IFRS 18 Student Handbook: Guide to Financial Statement Presentation and Disclosure

IFRS 18 STUDENT HANDBOOK

Presentation and Disclosure in Financial Statements

A Comprehensive Guide for Students and Accounting Professionals Effective Date: 1 January 2027

INTRODUCTION

Welcome to the IFRS 18 Student Handbook! This workbook is designed to help you understand the new standard on Presentation and Disclosure in Financial Statements, which represents one of the most significant changes to financial reporting presentation in recent years.

What This Handbook Covers

• Complete overview of IFRS 18 requirements
• Practical examples and illustrations
• Key differences from IAS 1
• Self-test questions with answers
• Real-world application guidance

1. IFRS 18 OVERVIEW AND INTRODUCTION

Background and Context

IFRS 18 was issued by the International Accounting Standards Board (IASB) on 9 April 2024, in response to investors' concerns about the comparability and transparency of entities' performance reporting. It will be effective for annual reporting periods beginning on or after 1 January 2027, including for interim financial statements.

Why Was IFRS 18 Needed?

Currently, there is no standardised structure for the statement of profit or loss, allowing companies to select their ownsubtotals for inclusion. An IASB study of 100 companies revealed that over 60 of them reported operating profit figures using at least nine different calculation methods, diminishing comparability.

Key Problems IFRS 18 Solves:

• Lack of comparability between entities
• Inconsistent definitions of "operating profit"
• Limited transparency in performance measures
• Unclear presentation guidance

Scope and Application

IFRS 18 sets out overall requirements for the presentation and disclosure in financial statements. The IASB did not reconsider all aspects of IAS 1 when developing IFRS 18, but instead focused on the statement of profit or loss.

Who Must Apply IFRS 18:

• All entities preparing IFRS financial statements
• Both public and private entities
• All industries (with specific guidance for certain business activities)

Relationship with Other Standards

IFRS 18 replaces IAS 1 but retains many existing principles. The IASB retained some paragraphs from IAS 1 in IFRS 18 and moved some paragraphs from IAS 1 to IAS 8 and IFRS 7 Financial Instruments: Disclosures.

2. KEY DEFINITIONS

Operating Category

Items of income and expenses that arise from an entity's main business activities, plus other income and expenses that do not belong in the investing, financing, income taxes or discontinued operations categories.

Investing Category

Returns from investments (such as dividends, interest revenue from investments) and increases or decreases in those investments (such as gains or losses on disposal, impairments or reversals of impairments).

Financing Category

Income and expenses from liabilities that involve only the raising of finance, and from equity.

Management-Defined Performance Measures (MPMs)

Subtotals of income and expenses not specified by IFRS Accounting Standards that are used in public communications to communicate management's view of an aspect of an entity's financial performance.

Specified Main Business Activities

IFRS 18 sets additional requirements for two types of business activity: (1) Investing in assets: for example, investment property companies, investment entities (e.g. funds), insurers; (2) Providing finance to customers: for example, banks, lessors, manufacturer/dealer financing companies.

Operating Profit or Loss

A defined term under IFRS 18 applicable to all companies, representing the result from the operating category, allowing users to better understand the performance of a company's operations and compare operating profit or loss across companies.

3. THE NEW STATEMENT OF PROFIT OR LOSS STRUCTURE

Five Categories System

IFRS 18 creates an opportunity for companies to revisit and change their communication strategy for their financial performance by requiring companies to classify all items of income and expenses into one of five categories: operating, investing, financing, income taxes and discontinued operations.

The Five Categories:

1. Operating - Main business activities
2. Investing - Investment-related income and expenses
3. Financing - Finance-related income and expenses
4. Income Taxes - Tax expenses
5. Discontinued Operations - Results from discontinued operations

Basic Structure Example

4. CATEGORIES OF INCOME AND EXPENSES

Operating Category - The Default Category

Operating category is the default – which means that if you cannot classify some expense or income as either investing or financing (or income tax or discontinued operation), then it is automatically in operating.

Examples of Operating Items:

• Revenue from customers
• Cost of sales
• Employee benefits
• Depreciation of operational assets
• Research and development costs
• Selling and marketing expenses
• Administrative expenses

Investing Category

Includes:

• Interest and dividend income from investments
• Gains/losses on disposal of investments
• Impairment losses on investments
• Fair value changes on investment properties

Example: A manufacturing company holds shares in another company as an investment. Dividend income from these shares would be classified in the investing category.

Financing Category

Includes:

• Interest expense on borrowings
• Finance lease interest
• Foreign exchange gains/losses on financing activities
• Transaction costs on borrowings

Important Note: Manufacturing company without specified main business activities classifies interest expense in financing category; but Bank providing loans to customers classifies interest expense in operating category, especiallywhen it is incurred on borrowings used to provide financing to customers.

