IFRS 18: Presentation and Disclosure in Financial Statements

IAS 1 is gone, and IFRS 18 doesn't just tweak the edges. It rewrites how entities present their statement of profit or loss, and it's going to change how you read financial statements for years to come.

In this episode, Meredith Mednick, CPA, CA is joined by Blake Oliver, CPA. They break down what's actually new: a mandatory five-category framework for classifying every item of income and expense, fresh rules on aggregation and disaggregation, and new required subtotals in the P&L. They also cover what preparers need to have sorted before the standard kicks in for periods beginning on or after January 1, 2027.

If you work with IFRS financial statements in any capacity, whether you're preparing them, auditing them, or just trying to make sense of them, this is the one to listen to before the transition clock runs out.

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Creators and Guests

Host

Meredith Mednick, CPA, CA

Meredith Mednick is a CPA, CA who has spent over 20 years in audit, accounting, banking, and finance — which means she's seen things. A lot of things. Now, instead of keeping all that hard-earned wisdom locked in a boardroom, she's bringing it to the podcast world to have the conversations that accountants actually want to be having.

Guest

Blake Oliver, CPA

Founder and CEO, Earmark CPE

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Standards aren't just boxes to check. This show digs into the audit, accounting, and tax rules that shape the profession and what they actually mean when you're the one applying them.

Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!

Meredith Mednick, CPA, CA: [00:00:07] Welcome to Standard Practice. I'm your host, Meredith Mednick, CPA. And joining me today is Blake Oliver, CPA, Blake. So happy to chat with you.

Blake Oliver, CPA: [00:00:17] Pleased to be here, Meredith.

Meredith Mednick, CPA, CA: [00:00:19] So excited for today's episode. We're going to discuss IFRS 18 presentation and disclosure in financial statements. We'll touch on the key changes introduced by IFRS 18, classifying income and expense under the new five category framework. New mandatory subtotals required in the statement of profit and loss and the transition requirements that entities should prepare for. We've got a lot to talk about, so let's get started.

Blake Oliver, CPA: [00:00:45] Meredith. I've got to say, when I first heard that we were replacing IAS one, I think my initial reaction was somewhere between mild panic and deep curiosity.

Meredith Mednick, CPA, CA: [00:00:56] That's a very diplomatic way to put it, Blake. I think a lot of practitioners felt that way. I know one has been around in various forms for decades. It's one of those standards that everyone just knows or think they know.

Blake Oliver, CPA: [00:01:09] Right? And IFRS 18, which was issued by the ISAB back in April 2024, it doesn't just tweak IAS one around the edges. It fundamentally changes how entities present their statement of profit or loss. And there are some significant new concepts that practitioners at every level need to get their heads around.

Meredith Mednick, CPA, CA: [00:01:30] Absolutely. So today we're going to do a thorough walk through of what IFRS 18 actually introduces, why it was needed and what it means in practice. And I think the best way to start, as always, is with the why. Because if we understand the problem that the iAsb was trying to solve, the solutions make a lot more sense.

Blake Oliver, CPA: [00:01:51] Couldn't agree more. Let's start there. What was actually broken under IS1?

Meredith Mednick, CPA, CA: [00:01:56] Blake. That's a really interesting question. And I think it's something that anyone who has ever tried to compare two companies financial statements will relate to immediately. Under IAS one, there was no detailed requirement for how entities should classify individual items of income and expense in the profit or loss statement. There were also no detailed rules around the presentations of subtotals above the profit or loss line. Things like operating profit and the aggregation and disaggregation of information was also largely left to prepare as judgments.

Blake Oliver, CPA: [00:02:28] And the consequence of that was enormous diversity in practice.

Meredith Mednick, CPA, CA: [00:02:32] Exactly. Take operating profit. As a classic example, under IAS one. Almost every company presented an operating profit subtotal, but there was no standard definition of what went into it. So one entity might include share based payment expenses within its operating profit figure, while another would strip them right out. One entity might treat impairment losses on goodwill as part of operating profit. Another might present them separately below that line.

Blake Oliver, CPA: [00:03:00] Which meant that when investors and analysts were trying to compare two companies in the same industry, they were essentially comparing apples to oranges, even though both companies were technically complying with IFRS.

