IFRS Alerts

Executive summary
The International Accounting Standards Board (IASB) has issued some amendments to IFRS 9 ‘Financial Instruments’ and to IFRS 7 ‘Financial Instruments: Disclosures’ to help entities apply these standards to contracts for renewable energy. The amendments also include changes to IFRS 19 ‘Subsidiaries without Public Accountability: Disclosures’ to reflect the amendments to IFRS 7.

Background
Contracts that reference nature-dependent electricity production, also known as power purchase agreements (PPAs), are contracts to buy and take delivery of electricity that is produced from nature-dependent sources. As generation of renewable energy has increased, so has the number of PPAs.

The IFRS Interpretations Committee (IFRIC) received requests for clarification on how IFRS 9 should be applied to these contracts, and following stakeholder feedback the IASB decided to add a narrow-scope standard-setting project to its work plan to address these issues.

The amendments
Amendments to IFRS 9
The amendments include detail on which PPA contracts can be used in hedge accounting, and the specific conditions allowed in such hedge relationships.

The amendments specifically target the use of PPAs as designated hedging instruments in qualifying hedge relationships. The amendments specify that for such a hedging relationship, the hedged item may be designated as a variable nominal amount of forecast electricity transactions, which is aligned with the variable amount of electricity that is expected to be delivered under a PPA designated as the hedging instrument.

In the application guidance, the amendments set out that some PPA contracts will expose entities to volume risk, the risk that they may have to buy electricity during a window in which they cannot use the electricity, or sell electricity that it cannot use within a specified period of time. The amendments clarify that these features are not necessarily inconsistent with a contract held in accordance with the entity’s expected usage requirements. The entity needs to determine in these situations whether or not they are still a net purchaser of electricity, and in making this determination they need to consider all reasonable and supportable information about past, present and future electricity transactions.

All of the existing hedge accounting requirements included in IFRS 9 still apply.

Amendments to IFRS 7
The amendments introduce new disclosure requirements for contracts referencing nature-dependent electricity as defined in the amendments to IFRS 9.

For such contracts, an entity is now required to disclose the following:

• Information about contractual features that expose the entity to variability in the underlying amount of electricity, and the risk that the entity may be required to purchase electricity when they are unable to use it
• Information about unrecognised commitments from such contracts at the reporting date including estimated future cash flows and a qualitative assessment of whether a contract may become onerous, and
• Qualitative and quantitative information about the effects of these contracts on the entity’s financial performance for the reporting period. This includes information on the costs of purchasing electricity under the contract and how much was unused, the proceeds from the sale of unused electricity and the cost of any purchases of electricity made to offset sales of unused electricity.

IFRS 19 is also amended to include these requirements, so there will be no relief for entities applying IFRS 19 for these contracts.

Effective date
The amendments are effective for periods starting on or after 1 January 2026, with early application permitted. The amendments to IFRS 7 must be applied at the same time as the amendments to IFRS 9.

The requirements related to identifying in-scope PPAs must be applied retrospectively in accordance with IAS 8 using facts and circumstances at the date of initial application of the amendments. The amendments related to designated hedging relationships should be applied prospectively to new hedging relationships designated on or after the date of initial application.

Our thoughts
We welcome these amendments from the IASB. PPA contracts are increasing in frequency, and we expect these to become increasingly used as demand for renewable energy increases in the coming years. The amendments will be helpful in bringing more consistency to accounting for these contracts.

Due to their narrow scope we do not expect that these amendments will impact a significant number of entities. They will primarily be relevant to larger entities with well-developed finance and risk teams who are familiar with the hedge accounting requirements set out in IFRS 9.

If you will be impacted by these amendments, or would like to discuss them further, please reach out to the IFRS contact at your local Grant Thornton firm.

According to data in the World Economic Outlook (WEO) report issued by the International Monetary Fund (IMF) in October 2024, and based on economic conditions that currently exist, certain countries are now considered to be hyperinflationary from 31 December 2024. Therefore, reporting entities in those countries will be required to apply IAS 29 'Financial Reporting in Hyperinflationary Economies'. Consequently, any entities with interim or annual financial reporting requirements at 31 December 2024 or thereafter should reflect IAS 29 in their IFRS financial statements.

