The way companies communicate their financial performance is set to change.
Responding to investor calls for more relevant information, IFRS 18 Presentation and Disclosure in Financial Statements(i) will enable companies to tell their story better through their financial statements. Investors will also benefit from greater consistency of presentation in the income and cash flow statements and more disaggregated information.
So what does this mean for companies’ financial reporting? Essentially, companies’ net profit will not change. What will change is how they present their results on the face of the income statement and disclose information in the notes to the financial statements. This includes disclosure of certain ‘non-GAAP’ measures – management performance measures (MPMs) – which will now form part of the audited financial statements.
IFRS 18 marks a step towards more connected reporting. Financial statements that include relevant and consistent information will afford users better information on companies’ financial performance.
“IFRS 18 brings three categories of income and expenses, two income statement subtotals and one single note on management performance measures. These, combined with enhanced disaggregation guidance, set the stage for better and more consistent information for users – and will affect all companies.”
Gabriela Kegalj
KPMG global IFRS presentation leader
Our article will help you understand:
IFRS 18—the key new requirements
Under current IFRS® Accounting Standards, companies use different formats to present their results, making it difficult for investors to compare financial performance across companies.
IFRS 18 promotes a more structured income statement, as set out below. In particular, it introduces a newly defined ‘operating profit’ subtotal and a requirement for all income and expenses to be allocated between three new distinct categories based on a company’s main business activities.
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All companies are required to report the newly defined ‘operating profit’ subtotal – an important measure for investors’ understanding of a company’s operating results – i.e. investing and financing activities are specifically excluded. This means that the results of equity-accounted investees are no longer part of operating profit and are presented in the ‘investing’ category.
IFRS 18 also requires companies to analyse their operating expenses directly on the face of the income statement – either by nature, by function or using a mixed presentation. Under the new standard, this presentation provides a ‘useful structured summary’ of those expenses. If any items are presented by function on the face of the income statement (e.g. cost of sales), then a company provides more detailed disclosures about their nature.
Companies often use ‘non-GAAP’ information to explain their financial performance because it allows them to tell their own story and provides investors with useful insight into a company’s performance.
IFRS 18 now requires some of these ‘non-GAAP’ measures to be reported in the financial statements. It introduces a narrow definition for MPMs(ii), requiring them to be:
- a subtotal of income and expenses;
- used in public communications outside the financial statements; and
- reflective of management’s view of financial performance.
For each MPM presented, companies will need to explain in a single note to the financial statements why the measure provides useful information, how it is calculated and reconcile it to an amount determined under IFRS Accounting Standards.
To provide investors with better insight into financial performance, the new standard includes enhanced guidance on how companies group information in the financial statements. This includes guidance on whether information is included in the primary financial statements or is further disaggregated in the notes.
Companies are discouraged from labelling items as ‘other’ and will now be required to disclose more information if they continue to do so.
How could IFRS 18 impact your business?
IFRS 18 will not only have implications on the presentation and disclosures in the financial statements, it may also have profound impacts on many aspects of the organisation.
Here are some key considerations businesses may need to keep in mind as they determine the extent to which they may be impacted by IFRS 18.
IFRS 18 may require new judgements and assessments — for example:
- judgement in deciding the appropriate level of aggregation and disaggregation across the financial statements, including when information should be included in the primary financial statements or disaggregated in the notes based on new requirements and guidance.
- assessing what the main business activities of the company are. For group companies with specified main business activities(iii) (e.g. manufacturer that provides financing to customers), the income statement classification at the consolidated level may differ from the operating company level, if all activities are not considered ‘main’ business activities for the group as a whole.
- identifying the categories in which income and expenses should be classified. This assessment may be more onerous with respect to income and expenses that have specific classification requirements in IFRS 18—for example, foreign exchange differences, derivatives, hybrid contracts.
- determining which method for presenting operating expenses—by nature, by function or using a mixed presentation—provides the most useful information about operating expenses on the face of the income statement.
Companies will need to prepare new or update disclosure within the notes to the financial statements for the analysis of operating expenses by nature (if presentation by function or mixed presentation is used in the income statement) and MPMs (if they communicate using measures that are MPMs). In addition, companies may need to further disaggregate the information disclosed in existing notes.
Companies will need to understand how the underlying data needed to provide or update the relevant disclosures will be sourced, and if any data collection processes and controls need to be updated to facilitate this.
Some companies may need to adapt their financial reporting systems to track and collate the more disaggregated information and classify income and expenses into the new categories.
The system implications may be more significant for companies presenting an analysis of operating expenses by function or mixed presentation on the face of income statement.
System implications may also arise, for example, where:
- the output of one group company is the input of another group company and the nature of expense is lost or not tracked at the consolidated level. This may be more significant where the standard costing method for inventories is used.