Meredith Mednick, CPA, CA: [00:03:12] Exactly. And the iAsb received a lot of feedback about this from stakeholders, investors, analysts, standard setters. The message was clear we need more structure, more comparability, more consistency. So from about 2015 through to 2019, the iAsb was doing research into how to fix this. They pointed an exposure draft in December 2019, deliberated on the feedback they received, and ultimately, they issued IFRS 18 in April of 2024.

Blake Oliver, CPA: [00:03:43] And it's worth noting the scope of what IFRS 18 does and doesn't change. It doesn't touch recognition or measurement. So how you measure a financial instrument when you recognize revenue, none of that changes. This is purely about presentation and disclosure. But that doesn't mean the impact is small.

Meredith Mednick, CPA, CA: [00:04:02] Not at all. The iAsb has given preparers roughly three years to get ready. The standard is mandatorily effective for annual periods beginning on or after the 1st of January 2027 for entities with a December year end. That's the 31st of December of 2027. Financial statements. The iAsb chose that timeline deliberately. It's roughly similar to the runway given for IFRS nine, 15, and 16, which gives you a sense of implementation complexity involved.

Blake Oliver, CPA: [00:04:33] It really should. And we'll come back to the transition requirements at the end of the episode. But first, let's get into the substance of what IFRS 18 actually introduces. So, Meredith, if you had to summarize the key changes in IFRS 18 at a high level, what are we actually dealing with here?

Meredith Mednick, CPA, CA: [00:04:52] So I'd group it into four broad areas. First, and this is a big one. Classification of income and expense. In the statement of profit or loss, IFRS 18 introduces a mandatory framework for how every single item of income and expense gets categorized. Second, there are new principles for aggregation and disaggregation. That means how you group and present information in the primary financial statements and in the notes. Third, there are new mandatory subtotals that every entity must present in the profit or loss statement. And fourth, we're only going to touch on this briefly today because it really deserves its own episode. There are new disclosure requirements around what the standard calls management defined performance measures.

Blake Oliver, CPA: [00:05:35] And then there are some consequential amendments to the other standards as well. Right?

Meredith Mednick, CPA, CA: [00:05:39] Yes. And a few of these are quite significant in their own right. I seven, for example, which is the statement of cash flows for entities using the indirect method, the starting point changes from profit or loss to operating profit, that's a meaningful shift. Ifrs 18 also eliminates the classification options that currently exist under IAS seven for interest and dividend cash flows. Under current IIs, seven entities have flexibility in where they present interest paid, interest received, and dividends. And that flexibility has led to significant diversity in practice. Under IFRS 18, that flexibility is largely removed with classification driven by the entities specified main business activities. It's a change that will affect the cash flow metrics that investors and analysts track closely.

Blake Oliver, CPA: [00:06:28] And there's a change in the statement of financial position, too. Right.

Meredith Mednick, CPA, CA: [00:06:32] Exactly. Goodwill must now be presented as a separate line item in the statement of financial position, distinct from other intangible assets under IAS, one that wasn't specifically required. And there are some amendments to IAS 33 on earnings per share as well around what numerators can be used for additional EPS disclosures.

Blake Oliver, CPA: [00:06:52] Okay, so there's a lot going on. But as we said, the classification framework is really the engine that drives everything else. Let's spend some serious time there. So Meredith, can you walk us through those five categories?

Meredith Mednick, CPA, CA: [00:07:05] Yes. So the fundamental principles of IFRS 18 is that every item of income and expense must be classified into one of those five categories. They are operating, investing, financing, income taxes, and discontinued operations. Everything has to go somewhere.

Blake Oliver, CPA: [00:07:24] And it's worth pausing here for a moment, because I think the names of these categories can be a little misleading. The investing and financing categories in IFRS 18, they're not the same as investing in financing activities in IAS seven. The cash flow statement. The iAsb acknowledged that this could cause confusion, but they kept the names anyway.

Meredith Mednick, CPA, CA: [00:07:46] They did. And that's an important point for practitioners to flag when they're training their teams and reading this. A straightforward example is if you dispose of a piece of machinery used in your production line, the cash received goes into investing activities in IIs seven, but the gain or loss recognized on that disposal under IFRS 18, it goes into the operating category in the profit or loss statement. And that's because the machinery doesn't meet the criteria for the investing category. It's an asset used in combination with other resources to produce goods. So you can't assume alignment between the two statements.