From 31 December 2024 onwards there are fifteen countries around the world where IAS 29 should be applied, when entities want to state they are in full compliance with IFRS. These countries are: Argentina, Ethiopia, Ghana, Haiti, Iran, Laos, Lebanon, Malawi, Sierra Leone, South Sudan, Suriname, Turkey, Venezuela, Yemen and Zimbabwe.

Additional considerations were made to determine if South Sudan and Ghana are still hyperinflationary. For the time being, they remain hyperinflationary but we will be keeping a close eye on further inflation data from these countries.

Egypt and Nigeria were also assessed due to high inflation numbers for the preceding three-year period. However, in both cases certain qualitative factors were considered and for now neither is considered to be hyperinflationary. A close eye should be kept on further inflation data from both of these countries.

Recapping the requirements of IAS 29
IAS 29 lists factors that indicate when an economy is hyperinflationary. One of the indicators of hyperinflation is if cumulative inflation over a three-year period approaches, or is in excess of 100 per cent. ​

The mechanics of restatement​
IAS 29 requires amounts in the statement of financial position that are not already expressed in terms of the measuring unit current at the end of the reporting period, are restated by applying a general price index. In summary:

• assets and liabilities linked by agreement to changes in prices, such as index linked bonds and loans, are adjusted in accordance with the agreement
• non-monetary items carried at current amounts at the end of the reporting period (such as net realisable value and fair value) are not restated
• all other non-monetary assets and liabilities are restated
• monetary items (ie money held and items to be received or paid in money) are not restated because they are already expressed in terms of the monetary unit currency at the end of the reporting period, and
• all items in the statement of comprehensive income should be expressed using the measuring unit current at the end of the reporting period, so all amounts need to be restated from the dates when the items of income and expenditure were originally recorded in the financial statements.​

Other important factors that should be taken into consideration when applying IAS 29

IAS 29 sets out specific requirements on how to restate prior period comparatives. It requires corresponding figures for the previous reporting period to be restated by applying a general price index so that the comparative financial statements are presented in terms of the measuring unit current at the end of the reporting period.​

IAS 29 may result in the creation of additional temporary differences under IAS 12 ‘Income Taxes’. This is because the restatement of items under IAS 29 will often lead to adjustments to the carrying amounts of items without corresponding changes to their tax bases. Be mindful that IAS 12 requires these adjustments to be recognised in profit or loss.​

Impairment testing should also not be overlooked. IAS 29 requires any restated non-monetary items to be reduced when it exceeds its recoverable amount, even if those assets were not previously considered impaired under historical cost accounting. It will be important when preparing financial statements to consider whether the restatement of asset carrying values affects the results of impairment tests that were conducted in previous reporting periods, and whether there are any indicators of impairment for assets that were not tested for impairment in previous periods.​

IFRIC decisions relating to hyperinflation​
The IFRS Interpretations Committee (IFRIC) have previously considered a number of accounting issues in relation to dealing with hyperinflation. These include:

• translating a hyperinflationary foreign operation and presenting exchange differences​
• accounting for cumulative exchange differences before a foreign operation becomes hyperinflationary
• presenting comparative amounts when a foreign operation first becomes hyperinflationary, and
• consolidation of a non-hyperinflationary subsidiary by a hyperinflationary parent.

We encourage careful consideration of these issues when preparing IFRS financial statements and applying IAS 29.​

Our thoughts
IAS 29 is not a Standard that can be quickly implemented, particularly in group situations. Careful consideration needs to be given to the IFRIC guidance dealing with situations where there is a hyperinflationary parent that has subsidiaries who also report in a hyperinflationary currency versus situations where a non-hyperinflationary parent has subsidiaries that report in a hyperinflationary currency. Also be mindful of how a hyperinflationary parent with subsidiaries that do not report in a hyperinflationary currency should be accounted for given the requirements set out in IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’. 

Any reporting entity considering IAS 29 for the first time will have to adapt their existing accounting systems to be able to process the hyperinflationary adjustments. It is important they understand the mechanics of adjusting for hyperinflation so they can restate in their financial statements both current and comparative periods.​

The International Accounting Standards Board (IASB) has published 'Annual Improvements to IFRS Accounting Standards – Volume 11' addressing non-urgent (but necessary) minor amendments to five Standards, as described below.