- there is more than one set of business activities in the group, and the classification of items of income and expenses will be different at the consolidated level as compared to the operating company level.
- IFRS 18 includes specific classification requirements—for items such as foreign exchange differences, fair value gains and losses on derivatives and income and expenses from hybrid contracts. Such income and expenses may therefore need to be classified into different income statement categories. Some companies may also utilise separate treasury management systems to record information on financial instruments at a more granular level compared with the ERP systems, which may also require updates.
Companies may need to review charts of accounts, update transaction recording systems, revise consolidation processes, add new data points for disclosures or design revised control procedures to ensure compliance.
Currently, some companies present self-defined subtotals in the income statement, which are likely to change to align with the new defined subtotals in IFRS 18. For example, the introduction of the mandatory defined subtotal for operating profit under IFRS 18 would mean companies that currently present a subtotal labelled operating profit may need to change how they calculate the subtotal.
Remuneration arrangements, bonus schemes or covenant tests that directly link to, or use existing self-defined subtotals such as operating profit or loss as a starting point for the relevant assessment will need to be reviewed to determine if they are impacted by IFRS 18. Depending on the specific arrangements in place, it may be necessary to amend existing terms and conditions. Where this is the case, companies will need to determine the changes required, explain these to the relevant counterparties and, indeed, assess results and outcomes on the new terms.
In the UK, the annual report is a key aspect of a company’s communication with its stakeholders. It is common for the analysis in the strategic report included within the front-half of the annual report to use non-GAAP performance measures, for example adjusted operating profit or EBITDA, in assessing progress against strategic objectives and measuring business performance. IFRS 18 may cause companies to revisit the non-GAAP performance measures discussed in their front-half of annual report.
Additionally, ensuring that investors and other stakeholders really understand how your income statement and disclosures will change ahead of the first annual report and accounts applying IFRS 18 will be critical. Involving your investor relations team early will be important so that when mandatory reporting under IFRS 18 is here, all your key stakeholders already understand the impact of the new standard and you avoid potential misinterpretations. Similarly, companies will need to educate their staff members on the requirements in IFRS 18 and changes to processes, systems and controls.
What should you do next?
Now is the time to get ready to report under the new standard, which is effective from 1 January 2027 and applies retrospectively. This means for companies with December year-ends, it will be necessary for any changes to systems, processes and controls to be in place from 1 January 2026. In addition, companies will be required to present the new income statement categories and subtotals in the interim financial statements in the first year of applying IFRS 18. Early application of IFRS 18 is also permitted(iv).
We would therefore encourage companies to start early in planning their IFRS 18 implementation.
The implications of IFRS 18 will vary and may be more significant for some companies than others. Management and those charged with corporate reporting responsibilities should begin understanding the new changes in detail and undertake an initial impact assessment to assess the likely areas of impacts for the company.
How KPMG can help
KPMG’s Accounting Advisory Services team stands ready to support you with the transition to IFRS 18. Our team of technical accountants, corporate reporting specialists and systems transformation experts bring deep experience in accounting standard changes and knowledge applicable at each stage of the transition process. Click below to find out more.
- Tailored in-person or virtual workshops to explain the new requirements, what applies to you, and the likely differences to the content you currently report.
- Review your existing income statement and disclosures (including the financial statements and front-half disclosures) in detail and identify your impacted areas.
- Evaluate the ability of your existing systems and processes to capture the required changes to the income statement and disclosures. Identify areas where changes to those systems and processes may be necessary for compliance.
- Determine a transition approach appropriate for your business.
- Prepare papers setting out your application of the new standard, including decisions on key judgements and new policies.
- Explore your options to update aspects of your existing systems, processes and controls related to financial reporting, including adapting new tools that are scalable and adaptable for future changes.
- Explain the planned changes to your auditors, investors and other stakeholders.
- Implement changes needed to existing systems, processes and controls.
- Embed new ways of working and upskill the business, including trainings to staff.
- Prepare or review draft disclosures and new income statement format.
Please stay tuned for more information on the new standard or get in touch with our experts below if you require support or further information.
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(i) IFRS 18 replaces IAS 1 Presentation of Financial Statements.
(ii) IFRS 18 defines management performance measures (MPMs); these measures are currently commonly known as non-GAAP measures, alternative performance measures (APMs), or key performance indicators (KPIs).
(iii) Companies with specified main business activities are companies that invest in assets (e.g. real estate companies) or provide financing to customers (e.g. banks) as their main business activity. Such companies would classify in the operating category of the income statement some income and expenses that would otherwise form part of the investing or financing categories for most other companies.
(iv) This is subject to formal adoption in the UK by the UK Endorsement Board (UKEB). Refer IFRS 18 | UK Endorsement Board (endorsement-board.uk) for the adoption status.