Practical Classification Exercise

5. REQUIRED SUBTOTALS

Three Mandatory Subtotals

IFRS 18 requires presenting three subtotals: (1) Operating profit or loss, (2) Profit or loss before financing and income taxes, (3) Profit or loss.

1. Operating Profit or Loss

• What it includes: All items in the operating category
• Purpose: Shows performance from main business activities
• Comparability: Standardized across all entities

2. Profit or Loss Before Financing and Income Taxes

• What it includes: Operating + Investing categories
• Purpose: Shows performance before financing decisions
• Note: Not permitted for an entity that provides financing to customers as a main business activity and chooses to classify income and expenses as operating for all liabilities that involve only the raising of finance.

3. Profit or Loss

• What it includes: All categories combined
• Purpose: Final result for the period

Building Up the Subtotals

6. ENTITIES WITH SPECIFIED MAIN BUSINESS ACTIVITIES

Two Types of Specified Activities

IFRS 18 sets additional requirements for two types of business activity: (1) Investing in assets, (2) Providing finance to customers.

Type 1: Investing in Assets

Examples:

• Investment funds
• Investment property companies
• Insurance companies
• Private equity firms

Special Treatment:

• More investment-related items classified as operating
• Different presentation requirements

Type 2: Providing Finance to Customers

Examples:

• Banks
• Credit unions
• Leasing companies
• Manufacturer financing arms

Special Treatment:

• Interest income/expense often classified as operating
• Different subtotal requirements

Bank Example

7. MANAGEMENT-DEFINED PERFORMANCE MEASURES (MPMs)

What Are MPMs?

Management-defined performance measures are subtotals of income and expenses not specified by IFRS Accounting Standards that are used in public communications to communicate management's view of an aspect of an entity's financial performance.

Examples of MPMs

• Adjusted EBITDA
• Underlying profit
• Normalized earnings
• Core operating profit
• Adjusted operating profit

Not MPMs

Required subtotals or common subtotals listed in IFRS would not be MPMs. Adjusted EBITDA – if EBITDA is the same as OPDAI (operating profit before depreciation, amortization and impairments) would not be an MPM.

Disclosure Requirements

Once you identified that you indeed have an MPM, here's what you need to disclose, in a single note for all MPMs:

Required Disclosures:

1. Why the MPM provides useful information
2. How the MPM is calculated
3. Reconciliation to the most comparable IFRS subtotal
4. Income tax effects
5. Effects on non-controlling interests

MPM Example

Company XYZ Note 25: Management-Defined Performance Measures

The Group uses adjusted operating profit to communicate management's view of underlying profitability. This measure excludes items that management does not expect to arise for several future annual reporting periods.

8. AGGREGATION AND DISAGGREGATION PRINCIPLES

Enhanced Guidance

IFRS 18 provides enhanced guidance on the principles of aggregation and disaggregation that focuses on grouping items based on their shared characteristics. These principles are applied across the financial statements.

Shared Characteristics Principle

Items should be grouped together when they share characteristics such as:

• Nature (what they are)
• Function (what role they serve)
• Measurement basis
• Classification requirements

Disaggregation Requirements

IFRS 18 mandates additional disclosures for items categorised as "other" in the financial statements. Consequently, entities are discouraged from using generic labels and would be required to provide more detailed information.

Example: Better Labeling

Instead of:

Provide:

9. PRESENTATION METHODS: BY NATURE VS BY FUNCTION

The Three Options

IFRS 18 explicitly permits presenting on mixed basis presentation. The method of presentation is not a choice – IFRS 18 gives guidance on how to determine which presentation is most useful.

By Nature Method

Shows what costs are:

By Function Method

Shows what costs do:

Mixed Presentation

Combination of both methods where most appropriate.

Additional Disclosure Requirement

If you are presenting on "by-function" basis on the face of profit or loss statement, then you need to disclose also "by-nature" presentation in the notes (so effectively, you need to work out both methods).

10. COMPARATIVE INFORMATION AND TRANSITION

Effective Date

The new standard will be effective for annual reporting periods beginning on or after 1 January 2027, including for interim financial statements.

Comparative Information Required

• Must restate prior year comparatives
• Apply consistently for at least two years
• May require system and process changes

Early Adoption

Earlier application is permitted.

Implementation Timeline

For December year-end entities:

• 2026: Preparation year - update systems, processes, policies
• 2027: First year of application with 2026 comparatives restated
• 2028: Second year - full comparative periods under IFRS 18

11. PRACTICAL EXAMPLES

Example 1: Manufacturing Company

ABC Manufacturing Ltd - Statement of Profit or Loss

Example 2: Bank

XYZ Bank Ltd - Statement of Profit or Loss

Note: Bank does not present "Profit before financing and income taxes" as providing finance is its main business activity.