Background

The publication is a collection of amendments to IFRS Standards discussed by the IASB during the current project cycle for annual improvements. The IASB uses the Annual Improvements process to make necessary, but non-urgent, amendments to IFRS Standards that will not be included as part of any other project. By presenting the amendments in a single document rather than as a series of piecemeal changes, the IASB aims to ease the burden of change for all concerned. A summary of the issues addressed is set out below:

IFRS 1 ‘First-time Adoption of International Financial Reporting Standards'
Subject of amendment: Hedge accounting by a first-time adopter

IASB’s summary of amendment
Amends paragraphs B5–B6 of IFRS 1:

• to improve consistency with the requirements in IFRS 9 ‘Financial Instruments’, and
• to add cross-references to improve the understandability of IFRS 1.

IFRS 7 ‘Financial Instruments: Disclosures’
Subject of amendment: Gain or loss on derecognition

IASB’s summary of amendment
Amends paragraph B38 of IFRS 7:

• to replace an obsolete reference to paragraph 27A of IFRS 7 with a reference to paragraphs 72–73 of IFRS 13 ’Fair Value Measurement’, and
• to replace the phrase ‘inputs that were not based on observable market data’ with ‘unobservable inputs’ to make the wording consistent with the wording in paragraph 72 of IFRS 13.

Guidance on implementing IFRS 7 ‘Financial Instruments: Disclosures’
Subject of amendment: Disclosure of deferred difference between fair value and transaction price

IASB’s summary of amendment
Amends paragraph IG14 to make its wording consistent with the requirements in paragraph 28 of IFRS 7 and with the wording and concepts in IFRS 9 and IFRS 13.

Subject of amendment: Introduction and credit risk disclosures

IASB’s summary of amendment
Improved clarity by:

• amending paragraph IG1 to clarify that the guidance does not necessarily illustrate all the requirements in the referenced paragraphs of IFRS 7, and amending paragraph IG20B to simplify the explanation of the aspects of the requirements that are not illustrated.

IFRS 9 ‘Financial Instruments’
Subject of amendment: Derecognition of lease liabilities

IASB’s summary of amendment
Amends paragraph 2.1(b)(ii) of IFRS 9 to add a cross-reference to paragraph 3.3.3 of IFRS 9 to clarify that when a lease liability has been extinguished in accordance with IFRS 9, the lessee is required to apply paragraph 3.3.3 and recognise any resulting gain or loss in profit or loss.

Subject of amendment: Transaction price

IASB’s summary of amendment
Amends paragraph 5.1.3 of IFRS 9 to replace ‘their transaction price (as defined in IFRS 15 ‘Revenue from Contracts with Customers’)’ with ‘the amount determined by applying IFRS 15’ due to an inconsistency between 5.1.3 and the requirements in IFRS 15. As a result, IFRS 9 Appendix A was also amended to remove the term.

IFRS 10 ‘Consolidated Financial Statements’
Subject of amendment: Determination of a ‘de facto agent’

IASB’s summary of amendment
Amends paragraph B74 of IFRS 10 ‘Consolidated Financial Statements’ to use less conclusive language and to clarify that the relationship described in paragraph B74 is just one example of a circumstance in which judgement is required to determine whether a party is acting as a de facto agent.

IAS 7 ‘Statement of Cash Flows’
Subject of amendment: Cost method

IASB’s summary of amendment
Amends paragraph 37 of IAS 7 to replace the term ‘cost method’ with ‘at cost’. 

Effective date
The amendments are effective from annual reporting periods beginning on or after 1 January 2026, with early application permitted.

Our thoughts
The Annual Improvements process is an efficient way to ensure that inconsistencies and terminology within the Standards can be updated without issuing individual amendments to each standard. All the amendments made in 'Annual Improvements to IFRS Accounting Standards – Volume 11' are uncontroversial in nature, and our view is they increase clarity to the impacted Standards.

The International Accounting Standards Board (IASB) has issued amendments to IFRS 9 ‘Financial Instruments’ and some amendments have also been made to IFRS 7 ‘Financial Instruments: Disclosures’, following a post-implementation review (PIR) of IFRS 9. The amendments also include consequential changes to IFRS 19 ‘Subsidiaries without Public Accountability: Disclosures’ to reflect the amendments made to IFRS 7.