Blake Oliver, CPA: [00:08:23] That's a great example. Now let's go through each category. Where do you want to start.

Meredith Mednick, CPA, CA: [00:08:28] I think it's best to start with operating because it's actually the foundation. And then we can go through investing and financing and contrast them.

Blake Oliver, CPA: [00:08:36] Perfect.

Meredith Mednick, CPA, CA: [00:08:37] So the operating category is what the standard calls the residual category. That means and this is really important income and expenses go into operating unless they meet the criteria to be in any one of the other four categories, it's the default. So the practical approach for any practitioner is first, ask whether an item belongs in investing, financing, income taxes or discontinued operations. If it doesn't fit in any of those, it goes to operating.

Blake Oliver, CPA: [00:09:07] Which means you can't just arbitrarily exclude something from operating profit because it's volatile, unusual, or non-recurring. If it doesn't meet the criteria for another category, it's operating full stop.

Meredith Mednick, CPA, CA: [00:09:20] Exactly. And that is a significant change in mindset for a lot of entities that have historically been quite flexible about what they include or exclude from their version of operating profit.

Blake Oliver, CPA: [00:09:32] Okay. So let's talk about the investing category, because I think this is where a lot of the interesting complexity lives.

Meredith Mednick, CPA, CA: [00:09:39] It really is. The investing category focuses on assets. Specifically, there are three types of assets whose income and expenses. Of course, there are some conditions get classified into the investing category. The first is investments in associates, joint ventures and unconsolidated subsidiaries. The second is cash and cash equivalents. And the third is a broader category. Other assets that generate a return individually and largely independently of the entity's other resources.

Blake Oliver, CPA: [00:10:09] That third one is doing a lot of the work. Can you unpack it a bit for me?

Meredith Mednick, CPA, CA: [00:10:13] Yes, let's talk about that. The key phrase is individually and largely independently. The idea is, does this asset generate its return on its own without needing to be combined with the entity's other resources? Let's think about a holding of listed equity shares that produces dividend income. Those shares generate their return without depending on the entity's employees, its supply chain, or its operational infrastructure. The return is largely independent.

Blake Oliver, CPA: [00:10:42] As compared to, say, a delivery fleet that the entity uses to distribute its products to customers. Those vehicles are deeply integrated with the entity's warehousing, logistics staff and sales operations. They don't generate a return independently.

Meredith Mednick, CPA, CA: [00:10:58] Exactly. So depreciation on that delivery fleet operating category. Fair value gains on the listed equity shares investing category. Assuming the entity doesn't invest in financial assets as a main business activity, we'll get there.

Blake Oliver, CPA: [00:11:14] And it's not just depreciation. It's a specific list of income and expense types that can go into investing, right?

Meredith Mednick, CPA, CA: [00:11:21] Exactly. The specified types of income and expense for the investing category are income generated by the asset. Those are things like interest, dividends, rental income, then income and expenses from initial and subsequent measurement of the asset, including on De-recognition. So depreciation impairment, fair value gains and losses. And finally, the incremental expenses directly attributable to the acquisition and disposal of the assets. Those are things like broker fees when purchasing or selling the financial instruments.

Blake Oliver, CPA: [00:11:54] The condition is actually two part costs must be both incremental and directly attributable to the acquisition or disposal. So if you have staff who manage your investment portfolio as part of broader responsibilities, their salaries don't qualify. Not because they're not incremental, but because they're not directly attributable to a specific transaction. There's also an interesting nuance around routine upkeep costs on assets that otherwise qualify for the investing category. Say the ongoing repairs and property management fees on a building held as an investment property. Those costs go to operating, not investing, even though the property itself isn't investing asset.

Meredith Mednick, CPA, CA: [00:12:35] You got it. That's because the routine upkeep costs aren't income generated by the asset. They're not measurement related and they're not incremental acquisition or disposal costs. They're just regular operating costs. So you kind of end up with a mismatch where rental income on that building sits in investing. But the repair and property management costs for the same building sit in operating. It's kind of counterintuitive at first, but it's the logical application of the rules.

