specifies a uniform structure for the income statement with defined subtotals. If the cost of sales method is chosen then additional information will have to be disclosed in the notes. Furthermore, in response to the previous criticism that analysis options are limited, the IASB has provided rules on aggregation and disaggregation when relevant information is presented in a way that is either highly aggregated or too detailed.
3. Income statement structure
In future, the expenses and income that have to be reported in the income statement must be allocated to one of five categories. Furthermore, two subtotals have to be included. In future, for a manufacturing company this would result in the structure presented in the following figure.
|
Operating Activity |
- = + - - - - - |
Sales revenues Cost of sales Gross profit Other operating income Selling expenses R&D expenses Administrative expenses Goodwill impairment loss Other operating expenses |
|
|
= | Operating profit or loss |
|
Investments |
+ + |
Interest income Investment income |
|
|
= | Profit or loss before financing and income taxes |
|
Financing |
- | Interest expense |
|
|
= | Profit or loss before income taxes |
|
Income taxes |
- | Income taxes |
|
|
= | Profit or loss from continuing operations after income tax |
|
Profit or loss from discontinued operations |
+/- | Profit or loss from discontinued operations |
|
|
= | Annual profit or loss |
The classification of items of income and expense included in the income statement into the categories under IFRS 18.47 is based on the categorisation of the underlying assets and liabilities and is described in IFRS 18.47-68 as well as in Appendix B “Application guidance“ B29 ff.
The income and expenses for an operating activity have to be classified either according to the cost of sales method or the total cost method. The choice of method to be applied here must be made with reference to its usefulness for decision-making. If the cost of sales method is applied, then additional disclosures will be required in the notes, in particular, on scheduled and unscheduled depreciation or write-downs as well as personnel and material expenses.
4. Aggregation and disaggregation of information
As was already the case under IAS 1, the primary financial statements are defined as consisting of an income statement, a balance sheet, a statement of changes in equity as well as a statement of cash flows. In IFRS 18, a novel element is that the functions of these components have been conceptualised. The purpose of the notes to the financial statements is, accordingly,
- to provide material information for enabling an understanding of the items presented in the primary components of the financial statements, and
- to supply additional information to meet the objective of the financial statements (IFRS 18.17).
To this end, IFRS 18 includes explicit guidelines on when an item has to be reported in the primary financial statements. Moreover, the standard stipulates what has to be disclosed in the notes if it was judged to be unnecessary to present an item in the primary financial statements. Criteria for aggregating and disaggregating mentioned in IFRS 18.41:
- assets, liabilities, equity, income, expenses or cash flows must be combined in items on the basis of shared characteristics;
- items based on characteristics that are not shared must be broken down;
- items must be aggregated or disaggregated in such a way so that the primary function of the financial statements can be fulfilled, namely, to provide useful structured summaries.
5. Management-defined performance measures (MPMs)
For the first time, businesses will have to disclose management-defined performance measures (MPMs) in the notes to the financial statements. In doing so, the MPMs need to be defined, and how they provide useful information must be explained. Moreover, these performance measures have to be reconciled with the totals or subtotals specified under IFRS.
Example: A business specifies working capital as a management-defined performance measure. Working capital is defined as the difference between current assets and short-term liabilities; it serves as a metric that is useful for decision-making when assessing the financial performance of a business. Positive working capital provides information on the financial flexibility that enables the financing of investments and growth; negative working capital can indicate that there is difficulty in meeting payments. Current assets are shown as a subtotal on the balance sheet; other provisions and trade payables qualify as short-term liabilities.