Background
The IASB’s PIR of the classification and measurement requirements in IFRS 9 and the related requirements in IFRS 7 concluded that overall, the requirements set out in these two standards can be applied consistently and they also provide useful information to users of the financial statements. However, the PIR process did reveal some areas that could be improved and they included:

• accounting for the settlement of a financial asset or liability using an electronic payment system, and
• applying the requirements for assessing contractual cash flow characteristics to financial assets with features related to environmental, social, and governance (ESG) matters.

To address these matters and to improve clarity and understanding, the IASB has issued some amendments to the classification and measurement of financial instruments to promote consistency.

The amendments

Derecognition of financial instruments when an electronic payment system is used
New guidance has been added to IFRS 9 to specifically address when a financial liability should be derecognised when it is settled by electronic payment. Previously, an entity was required to wait until the settlement date of the transaction to discharge the liability, but the new guidance allows for the liability to be discharged before the settlement date if:

• the payment cannot be withdrawn, stopped or cancelled
• the entity no longer has the practical ability to access the cash, and
• settlement risk associated with the electronic payment system is insignificant.

Classification of financial assets

Contractual cash flows that are solely payments of principal and interest on the principal amount outstanding

IFRS 9 has always required an entity to consider the characteristics of its contractual cash flows to appropriately classify a financial asset. The amendments provide some additional guidance to help an entity assess whether the contractual cash flows of a financial asset are consistent with a basic lending arrangement. Given the importance of this determination, new guidance has been provided, including examples of contractual cash flows that are solely payments of principal and interest on the principal outstanding, to ascertain whether or not the arrangements would be consistent with a basic lending arrangement.

IFRS 9 also describes certain situations where financial assets may have contractual cash flows that are described as principal and interest, but the payments made do not actually represent a basic lending arrangement. This may be the case if a financial asset has non-recourse features. The amendments to IFRS 9 provide a clearer definition of a non-recourse feature, which is now outlined as a financial asset where the entity’s ultimate right to receive cash flows is contractually limited to the cash flows generated by specified assets.

Contractually linked instruments

IFRS 9 has also been updated to provide additional guidance to clarify the characteristics of contractually linked instruments as well as the definition of the underlying pool used to assess whether a transaction contains contractually linked instruments. The amendments also specify that transactions that contain multiple debt instruments are not automatically contracts with multiple contractually linked instruments, and so they must be carefully assessed before a final determination is made.

IFRS 7: Disclosures

Investments in equity instruments designated at fair value through other comprehensive income

The amendments to IFRS 7 add new required disclosures for any investments in equity instruments designated at fair value through other comprehensive income. These include disclosures of the fair value gain or loss presented in other comprehensive income for the period, showing separately the fair value gain or loss related to investments derecognised or held, as well as the transfer of cumulative gain or loss within equity related to derecognised investments.

Contractual terms that could change the amount of contractual cash flow based on contingent events

IFRS 7 has been amended to require additional new disclosures for each class of financial asset measured at amortised cost or fair value through other comprehensive income, as well as financial liabilities measured at amortised cost. When there are contractual terms that could change the contractual cash flows based on the outcome of a contingent event not directly related to basic lending risk, an entity must now disclose certain information surrounding the related contingent event as well as possible changes to cash flows and the gross carrying value and amortised cost of the related financial asset or liability. These new disclosures are also now reflected in IFRS 19.

Effective date
The amendments are effective from annual reporting periods beginning on or after 1 January 2026. Early adoption of the Standard is permitted, with a choice to either apply all amendments at the same time and disclose that fact or to apply only the amendments to the Application Guidance sections for the earlier period and disclose that fact.

An entity is required to apply these amendments retrospectively.  However, an entity is not required to restate prior periods to reflect the application of the amendments unless it can clearly demonstrate that hindsight has not been used to make those changes.

Our thoughts
We were pleased to see the IASB taking on board many of the comments submitted to it during the PIR process on IFRS 9 and responding to them in a timely way. One of the goals of the IASB in making these amendments was to reduce diversity in practice, and we believe this will happen.

The guidance set out in these amendments for preparers on the derecognition of financial liabilities settled through electronic transfer will be helpful. So will the amendments clarifying how to assess the contractual cash flows characteristics of financial assets when ESG-linked features are present, when non-recourse features exist and when contractually linked arrangements are in place. For investors the additional disclosure requirements now reflected in IFRS 7, to deal with both financial equity investments designated at fair value through other comprehensive income and financial instruments with contractual terms that could change the timing or amount of contractual cash flows on the occurrence (or non-occurrence) of a contingent event, will be insightful.  

