Marina Matyukhina explains what you need to know about IFRS 18 if you are preparing for the FR exam from September 2025 onwards.
The standard on presentation of financial statements is one of the IFRS’ historical relics. Dating back to 1975, it is almost as old as the IASB’s predecessor, the IASC. When first issued, the standard was named IAS 1 Disclosure of Accounting Policies. In 1997, it was replaced by IAS 1 Presentation of Financial Statements. Now, almost 30 years later, after multiple patches and add-ons, the time has come for another major revamp.
Over the years, while amendments were being made to improve terminology, refine the definition of materiality and classification of liabilities, a significant issue remained pending – bringing multiple complaints from investors. The comparability of entities’ statements of profit or loss was not consistent enough, and the problem was getting worse.
Some companies reported operating profit, while others didn’t. Some included the profit from associates in their operating profit, others left it outside. Many could get away with hiding a huge litigation expense in the ‘Miscellaneous’ category. Many could use management-defined performance measures looking incredibly appealing to investors, unless the latter inquired about the logic behind reporting EBITDA before Moon Phases or Profit adjusted for Unicorn Dust (these aren’t real, of course, but the real ones are sometimes no less entertaining!).
In a long-awaited refresh in 2019, the IASB issued an exposure draft intended to address the investors’ concerns. Having collected feedback from users, it came up with a new improved standard, which substantially strengthened the IAS 1 and IAS 8 requirements and introduced changes to how financial performance was reported. IFRS 18 went live in April 2024.
Entities must apply IFRS 18 for annual periods beginning on or after 1 January 2027, with earlier application permitted. The ACCA syllabus has been updated accordingly, with the new requirements examinable starting from September 2025.
IFRS 18 at a glance
The table below summarises key points you need to know about IFRS 18:
- A ‘bank’ here is short for an entity with specified main business activities, such as investing in a particular type of assets or providing financing to customers (as defined by IFRS 18).
SPL categories: the Fab Five
The new categories introduced by the standard are:
- Operating
- Investing
- Financing
- Income taxes
- Discontinued operations
All income and expenses must be placed into one of these five categories, with the relevant cash flows being classified into the matching categories in the SCF.
IFRS 18 sets out specifically which items of income and expenses must be put into investing, financing, income taxes and discontinued operations categories. All the rest is left for operating.
At the same time, the new rules for aggregation and disaggregation refer to materiality and strongly discourage the use of the line item ‘other’ anywhere in the financial statements. As far as practicable, any ‘other’ items of income and expenses, or assets and liabilities must be sorted into defined lines. In the SPL, they must be at least split between or placed into one of the five categories.
Bottom lines aligned
The new requirement for all reporting entities is to include the following subtotals in their SPL:
- Operating profit or loss;
- Profit or loss before financing and income taxes;
- Profit or loss.
There are no changes to other subtotals commonly used by companies (for example, gross profit, profit before income taxes), but these three are now mandatory and must be reported.
Including MPMs
IFRS 18 requires certain management- defined performance measures (MPMs) to be included in the financial statements with corresponding disclosures. These are the MPMs that are used in public communications outside financial statements and aim to communicate management’s view of an aspect of the financial performance of the entity.
What it means for your FR exam
- SPL subtotals and categories – One of the Section C questions may ask you to prepare a statement of profit or loss of a standalone company. Don’t forget to set up the proforma with the relevant categories and subtotals.
- SCF: start with operating profit or loss – Another new thing to keep in mind (especially if you were attempting FR previously) is the new starting point for the statement of cash flows.
Particularly, cash flows from operating activities prepared by indirect method must now start with the operating profit or loss figure, followed by the relevant adjustments. Also, because the new figure is an ‘upper’ subtotal in the SPL, forget about interest income or expense adjustments. - No more interest and dividends in cashflows from operating activities – Interest and dividends paid can now be classified as financing cash flows only, while interest and dividends received as investing only accordingly. No longer in the cash flows from operating activities, as was previously allowed.
- Ratios: operating profit ≠profit before financing and income taxes Another topic examined regularly affected by IFRS 18 is the calculation of ratios.
ROCE now is calculated as:
This makes the formula previously used to calculate the interrelationship between ratios ROCE = Operating margin × Asset turnover no longer relevant, unless a company has no investment income or expenses.
- Management defined performance measures (MPMs)
Good news at last! These are not examinable. For now.
Also, what remains unchanged – and as relevant as ever – is the frequently overlooked advice: make sure you are using up-to-date study materials.
- Marina Matyukhina is a freelance tutor whose courses can be found on the fmelearnonline.com ACCA Platinum ALP platform
