Overview of IFRS 18: Presentation and Disclosure in Financial Statements

A Detailed Look at IFRS 18

IFRS 18 focuses on recognizing revenue from contracts with customers, replacing multiple older standards and interpretations. It provides a uniform framework for recognizing revenue across various industries and transactions. The core objective of IFRS 18 is to depict the transfer of goods or services to customers accurately, reflecting the expected consideration for these transfers.

Essential Components of IFRS 18

1. Identifying Contracts and Performance Obligations

The initial step involves identifying contracts with customers. Each promise within the contract, which might involve different goods or services, is assessed to determine distinct performance obligations. For instance, if a software company sells a software package, provides installation services, and offers ongoing technical support, each promise is evaluated to see if it is distinct and identifiable.

2. Determining Transaction Price

The transaction price is the amount an entity expects to receive in exchange for transferring goods or services. This includes fixed amounts, variable considerations (like discounts, rebates, and performance bonuses), and the time value of money. For example, a construction company might include performance bonuses in its contract, affecting the total transaction price.

3. Allocating the Transaction Price

The transaction price is allocated to each performance obligation based on their standalone selling prices. If these prices are not directly observable, they need to be estimated. For example, an electronics retailer selling a television with an extended warranty must allocate the transaction price between the television and the warranty based on their standalone selling prices.

4. Recognizing Revenue

Revenue is recognized when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer. This can occur over time or at a point in time, depending on when control of the good or service is transferred. For instance, a subscription-based service provider might recognize revenue over time as the service is delivered, whereas a car dealership would recognize revenue at the point of sale.

Comprehensive Set of Financial Statements

Under IFRS 18.10, a full set of financial statements includes:

• Statement(s) of Financial Performance for the reporting period
• Statement of Financial Position at the end of the reporting period
• Statement of Changes in Equity for the reporting period
• Statement of Cash Flows for the reporting period
• Notes providing additional information for the reporting period
• Comparative Information for the preceding period
• Statement of Financial Position at the beginning of the preceding period, if necessary (e.g., when applying a new accounting policy retrospectively or making a material restatement)

Identifying Financial Statements

Each financial statement must be clearly identified with the following information disclosed:

• Name of the reporting entity and any changes from the preceding reporting period
• Information about group or separate financial statements
• Date of the end of the reporting period or the period covered
• Presentation currency
• Level of rounding used

Core Principles of IFRS 18

IFRS 18 outlines several key principles, including:

• Frequency of reporting
• Consistency in disclosure and classification
• Comparative information
• Aggregation, disaggregation, and offsetting

Statement of Profit or Loss

IFRS 18 introduces significant changes to how profit or loss is presented, specifying categories of income and expenses and new mandatory subtotals.

Categories in the Profit or Loss Statement

Income and expenses must be classified into one of five categories:

1. Operating Category: The default category for all items not classified elsewhere.
2. Investing Category: Includes returns on investments, rentals from investment property, etc.
3. Financing Category: Encompasses all income and expenses related to liabilities, such as interest expenses on bonds or loans.
4. Income Taxes
5. Discontinued Operations

For entities with specific main business activities, classifications may differ. For example, if the main activity is investing in assets, related income and expenses are classified as operating, not investing.

Totals and Subtotals in the Profit or Loss Statement

IFRS 18 mandates three new subtotals:

1. Operating Profit or Loss: Includes all income and expenses in the operating category.
2. Profit or Loss Before Financing and Income Taxes: Includes operating profit or loss and all income and expenses in the investing category.
3. Profit or Loss: Including all items in profit or loss.

Line Items to Be Presented in Profit or Loss

Entities must present the following amounts at a minimum:

• Revenue, with interest revenue and insurance revenue presented separately
• Operating expenses (by nature or by function)
• Share of the profit or loss of associates and joint ventures by equity method
• Income tax expense or income
• Total for discontinued operations under IFRS 5
• Amounts required by IFRS 9 (Financial Instruments) and IFRS 17 (Insurance Contracts)

Additionally, entities should present profit or loss for the period attributed to non-controlling interests and owners of the parent.