Following last month’s release of IFRS 18 ‘Presentation and Disclosure in Financial Statements’, the International Accounting Standards Board (IASB) has published another new standard — IFRS 19 ‘Subsidiaries without Public Accountability: Disclosures’ (the Standard). The new Standard creates a reduced set of disclosures that certain in-scope entities can elect to apply instead of the disclosure requirements set out in other IFRS. IFRS 19 will work alongside other IFRS, with eligible subsidiaries applying the measurement, recognition and presentation requirements set out in other IFRS and the revised disclosures outlined in IFRS 19.

The objective of the Standard is to alleviate the reporting burden for subsidiaries without public accountability.

Background
The release of the Standard is the final stage of the ‘Disclosure Initiative – Targeted Standards-level Review of Disclosures’ project, which came about due to subsidiaries struggling to meet the requirements for reporting information to their parent entity to be used in consolidated financial statements. When reporting to a parent that applies full IFRS, subsidiaries must apply the recognition and measurement requirements in IFRS. This creates difficult circumstances for entities that qualify to apply IFRS for Small and Medium-Sized Entities (SMEs) for their standalone reporting.

IFRS for SMEs has fewer disclosure requirements than full application of IFRS; however, the recognition and measurement requirements differ to those of full IFRS. As a result, some subsidiaries choose not to take advantage of the reduced disclosures for IFRS for SMEs as it results in additional accounting to agree information reported to the parent entity with full IFRS recognition and measurement principles.

This new Standard aims to create a more attractive option for subsidiaries without public accountability. Eligible entities will now be able to elect to apply IFRS 19, which has the same recognition, measurement, and presentation principles as full IFRS, but allows for specific reduced disclosures in most topic areas.

The IASB believes IFRS 19 will provide a solution that will alleviate the reporting burden for in-scope entities.

Scope
In order to apply IFRS 19, an entity must meet all of the following criteria at the end of its reporting period:

• is a subsidiary
• does not have public accountability, and
• has a parent that produces consolidated financial statements available for public use that comply with full application of IFRS.

For purposes of applying IFRS 19, an entity has public accountability if:

• it has debt or equity instruments that are traded on a public market or is in the process of issuing such instruments, or
• holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary business activities.

Disclosure requirements
IFRS 19 includes reduced disclosures for almost all existing IFRS, the details of which are specific to each impacted standard. To apply IFRS 19, entities will first apply the recognition, measurement, and presentation requirements in each applicable IFRS. The entity will then not apply the disclosure requirements in the applicable IFRS but will instead refer to IFRS 19 for required disclosures.

Standards with no reduced disclosures
The IASB assessed each individual standard to determine whether to reduce disclosures and how best to do so while still meeting the fair presentation requirements and investor needs. The following standards do not have reduced disclosure requirements under IFRS 19 and the disclosures set out in each standard still apply:

• IAS 33 ‘Earnings per Share’
• IFRS 8 ‘Operating Segments’
• IFRS 17 ‘Insurance Contracts’

Subsidiaries that are eligible to apply IFRS 19 are not required to apply IAS 33 or IFRS 8 but may do so voluntarily. If either are applied, the full disclosures required by IAS 33 or IFRS 8 will apply.

Maintenance of IFRS 19
Due to the nature of IFRS 19, it will need to be amended whenever there are any new or amended disclosure requirements in other IFRS. To ensure that IFRS 19 is always up to date, any proposed amendments to IFRS 19 will be included in an exposure draft for the corresponding new or amended IFRS.

Effective date of IFRS 19
The Standard is effective from annual reporting periods beginning on or after 1 January 2027, allowing eligible reporting entities and their auditors time to assess whether electing to apply IFRS 19 would benefit them. Early adoption of the Standard is permitted. It is important to note that if an entity applies IFRS 19 in the current period but not in the period immediately preceding, comparative prior period information is required to be provided for amounts reported in the current period financial statements.

Our thoughts
We support the release of this new Standard, which should reduce the cost of preparing financial statements for eligible subsidiaries while maintaining the usefulness of the presented information.

While the effective date is a while away, we would encourage entities to consider whether they are eligible and to assess whether applying IFRS 19 would reduce their reporting burden. We have plans to release an article later in the year that will provide a more detailed look at the requirements of this Standard.

