How companies communicate financial

performance is changing
IFRS 18 aims to deliver more consistent, comparable and transparent information

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Article Posted date9 April 2024

4 min read

Global IFRS Institute

Highlights
• A more structured income statement
• MPMs – Disclosed and subject to audit
• Greater disaggregation of information
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 Statements1 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
A more structured income statement
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.

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.

MPMs – Disclosed and subject to audit

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 2, 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.

Greater disaggregation of information

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.

Next steps
Now is the time to get ready to report under the new standard, which is effective
from 1 January 2027 and applies retrospectively. It is available for early adoption.

• Assess the impacts on your financial statements.

• Communicate the impacts with investors.
• Consider how the new requirements impact financial reporting
systems and processes.
• Monitor any changes in the local reporting landscape.
Our high-level guide, available shortly, will help you understand the new accounting
standard and assess the impacts for your company. And look out for our First
Impressions publication, which will provide more information on the new standard,
including our detailed insight and illustrative examples.
1
IFRS 18 replaces IAS 1 Presentation of Financial Statements.
2
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).
© 2024 KPMG IFRG Limited, a UK company, limited by guarantee.
IFRS 18 is here: redefining financial performance reporting

Publication date: 09 Apr 2024

Key points

The IASB has issued IFRS 18, the new standard on presentation and disclosure in
financial statements, with a focus on updates to the statement of profit or loss.
The key new concepts introduced in IFRS 18 relate to:

The structure of the statement of profit or loss;

Required disclosures in the financial statements for certain profit or loss

performance measures that are reported outside an entity’s financial
statements (that is, management-defined performance measures); and

Enhanced principles on aggregation and disaggregation which apply to the

primary financial statements and notes in general.

IFRS 18 will replace IAS 1; many of the other existing principles in IAS 1 are
retained, with limited changes. IFRS 18 will not impact the recognition or
measurement of items in the financial statements, but it might change what an
entity reports as its ‘operating profit or loss’.

IFRS 18 will apply for reporting periods beginning on or after 1 January 2027 and
also applies to comparative information. The changes in presentation and
disclosure required by IFRS 18 might require system and process changes for
many entities, so entities should focus now to be ready for adoption.

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What’s the issue?

On 9 April 2024, the IASB issued a new standard – IFRS 18, ‘Presentation and
Disclosure in Financial Statements’ – in response to investors’ concerns about
the comparability and transparency of entities’ performance reporting. The new
requirements introduced in IFRS 18 will help to achieve comparability of the
financial performance of similar entities, especially related to how ‘operating
profit or loss’ is defined. The new disclosures required for some management-
defined performance measures will also enhance transparency.

Key changes

Structure of the statement of profit or loss

IFRS 18 introduces a defined structure for the statement of profit or loss. The
goal of the defined structure is to reduce diversity in the reporting of the
statement of profit and loss, helping users of financial statements to understand
the information and to make better comparisons between companies. The
structure is composed of categories and required subtotals:

Categories: Items in the statement of profit or loss will need to be classified into
one of five categories: operating, investing, financing, income taxes and
discontinued operations. IFRS 18 provides general guidance for entities to
classify the items among these categories – the three main categories are:

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IFRS 18 includes additional requirements for entities that provide financing to

customers (for example, banks) or that invest in assets with specific
characteristics (for example, an investment entity) as a main business activity.
Some income and expenses that might ordinarily have been classified in the
investing or financing category, when applying the general principles, will be
presented in the operating category for these entities. The result of this is that
operating profit will include the results of an entity’s main business activities

Required subtotals: IFRS 18 requires entities to present specified totals and

subtotals: the main change relates to the mandatory inclusion of ‘Operating
profit or loss’. The other required subtotals are ‘Profit or loss’ and ‘Profit or loss
before financing and income taxes’, with some exceptions (for example, where a
bank has financing as a main business activity and has made specific
presentation choices).

These principles are illustrated in the following examples:

Statement of profit or loss of a general corporate

Statement of profit or loss of an insurer

Statement of profit or loss of an investment and retail bank

Disclosures related to the statement of profit or loss

IFRS 18 introduces specific disclosure requirements related to the statement of

profit or loss:

Management-defined performance measures: Management might define its

own measures of performance, sometimes referred to as ‘alternative
performance measures’ or ‘non-GAAP measures’. IFRS 18 defines a subset of
these measures which relate to an entity’s financial performance as
management-defined performance measures (‘MPMs’). Information related to
these measures should be disclosed in the financial statements in a single note,
including a reconciliation between the MPM and the most similar specified
subtotal in IFRS® Accounting Standards. This will effectively bring a portion of
non-GAAP measures into the financial statements.

Disclosure of expenses by nature, for entities that present the statement of

profit or loss by function: Entities will present expenses in the operating
category by nature, function or a mix of both. IFRS 18 includes guidance for
entities to assess and determine which approach is most appropriate, based on
the facts and circumstances. Where items are presented by function, an entity is
required to disclose information by nature for specific expenses.

Aggregation and disaggregation (impacting all primary financial statements and

notes)
IFRS 18 provides enhanced guidance on the principles of aggregation and
disaggregation which focus on grouping items based on their shared
characteristics. These principles are applied across the financial statements, and
they are used in defining which line items are presented in the primary financial
statements and what information is disclosed in the notes.

Other limited changes

IFRS 18 will make some other limited changes to presentation and disclosure in
the financial statements. For example, IAS 7, ‘Statement of cash flows’, is
amended to:

Specify ‘operating profit or loss’ as the starting point for reconciling cash flows
from operating activities; and

Remove the existing options for the presentation of interest and dividends paid
and received.

PwC Observation

The guidance on aggregation and disaggregation has changed. This will require
entities to reconsider their chart of accounts to evaluate whether their existing
presentation is still appropriate or whether improvements can be made to the
way in which line items are grouped and described in the primary financial
statements. In addition, changes in the structure of the statement of profit or
loss and additional disclosure requirements might require an entity to make
significant changes to its systems, charts of accounts, mappings etc. The level of
operational change required by the new standard should not be
underestimated, and entities should start thinking about the operational
challenges as soon as possible.

It might be difficult to Identify MPMs, and extensive procedures might be

required by auditors to assess completeness.

Who is impacted?
All entities reporting under IFRS Accounting Standards will be impacted. The
same requirements apply for both public and private entities, including the
identification and disclosure of MPMs.

The classification among categories for the statement of profit or loss is

performed at the reporting entity level – there might therefore be differences in
classification between an entity’s individual financial statements and the
consolidated financial statements.

When does it apply?

The new standard will be effective for annual reporting periods beginning on or
after 1 January 2027, including for interim financial statements. Retrospective
application is required, and so comparative information needs to be prepared
under IFRS 18.

In the year of adopting IFRS 18, the standard requires a reconciliation between
how the statement of profit or loss was presented for the comparative period
under IAS 1 and how it is presented in the current year under IFRS 18. Interim
financial statements in the first year of adoption include similar reconciliation
requirements.