Statement of Comprehensive Income

The statement presenting comprehensive income should show:

• Profit or loss (carried from the statement of profit or loss)
• Other comprehensive income, divided into:
  • Items reclassified to profit or loss after certain conditions are met
  • Items not reclassified

Comprehensive income is the total of profit or loss and other comprehensive income, with allocations attributable to non-controlling interests and owners of the parent.

Statement of Changes in Equity

The requirements for the statement of changes in equity under IFRS 18 are consistent with those from IAS 1. At a minimum, this statement should include:

• Total comprehensive income for the period, with separate amounts attributable to owners of the parent and non-controlling interests
• The impact of retrospective application or restatement for each component of equity, if applicable
• Reconciliation of the carrying amount at the beginning and end of the period for each equity component, disclosing separately:
  • Changes from profit or loss
  • Changes from other comprehensive income
  • Changes from transactions with owners (such as contributions, distributions, and changes in ownership)

Notes to the Financial Statements

The notes provide additional information not included in the primary financial statements. They should cover:

• Basis for preparation of the financial statements
• Accounting policies used
• Information required by IFRS not presented in the primary financial statements, including subtotals and additional disclosures required by other standards
• Other relevant information not presented in the primary financial statements, such as significant events, trends, or contracts affecting the business

Management Defined Performance Measures (MPMs)

IFRS 18 introduces the concept of Management Defined Performance Measures (MPMs), defined as:

• A subtotal of income and expenses
• Used in public communications outside financial statements to convey management’s view of an aspect of the entity’s financial performance

Public communications include management commentary, press releases, and investor presentations, but exclude oral communications, written transcripts of oral communications, and social media posts.

Subtotals mandated by an IFRS standard are not considered MPMs. Other subtotals, such as gross profit or loss, are also not classified as MPMs. All MPMs must be disclosed in a single note, with explanations on their utility, calculation method, and reconciliation to the most comparable IFRS-specified subtotal.

Practical Considerations for Implementing IFRS 18

Location of Information, Aggregation, and Disaggregation

IFRS 18 emphasizes grouping information in financial statements based on shared characteristics, guiding whether information should be presented in the primary statements or further broken down in the notes. Additional disclosures are required for items categorized as “other” to avoid generic labels and provide more detailed information.

Practical Applications

Airbus SE

Airbus SE’s complex contracts for selling aircraft involve multiple performance obligations, including training and maintenance. The company allocates transaction prices to each obligation and recognizes revenue as obligations are satisfied, with detailed disclosures.

Analysis:

From Airbus SE’s balance sheet, we understand how IFRS 18 affects the presentation of current and non-current assets and liabilities, which include amounts related to different stages of contract performance obligations. This helps in providing a clear view of financial health and contractual commitments, aligning with IFRS 18’s principles of transparency and comprehensive disclosure.

Amazon.com, Inc.

Amazon categorizes its revenue into segments like online stores and AWS, helping stakeholders understand diverse revenue sources and economic factors.

Amazon.com, Inc. Income Statement (Simplified):

Analysis:

Amazon’s income statement provides insights into how different revenue streams and operating expenses are categorized under IFRS 18. This categorization enhances transparency, making it easier for stakeholders to assess the performance of various business segments.

Vodafone Group Plc

Vodafone’s statement of cash flows shows cash generated from operating, investing, and financing activities, aiding in evaluating liquidity and financial flexibility.

Vodafone Group Plc Cash Flow Statement (Simplified):

Analysis:

Vodafone’s cash flow statement demonstrates the application of IFRS 18 in categorizing cash flows from different activities. This classification helps stakeholders understand the sources and uses of cash, reflecting the company’s liquidity and financial management practices.

Conclusion

IFRS 18 is crucial for providing a clear and comprehensive view of an entity’s revenue and related cash flows in financial statements. By requiring detailed presentation and disclosure, it enhances transparency and comparability across industries. Real-life examples like Airbus, Amazon, and Vodafone demonstrate the practical application of IFRS 18, offering valuable insights into its impact on financial reporting.