Blake Oliver, CPA: [00:13:06] Okay, let's move on to the financing category. This one focuses on liabilities, right?

Meredith Mednick, CPA, CA: [00:13:12] Exactly. Financing is the liability side mirror of investing. And the isb's rationale here is important. They wanted users to be able to analyze an entity's performance independently of how it's financed, by separating financing costs into their own category. You can compare two entities operational performance without the noise of different capital structures getting in the way.

Blake Oliver, CPA: [00:13:37] Which makes the profit before financing an income taxes subtotal. Very powerful. But let's come back to subtotals in a moment for now. How does the financing category work?

Meredith Mednick, CPA, CA: [00:13:49] So there's a couple things you need to do here. First you need to classify your liabilities into two buckets. The first bucket is liabilities that arise from transactions that involve only the raising of finance. Think bonds payable, bank borrowings notes issued. You receive cash now and you return cash or your own equity instruments later. Pure financing agreements for these, a broad range of income and expense go into the financing category interest expenses, fair value gains and losses. If the liabilities measured at fair value through profit or loss gains and losses on de-recognition incremental transaction costs on issuance. That's a lot.

Blake Oliver, CPA: [00:14:30] And how about the second bucket?

Meredith Mednick, CPA, CA: [00:14:33] The second bucket is everything else. Liabilities from transactions that don't involve the raising of finance. Think about lease liabilities, trade payables. Contract liabilities, pension liabilities, provisions. For these, the range of income and expense that goes into the financing category is much narrower. It's essentially only interest, income and expense, but only if the entity is separately identifying those amounts under other IFRS standards and income and expenses from changes in interest rates. Again, only if identified under other standards.

Blake Oliver, CPA: [00:15:07] So can you give us a practical example of how that plays out?

Meredith Mednick, CPA, CA: [00:15:11] Yeah. Let's talk about defined benefit pension obligations under IAS 19. The net interest expense on those net defined benefit liability that goes into the financing category. And that's because IAS 19 specifically requires you to calculate and recognize that net interest component. But if the current service cost, which is the expense related to employee service in the current period that goes into operating same pension arrangement, two different categories for different components of the cost.

Blake Oliver, CPA: [00:15:44] And what about a provision like a decommissioning obligation that's been discounted to present value.

Meredith Mednick, CPA, CA: [00:15:50] That's a great example. The unwinding of the discount on that decommissioning provision, essentially the time value of money component that goes into financing because it's interest expense identified under IAS 37. But if you revise your best estimate of the decommissioning cost upward or downward, that change in estimates goes into operating. So a single provision can generate entries in two different categories.

Blake Oliver, CPA: [00:16:16] That's going to require some careful tracking and practice.

Meredith Mednick, CPA, CA: [00:16:19] It will. And it's one of those areas where systems and processes are going to be needed to be updated well before that effective date.

Blake Oliver, CPA: [00:16:27] Let's quickly cover income taxes and discontinued operations. Those are more straightforward, I hope.

Meredith Mednick, CPA, CA: [00:16:33] Yeah. Those are much more straightforward income taxes. Those are anything within the scope of IS12. Those go there. Current tax deferred tax. The effects of uncertain tax treatments under Ifric 23. The one nuance is that penalties and interest on income taxes may or may not be in this category, depending on whether they're considered income taxes under IS12 or provisions under IIs 37. There is existing IFRS Interpretation Committee agenda decisions that helps navigate that.

Blake Oliver, CPA: [00:17:05] And what about discontinued operations?

Meredith Mednick, CPA, CA: [00:17:08] Well, those are straightforward in principle. The single amount presented for discontinued operations in accordance with IFRS five goes into discontinued operations category. The complexity here is really in what qualifies as a discontinued operation under IFRS five, which in itself is a separate discussion.

Blake Oliver, CPA: [00:17:28] Okay, let's do a quick recap of the five categories before we move on. One operating. This is the residual category. Everything that doesn't fit elsewhere goes here. That includes revenue, cost of sales, employee benefits and depreciation of assets used in the business. Number two is investing. This is income and expenses from specified assets that generate returns independently, such as equity investments and investment properties. Category three is financing. This is income and expense from liabilities, with broader coverage for pure financing arrangements like bonds and bank borrowings, and narrower coverage for other liabilities like leases and pension obligations. Category four is income taxes. This is anything in scope of IAS 12, and category five is discontinued operations. The IFRS five single amount.

