IAS 1, Presentation of Financial Statements, is about to become an IFRS as it is being replaced by IFRS 18, Presentation and Disclosure in Financial Statements, likely to be issued early this year (2024). A significant change will be the introduction of new subtotals and recording income and expenses into newly specified categories.
New subtotals
A major change relates to two new subtotals that are to be included in the statement of profit or loss, namely ‘operating profit’ and ‘profit before financing and income tax’. These subtotals would also mean that an entity would present income and expenses recorded in several specified categories: operating, investing, financing, income taxes and discontinued operations. The allocation of items between operating, investing and financing will be one of the key changes that entities will have to be prepared for.
Operating category
The operating category is really seen as the default category for income and expenses. It comprises all income and expenses relating to an entity’s main business activities, whether they are volatile and unusual or not.
This could mean that income or expenses from investments or from providing finance to customers are included here if that is the main business activity of the entity.
Entities will continue to be required to present operating expenses based on either their nature or function, or a mixed presentation, whichever provides the most useful information.
Entities that present cost of sales will be required to include within cost of sales the carrying amount of inventories recognised as an expense.
Investing category
The investing category will include income or expenses from assets that generate returns individually and largely independently from other resources held by the entity. Such assets would include associates or joint ventures, and any income or expenses from cash and cash equivalents would also be included.
Any income or expenses arising from the disposal of individual assets or disposal groups (including items held for sale) would not be classified here unless the income or expenses from the assets were also recorded in the investing category.
Financing category
The financing category will include income or expenses from liabilities that arise in the raising of finance. As stated earlier, entities providing finance to customers as a main activity are unlikely to use this category. As a result, these entities would also not present the subtotal ‘profit or loss before financing and income tax’ if they classify these items in the operating category.
Complex items
Some items could be difficult to assess, as they could potentially fit in several categories. One such item relates to foreign exchange differences. The tentative decision is to record the foreign exchange difference in the same category as the income or expenses from the items that gave rise to the differences, unless doing so would involve undue cost or effort. This means that foreign exchange differences on liabilities used to raise finance would go in the financing category, and foreign exchange differences on tax balances would go into the income tax category.
Timeline
IFRS 18 is currently projected to be applicable for annual periods beginning on or after 1 January 2027. An entity will be required to apply IFRS 18 retrospectively.
In the first year of application, an entity will be required to disclose a reconciliation between each line item in the statement of profit or loss presented by applying IAS 1, and each line item presented by applying IFRS 18. This would be required for the comparative period immediately preceding the period in which IFRS 18 is first applied. It is permitted, but not required, for the first period in which IFRS 18 is first applied.