On 9 April 2024 the International Accounting Standards Board (IASB) published a new standard, its first since 2017. The new standard, IFRS 18 ‘Presentation and Disclosure in Financial Statements’ (the Standard) replaces IAS 1 ‘Presentation of Financial Statements’ and will impact every reporting entity that currently uses International Financial Reporting Standards (IFRS).

The objective of the Standard is to improve how information is communicated in an entity’s financial statements, particularly in the statement of profit or loss and in its notes to the financial statements.

Key changes

• Changes to presentation requirements in the statement of profit or loss
• Foreign exchange differences
• Entities with specified main business activities
• New requirements to be included in the notes to the financial statements
• Management-defined performance measures
• Updated guidance for the aggregation and disaggregation of information
• Changes to how expenses in the operating category are presented
• Consequential changes made to other standards

Background
The release of the Standard is the final stage of the Primary Financial Statements project, which came about due to the lack of detailed requirements in IAS 1 for the following areas:

• the classification of income and expenses in the statement of profit or loss
• the presentation of subtotals in the statement of profit or loss, and
• the aggregation and disaggregation of information presented in the primary financial statements or disclosed in the notes.

This led to diversity in practice as entities defined their own subtotals and performance measures, which made comparison of financial performance between entities difficult for investors.

The IASB believes IFRS 18 will resolve these issues and improve the overall quality of financial reporting.

The key changes in the new Standard
Overall, the majority of changes made in IFRS 18 impact the statement of profit or loss and notes to the financial statements, but there are also limited changes to specific requirements that are set out in IAS 7 ‘Statement of Cash Flows’. Only minimal changes were made to the disclosures required for the statement presenting comprehensive income, the statement of changes in equity and the statement of financial position. While much has been carried forward from IAS 1, there are some key changes that reporting entities need to be aware of.

Changes to presentation requirements in the statement of profit or loss
The main change introduced by IFRS 18 is to the way in which reporting entities will structure their statement of profit or loss. 

Firstly, the Standard introduces two new defined subtotals:

• Operating profit, and
• Profit before financing and income taxes.

These new required subtotals are intended to increase comparability by ensuring that information presented for investors is consistent across different entities.

Additionally, the Standard requires an entity to classify all income and expenses into one of the following five categories:

• operating
• investing
• financing
• income taxes, and
• discontinued operations.

The investing category includes income and expenses from investments in associates, joint ventures and unconsolidated subsidiaries, cash and cash equivalents, and any other assets (such as cash and cash equivalents) that generate returns separately from the entity’s other resources.

The financing category distinguishes between transactions that are solely for the purpose of raising finance, and those that are not. Income and expenses from all liabilities that result solely from the raising of finance are included in this category, along with some elements of interest income or expense recognised by applying other IFRS. This category, together with the subtotal for profit before financing and income taxes enables investors to assess the reporting entity’s performance before the effects of its financing.

The income taxes and discontinued operations categories include income and expenses resulting from the application of IAS 12 ‘Income taxes’ and any related foreign exchange differences, and IFRS 5 ‘Non-current assets held for sale and discontinued operations’ respectively.

Finally, the operating category includes all other items of income and expense that are not allocated to one of the other four categories. It is a default category, so it is important to note this category will include income and expenses from an entity’s main business activities, regardless of whether the income or expenses are volatile or unusual. The operating profit subtotal provides not only a measure of past performance, but also a starting point for forecasting an entity’s future cash flows.

Foreign exchange differences
IFRS 18 requires foreign exchange differences to be classified in the same category of the statement of profit or loss as the income and expenses from items that gave rise to the foreign exchange differences. This means, for example, that foreign exchange differences on bank loans would be classified in the financing category. However, if classifying foreign exchange differences this way would involve undue cost or effort, an entity is permitted to classify them in the operating category. Careful attention should be given to specific requirements for classifying income and expenses from hybrid contracts and fair value gains and losses on derivatives.

Entities with specified main business activities
While the above applies to most entities, it is complicated for reporting entities such as investment firms, financial institutions and insurers where their main business activities (for which income and expenses would usually be classified in the operating category), would fall into the definition of investing or financing activities.

When a reporting entity has assessed that it invests in assets as its main business activity, income and expenses are split between the investing category and operating category, depending on how the underlying assets are accounted for. For all assets accounted for using the equity method, income and expenses are included in the investing category, and for all other assets income and expenses are included in the operating category.