Meredith Mednick, CPA, CA: [00:18:28] That's a great summary. And the critical mindset shift is this. Always start by asking whether something belongs in investing, financing, income taxes or discontinued operations. If it doesn't by default, then it's in the operating category. So we've been talking about the general classification rules, but there's a really important exception layer built into IFRS 18. And this is where it gets especially interesting for entities in financial services, real estate insurance and similar industries. It's the concept of specified main business activities.

Blake Oliver, CPA: [00:19:05] And I think this is something that's going to generate a lot of discussion among preparers. The basic idea is for certain entities, the activities that would normally create investing or financing category income and expenses are actually their core business. So it would be misleading to present those items outside of operating profit.

Meredith Mednick, CPA, CA: [00:19:24] You've got it. Think about a lending institution. Its entire business model is built around accepting deposits, extending loans to borrowers and earning the spread between what it pays on deposits and what it charges on loans. If you pushed all that interest, income and expense into the investing and financing categories, the entities operating profit would look almost empty, as though it had no meaningful core business activity. That clearly doesn't reflect the economic substance of the business.

Blake Oliver, CPA: [00:19:53] So what does IFRS 18 actually do for these entities?

Meredith Mednick, CPA, CA: [00:19:57] It allows. Well, actually it requires that certain items that would otherwise be in the investing or financing categories be reclassified into the operating category. There are two types of specified main business activities that trigger this. The first is entities that invest in assets as a main business activity. The second is entities that provide financing to customers as a main business activity.

Blake Oliver, CPA: [00:20:22] Can you give us some examples of each of those?

Meredith Mednick, CPA, CA: [00:20:25] Let's do it for investing in assets as a main business activity. The standard gives examples like investment entities as defined under IFRS ten investment property companies and insurers for providing financing to customers. That's like banks and other lending institutions, entities that provide financing to customers to enable them to purchase the entities products. Think about a construction equipment manufacturer that also provides installment loans or lease arrangements to its buyers and lessors, providing finance leases.

Blake Oliver, CPA: [00:20:59] And the consequences are quite significant for how these entities profit or loss statements look.

Meredith Mednick, CPA, CA: [00:21:05] They really are. For an entity that invests in equity and debt instruments as a main business activity, those fair value gains and losses on those instruments they would normally sit at investing for IFRS 18, they move into the operating category for an investment property company, rental income and fair value movements on investment property. Those move into operating for a lending institution. The interest income on loans extended to borrowers and interest expense on deposits taken from customers. We would think those would normally be in investing and financing, but really here they move into operating.

Blake Oliver, CPA: [00:21:43] I want to make sure listeners understand an important point here. This isn't an accounting policy choice, is it? You can't just decide to be a specified main business activities entity if it suits you, right?

Meredith Mednick, CPA, CA: [00:21:55] No. And that is critical. The assessment of whether you have specified main business activities is a matter of fact. It's based on your actual operations. If you meet the criteria, you're required to apply the special rules. You don't get to opt out because the general classification rules might give you a more favorable presentation.

Blake Oliver, CPA: [00:22:15] Okay, so how does an entity actually make that assessment?

Meredith Mednick, CPA, CA: [00:22:20] It's a great question. The standards point to two main sources of evidence. The first is whether the entity uses subtotals similar to gross profit as an important indicator of its operating performance. If you're a lending institution, communicating net interest income or net financial margin is a key metric whether to investors, analysts or your own board. That's strong evidence that providing financing is a main business activity. The second is, and we look to IFRS eight here, operating segment information. If a reportable segment comprises a single business activity, that's a strong indicator that activity is a main business activity of the entity.

Blake Oliver, CPA: [00:23:03] Actually, every entity makes its own assessment for its own financial statements. A subsidiary makes the assessment in its own accounts. The parent makes a separate assessment in its consolidated accounts. These can and often will reach different conclusions, which is the complexity we're about to describe.