12. MULTIPLE CHOICE QUESTIONS

Question 1: IFRS 18 becomes effective for annual periods beginning on or after: a) 1 January 2025 b) 1 January 2026

c) 1 January 2027 d) 1 January 2028

Question 2: How many categories must entities classify income and expenses into under IFRS 18? a) Three categories b) Four categories c) Five categories d) Six categories

Question 3: The default category for income and expenses is: a) Investing b) Financing c) Operating d) Other

Question 4: Which subtotal is NOT required under IFRS 18? a) Operating profit or loss b) Profit or loss before financing and income taxes c) Gross profit or loss d) Profit or loss

Question 5: Management-Defined Performance Measures (MPMs) must be disclosed: a) On the face of the profit or loss statement b) In a single note in the financial statements c) In the management commentary only d) Are not required to be disclosed

Question 6: A manufacturing company's interest expense on bank loans should typically be classified in which category? a) Operating b) Investing c) Financing d) Other

Question 7: For a bank, interest income from loans to customers is typically classified as: a) Operating b) Investing

c) Financing d) Other comprehensive income

Question 8: If an entity presents expenses by function, it must also disclose: a) Expenses by nature in the notes b) Expenses by geography c) Nothing additional d) Expenses by business segment

Question 9: Dividend income from investments is typically classified in which category? a) Operating b) Investing c) Financing d) Income taxes

Question 10: IFRS 18 replaces which previous standard? a) IAS 7 b) IAS 1 c) IFRS 15 d) IAS 16

Question 11: The two types of specified main business activities are: a) Manufacturing and services b) Investing in assets and providing finance to customers c) Domestic and international operations d) Public and private entities

Question 12: Which of the following is NOT typically considered an MPM? a) Adjusted EBITDA (when different from operating profit) b) Underlying profit c) Operating profit as defined by IFRS 18 d) Normalized earnings

Question 13: Comparative information under IFRS 18: a) Is not required b) Must be restated for the prior year c) Can be provided on the old IAS 1 basis d) Only applies to current year

Question 14: The aggregation and disaggregation principles focus on: a) Size of amounts only b) Management preferences c) Shared characteristics d) Alphabetical order

Question 15: Early adoption of IFRS 18 is: a) Prohibited b) Permitted c) Required for listed entities d) Only allowed with regulator approval

13. ANSWERS

Question 1: c) 1 January 2027 IFRS 18 is effective for annual periods beginning on or after 1 January 2027.

Question 2: c) Five categories

Operating, investing, financing, income taxes, and discontinued operations.

Question 3: c) Operating If an item cannot be classified elsewhere, it defaults to operating.

Question 4: c) Gross profit or loss Gross profit is not a required subtotal under IFRS 18.

Question 5: b) In a single note in the financial statements All MPMs must be disclosed together in one note.

Question 6: c) Financing For most entities, interest on borrowings is a financing activity.

Question 7: a) Operating For banks, lending is a main business activity, so related income is operating.

Question 8: a) Expenses by nature in the notes Function presentation requires nature disclosure in notes.

Question 9: b) Investing Dividend income represents returns from investments.

Question 10: b) IAS 1 IFRS 18 replaces IAS 1 Presentation of Financial Statements.

Question 11: b) Investing in assets and providing finance to customers These are the two specified main business activities with special rules.

Question 12: c) Operating profit as defined by IFRS 18 Required IFRS subtotals are not MPMs.

Question 13: b) Must be restated for the prior year Comparative information must be restated under IFRS 18.

Question 14: c) Shared characteristics Items with similar characteristics should be grouped together.

Question 15: b) Permitted Early adoption is allowed under IFRS 18.

CONCLUSION

IFRS 18 represents a significant step forward in financial reporting, bringing much-needed standardization and comparability to the statement of profit or loss. While the changes are substantial, they will ultimately benefit investors, creditors, and other users of financial statements by providing clearer, more consistent information about entity performance.

Key Takeaways:

1. Standardized structure improves comparability
2. Operating profit is now consistently defined
3. MPM disclosures bring transparency to non-GAAP measures
4. Category system provides logical framework
5. Early preparation is essential for successful implementation

Next Steps for Study:

• Review illustrative financial statements
• Practice categorizing different types of income/expenses
• Understand your entity's main business activities
• Consider impact on current reporting processes

This handbook is designed for educational purposes. Always refer to the full IFRS 18 standard and seek professional advice for specific implementation issues.

© Eduyush IFRS 18 Student Handbook | For educational use