When a reporting entity has assessed that it provides financing to customers as its main business activity, it will classify income and expenses from liabilities relating to providing such finance in the operating category.

The assessment of an entity’s main business activities is therefore going to be a key judgement which may significantly impact the geography of where items appear in the statement of profit or loss. This is likely to prove particularly challenging for mixed groups and groups of reporting entities which provide multiple services.

New requirements to be included in the notes to the financial statements
The Standard also introduces new disclosures, in addition to those carried forward from IAS 1, to supplement the primary financial statements. They are:

• Management-defined performance measures, and
• Specified expenses by nature.

Management-defined performance measures
In order to address the significant diversity in practice currently seen when it comes to so-called ‘alternative performance measures’ and any non-GAAP performance measures, IFRS 18 introduces the concept of a ‘management-defined performance measure’ (MPM).

MPMs are subtotals of income and expenses other than those listed by IFRS 18 or specifically required by another IFRS, that an entity uses:

• in public communications outside financial statements, and/or
• to communicate to users of financial statements management’s view of an aspect of the financial performance of the entity as a whole.

Alongside any MPMs that are disclosed, a reporting entity will also be required to disclose information including:

• a reconciliation between the MPM and the most directly comparable IFRS 18 subtotal, total or subtotal required by another IFRS
• a description of how the MPM communicates management’s view and how it is calculated
• an explanation of changes to the MPMs disclosed or to how any of the measures are calculated, and
• a statement indicating that measures used reflect management’s view of the financial performance of the entity as a whole and indicates that the measure may not always be directly comparable to any measures sharing similar labels and descriptions provided by other reporting entities.

These disclosures will be required for any measure that meets the definition of a MPM and when applicable and they must be included in a single note in the reporting entity’s financial statements.

Updated guidance for the aggregation and disaggregation of information
The Standard provides specific guidance to ensure that aggregation and disaggregation in the financial statements is consistent and provides investors with the information they need for analysis. The basic principles set out in IFRS 18 require entities to:

• aggregate or disaggregate items based on whether they share similar characteristics or have different characteristics
• ensure that the method of grouping items does not obscure material information or reduce understanding, and
• apply aggregation or disaggregation based on characteristics in both in the primary financial statements and the notes to the financial statements.

Changes to how expenses in the operating category are presented
Consistent with IAS 1, IFRS 18 requires an entity to present in a structured and meaningful way its operating expenses based either on their nature or their function. This means some entities might decide to classify some expenses by nature and other expenses by function. The Standard requires entities that present expenses classified by function to disclose the amount of depreciation, amortisation, employee benefits, impairment losses and write-down of inventories included in each line in the operating category of the statement of profit or loss.

Consequential changes made to other standards
Consequential changes have been made to the standard on cash flow statements. IAS 7 now requires entities to use the operating profit total as defined in IFRS 18 as the starting point for reporting cash flows from operating activities using the indirect method. In addition, the interest and dividend presentation alternatives that previously existed have also been removed to simplify practice and reduce diversity in preparation.

Elsewhere, IAS 33 ‘Earnings per Share’ (EPS) requirements have been amended to permit an entity to disclose additional EPS information over and above reporting basic and diluted EPS amounts. However, additional amounts can only be included in the EPS calculation if the numerator is either a total or subtotal identified in IFRS 18 or a MPM. IAS 34 ‘Interim Financial Reporting’ has also been updated to require disclosure of information about MPMs in interim financial statements and guidance is now provided on how subtotals should be dealt with in interim financial statements.

Effective date of IFRS 18
The Standard is effective from annual reporting periods beginning on or after 1 January 2027, allowing reporting entities and their auditors time to properly prepare for the transition to IFRS 18. Early adoption of the Standard is permitted. It is important to note, IFRS 18 must be applied retrospectively, so restatement of all comparative information is required when the Standard is adopted. 

Our thoughts
We support the release of this new Standard, which should improve the overall quality of financial reporting and enable better comparison of financial statements by investors. 

While the effective date is a while away, we would encourage entities to start considering the impact sooner rather than later. To assist with this, we have plans to release a ‘Getting ready for IFRS 18’ guide later in the year that will provide a more detailed look at the requirements of this Standard, and the likely impact on reporting entities.