Meredith Mednick, CPA, CA: [00:23:23] You summarize that really well. That can create some interesting complexities. You might have a subsidiary that clearly invests in assets as its main business activity in its own financial statements. But when you look at the consolidated group, that subsidiary's operations might represent only a small fraction of the group's overall manufacturing and distribution business. At the consolidated level, the group might conclude it doesn't have specified main business activities, even though its subsidiary does in its standalone statements.

Blake Oliver, CPA: [00:23:53] Which means the subsidiary presents certain income and expenses and operating in its own financial statements. But you need a consolidation adjustment to reclassify those same amounts to investing or financing in the group accounts.

Meredith Mednick, CPA, CA: [00:24:07] Correct. And for large, complex groups with many subsidiaries operating in different industries, getting those consolidation adjustments right is going to require some serious process design.

Blake Oliver, CPA: [00:24:20] One more nuance worth flagging. An entity can have more than one specified main business activity. Right.

Meredith Mednick, CPA, CA: [00:24:28] Absolutely. You might conclude that you both invest in assets and provide financing to customers as main business activities. A lending institution that also holds a substantial portfolio of investment properties, for example. And even within investing in assets as a main business activity, you can have different conclusions for different asset classes. One entity might invest in commercial real estate as a main business activity, but not in equity instruments, meaning real estate income and expenses go to operating, but equity instrument income and expense. Those would still go to investing.

Blake Oliver, CPA: [00:25:05] That is really nuanced. Let's do a quick recap of this segment before moving on.

Meredith Mednick, CPA, CA: [00:25:11] I think that's a great idea. There's two types of main specified business activities. There are one entities that invest in assets as a main business activity and two entities that provide financing to customers as main business activity for these entities. Certain items that would otherwise be in investing or financing are reclassified to operating. The assessment is fact based. It's not a choice. It's made at the reporting entity level. Evidence includes use of gross profit style subtotals and segment reporting, and the assessment can differ between a subsidiary and its consolidated parent. That creates a lot of consolidation complexity.

Blake Oliver, CPA: [00:25:54] Meredith, let's shift gears now and talk about aggregation and disaggregation. This is the second major pillar of IFRS 18. And I think it's sometimes underappreciated because the classification requirements tend to grab all the headlines.

Meredith Mednick, CPA, CA: [00:26:09] That's a great point. And it's an area where entities shouldn't underestimate the work involved. Ifrs 18 introduced a whole new set of principles for how information is grouped and presented. And these apply not just to the profit or loss statement, but across all primary financial statements and the notes.

Blake Oliver, CPA: [00:26:28] So what's the core principle here?

Meredith Mednick, CPA, CA: [00:26:31] Well, at its heart, IFRS 18 assigns distinct roles to the primary financial statements and the notes. The primary financial statements are meant to provide a useful, structured summary. They're more aggregated by nature, giving users an overview. The notes then disaggregate that information to help users understand the detail. The standard formalizes this distinction in a way that I don't think is one did.

Blake Oliver, CPA: [00:26:58] And practically, how does this change things?

Meredith Mednick, CPA, CA: [00:27:01] Well, it changes things in a few ways. First, when deciding how to group or separate items, you need to assess whether the items share characteristics. If they do, they get aggregated. If they don't, they get disaggregated. Characteristics to consider are things like the nature of the item, its function within the business, how persistent or recurring it is. The measurement basis used, the size of the item, geography and whether it arises on initial recognition or from subsequent changes in estimates.

Blake Oliver, CPA: [00:27:34] There's also a change around how operating expenses are presented, right? This is one that I think will affect a lot of entities in practice.

Meredith Mednick, CPA, CA: [00:27:42] That's a great call out. It is a significant practical change. Under IAS one, an entity could present the analysis of its operating expenses either in the profit or loss statement itself or in the notes. A lot of entities chose the notes under IFRS 18. That analysis must be in the statement of profit or loss. You must present your operating expenses using one or both of two characteristics nature or function. And that presentation must be in the primary statement, not hidden in a note back there.

Blake Oliver, CPA: [00:28:15] Could you explain the difference between the nature and function for listeners who might be less familiar.

Meredith Mednick, CPA, CA: [00:28:21] That's a great question. Presenting by nature means you classify expenses based on the type of resource consumed. Think about salaries and wages, depreciation, inventory expense, and so on. Without reference to which part of the business consumed those resources, presenting by function means you classify expenses based on the activity they relate to cost of sales, research and development, administration, distribution, and so on.

