In April 2024, the International Accounting Standards Board IASB published a new IFRS Accounting Standard, IFRS 18, Presentation and Disclosure in Financial Statements. This will be replacing IAS 1 with effect for financial years beginning on or after January 1, 2027. The adoption into the EU is currently being prepared by EFRAG and is expected before IFRS 18 first comes into effect. The first-time application will occur retrospectively. This means that the comparison year 2026 and also the quarterly reports for Q1/2027 will need to be adjusted using a comparison to the previous year’s quarter. As a consequence, the measures for switching to IFRS 18 ought to be completed by the end of 2026/2027 at the very latest.
So what are the changes? The main changes compared to IAS 1 are as follows:
- For the income statement, a uniform structure with defined subtotals will be specified for the first time. If the cost of sales method is chosen, significant information on the cost types must be disclosed in the notes.
- Key figures used by companies in financial market communication must, if necessary, be defined and reconciled with items in the income statement.
- Disclosure options in the cash flow statement are removed.
This article briefly explains these key changes.
Structure of the income statement, subtotals
The expenses and income to be reported in the income statement must in the future be assigned to one of five categories. In addition, two subtotals will be mandatory. This results in the following structure:
- “Operating”
- Subtotal: Operating profit or loss
- “Investing”
- Subtotal: Profit or loss before financing and income taxes
- “Financing”
- “Income taxes”
- “Discontinued operations”
Profit or loss
While the content of categories (4) and (5) remains unchanged from the previous IAS 1, category (2) “Investing” is a new addition. It mainly includes income and expenses from the application of the equity method of accounting and from other assets that produce results largely independently of the company’s other resources. These may be investment properties or investments in equity, or debt instruments (shares and bonds), for example.
Category (3) “Financing” includes expenses (income is likely to be less common) from general corporate financing, such as loans taken out and bonds issued. Finally, the central category (1) “Operating” is only defined negatively, i.e. by exclusion: It serves as a catch-all for any expenses and income that do not fit into any of the other predefined categories.
However, the new structure is not quite as clear as it might at first appear: Companies (groups) are required to analyze whether (a) investments in assets and/or (b) the provision of financial services are part of the group’s “main business activity.” This, quite clearly, is not only applicable to insurance companies, leasing companies, and banks, but also to many conglomerates. The existence of such main business activities can lead to reclassifications of expenses and income from the “Investing” and “Financing” categories to the “Operating” category. In addition, there are some special regulations, for example for the allocation of expenses and income for derivatives and hedging instruments.
An in-depth analysis of the investments and corporate financing against the background of any existing main business activities is indispensable. This can make it necessary to separate interest expenses and income (but also other items) and to assign them to different categories, depending on the underlying circumstances. As a result, there are implications for account mapping and accounting policies.
Total cost or cost of sales method
The strict separation between the total cost method and the cost of sales method is being abolished. This change explicitly allows for the separate disclosure of impairment expenses for goodwill or other assets within the scope of IAS 36 when using the sales cost method.
Additional disclosures when using the cost of sales method
Up until now, when using the cost of sales method, it has been mandatory to separately disclose scheduled depreciation as well as personnel and material expenses in the notes to the financial statements. This section has been clarified and expanded: If within the “Operating” category some items are reported using the cost of sales method, then scheduled depreciation of property, plant, and equipment, intangible assets, investment properties, and leasing rights-of-use, as well as personnel expenses according to IAS 19 and IFRS 2, and impairment losses and reversals of impairment losses according to IAS 36 (long-term assets) and IAS 2 (inventories), must be separately disclosed in the notes. Additionally, an indication is required as to where these expense and income items can be found within the “Operating” category, and whether and where they have been recorded outside of this category.
Company-specific key figures: Management-defined Performance Measures – MPM
Many companies and corporations like to use specially developed key figures in financial market communication, where it is often not quite clear how these are defined. In this context, terms like “adjusted EBITDA,” “sustainable operating result,” or “result before special effects” have gained a certain notoriety.
However, metrics such as gross profit, EBITDA, or EBT are not considered MPMs (Management-defined Performance Measures) because they can be derived as intermediate results from the income statement or can be specified directly. In the future, when using other metrics that do not directly appear as intermediate results, these must be explained. Additionally, and this is another novelty, a reconciliation to the nearest comparable figure from the income statement must be provided for such metrics, along with the indication of income tax effects and effects on non-controlling interests.
Cash flow statement
The existing options for classifying received and paid cash flows from interest and dividends are being eliminated. In the future, paid interest and dividends should be classified under financing activities, while received interest and dividends should be classified under investing activities. Note that there are exceptions for certain business models whose main activities are in the areas of investing or financing. This affects banks for example, as their services primarily relate to financing activities.
Conclusion on IFRS 18
IFRS 18 necessitates quite a number of adjustments regarding the income statement and the required disclosures as well as reconciliations for MPMs. These should be completed and fully operational by the end of 2026 at the latest. It is also important to note that, unlike before, the determination of MPMs, including the related disclosures, will be subject to audit requirements.
Best of luck!
Carsten Theile
