IFRS 18, Part 1: Operating, Investing and Financing Categories and the New Operating Profit

IFRS 18 is the new international accounting standard that defines how financial statements, and the income statement in particular, are presented. This is Part 1 of a short series: it summarizes what IFRS 18 changes. Part 2 will look at the impact from an SAP FI point of view, and Part 3 from an SAP CO point of view.

Note: the example figures below are illustrative only. Requirements are summarized from the IFRS Foundation materials linked at the end.

1. The standard at a glance

Item Value Detail
Standard IFRS 18 Presentation and Disclosure in Financial Statements
Issued April 2024 Issued by the International Accounting Standards Board (IASB)
Replaces IAS 1 Replaces the existing standard on presentation of financial statements
Effective date 1 January 2027 Annual reporting periods beginning on or after this date; earlier application is permitted
What changes Presentation and disclosure Recognition and measurement (when and how much revenue or expense is recorded) do not change. The structure of the income statement and the notes do

2. Three categories in the income statement: operating, investing, financing

Category What goes in Examples
Operating Income and expenses from the main business Everything not classified as investing, financing, income taxes or discontinued operations: revenue, cost of sales, selling and administrative expenses, impairment of property, plant and equipment
Investing Returns from assets that generate a return largely independently of other resources Share of profit of associates and joint ventures, rental income from investment property, interest income on cash and cash equivalents
Financing Cost of raising funds Interest expense on borrowings, interest on lease liabilities
Income taxes Separate category Income tax expense is shown outside the three categories
Discontinued operations Separate category Profit or loss from discontinued operations is also shown separately

3. Required subtotals

Item Subtotal Detail
Subtotal 1 Operating profit or loss Income minus expenses in the operating category
Subtotal 2 Profit or loss before financing and income taxes Operating profit or loss plus the investing category
Order Top to bottom Operating profit → investing → profit before financing and income taxes → financing → profit before income taxes → income taxes → discontinued operations → profit or loss
Exception Specified main business activities Entities such as banks or investment companies, whose main business is lending or investing, classify the related interest and investment results in the operating category

4. Example income statement, current presentation (illustrative figures)

Line item Amount Comment
Revenue 1,000
Cost of sales (600)
Selling and administrative expenses (250)
Operating profit 150 Revenue − cost of sales − selling and administrative expenses
Other income (gain on disposal of PP&E) 10 Shown below operating profit
Other expenses (impairment of PP&E) (30) Shown below operating profit
Share of profit of associates 20
Finance income (interest on deposits) 5
Finance costs (interest on borrowings) (40)
Profit before income taxes 115
Income tax expense (25)
Profit for the period 90

5. Example income statement, IFRS 18 presentation (same figures)

Line item Amount Category
Revenue 1,000 Operating
Cost of sales (600) Operating
Selling and administrative expenses (250) Operating
Gain on disposal of PP&E 10 Operating
Impairment of PP&E (30) Operating
Operating profit 130 Subtotal 1
Share of profit of associates 20 Investing
Interest income on deposits 5 Investing
Profit before financing and income taxes 155 Subtotal 2
Interest expense on borrowings (40) Financing
Profit before income taxes 115
Income tax expense (25) Income taxes
Profit for the period 90

6. What changed between the two

Item Change Detail
Operating profit 150 → 130 The disposal gain (10) and the impairment loss (30) move into the operating category, so operating profit falls by 20
New subtotal 155 Profit before financing and income taxes is new
Profit for the period 90 → 90 Only the order and the grouping change; the bottom line is the same

7. Management-defined performance measures (MPMs)

Item Topic Detail
Definition MPM A subtotal of income and expenses that is not specified by IFRS but is used in public communications. Examples: adjusted operating profit, adjusted EBITDA
Public communications Scope Annual reports, investor presentations and press releases are included. Oral statements and social media posts are not
Note disclosure 1 Explanation Why the measure is useful and how it is calculated
Note disclosure 2 Reconciliation A reconciliation to the most directly comparable IFRS subtotal (for example operating profit), with the income tax and non-controlling interest effect of each reconciling item

8. References

Source Document Link
IFRS Foundation IFRS 18 standard page ifrs.org, IFRS 18
IFRS Foundation Project Summary (April 2024) projectsummary-ifrs18-april2024.pdf

Korean version of this post: blog.naver.com/jeonnow/224412271739

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