Blake Oliver, CPA: [00:28:49] And a mixed presentation is also permitted where some of the line items are by nature and others by function.

Meredith Mednick, CPA, CA: [00:28:57] Another great call out there, Blake. Many entities already used a mixed approach in practice. For example, presenting cost of sales as a single function line item while separately disclosing items like amortization of intangible assets and share based payment expenses on a nature basis for everything outside of cost of sales. Ifrs 18 formalizes this and adds some specific labeling requirements to make sure line items are clear and not misleading.

Blake Oliver, CPA: [00:29:25] And there are some additional disclosure requirements if you present by function right.

Meredith Mednick, CPA, CA: [00:29:30] There are. If you present by function, IFRS 18 also requires you to disclose those key nature of expense amounts, depreciation and amortization, employee benefits and share based payments, impairment losses and inventory write downs. Those need to be broken down by functional category. These disclosures need to be clearly identifiable in your notes. It's designed to ensure that the nature of expense information isn't lost when a functional presentation is used.

Blake Oliver, CPA: [00:30:00] I heard there's also some new requirements around the use of other as a label, right?

Meredith Mednick, CPA, CA: [00:30:06] Exactly. The standard is quite explicit that other should only be used when a more informative label genuinely can't be found, and if you do use it, There are requirements to make the label as specific as possible. Think other operating expenses rather than just other expenses, and to consider whether the aggregated amount is large enough that users might wonder if material items are being obscured within it.

Blake Oliver, CPA: [00:30:34] And that's just a good discipline to apply, regardless of whether IFRS 18 requires it.

Meredith Mednick, CPA, CA: [00:30:40] Exactly. Users want to know what does this other mean?

Blake Oliver, CPA: [00:30:45] All right. Let's talk about subtotals. Because once you've classified your income and expenses into the five categories and you've decided how to aggregate and present them the subtotals follow logically from all of that work. Meredith, what does IFRS 18 actually mandate when it comes to subtotals?

Meredith Mednick, CPA, CA: [00:31:05] Ifrs 18 introduces two new mandatory subtotals that every entity must present before profit or loss. The first is operating profit. That's simply the total of all income and expense classified in the operating category. The second is profit or loss before financing and income taxes. That's the total of operating profit plus all income and expenses in the investing category.

Blake Oliver, CPA: [00:31:32] Okay, so profit before financing and income taxes effectively captures everything except the cost of financing, income taxes, and discontinued operations.

Meredith Mednick, CPA, CA: [00:31:45] You've got it. And that's intentional. The iAsb wants users to be able to see the operational and investment performance of an entity, separate from how it has chosen to fund itself. Two entities might generate very similar revenue and margins that carry very different amounts of debt. This subtotal lets users strip out the financing cost and compare underlying performance on an even footing. Here we're really comparing apples to apples.

Blake Oliver, CPA: [00:32:13] There's also an important exception to the profit before financing and income taxes requirement, isn't there?

Meredith Mednick, CPA, CA: [00:32:20] Yes. And that's really great to flag there, Blake, for entities that provide financing to customers as a main business activity. Let's go back there and remember that those are entities where financing income and expenses move into operating. If those entities elect to classify all related income and expenses in the operating category, they're actually prohibited from presenting the profit before financing and income taxes. Subtotal. And that's because, by definition, if all financing related items are already in operating, a subtotal that purports to be before financing would be misleading.

Blake Oliver, CPA: [00:32:56] That makes sense. So what do those entities present instead?

Meredith Mednick, CPA, CA: [00:33:02] They can still present an additional subtotal after operating profit and before any financing category items, but they cannot label it in a way that implies it excludes financing amounts. So for them, profit before financing is off the table. They might present it as a way like profit before income taxes instead, which is one of the additional subtotals many entities will choose to include.

Blake Oliver, CPA: [00:33:26] Speaking of which, there are some other common subtotals that aren't mandatory, but that entities are expected to consider presenting as additional subtotals. Correct?

Meredith Mednick, CPA, CA: [00:33:35] Correct. Ifrs 18 doesn't just permit additional subtotals, it actually requires entities to consider whether additional subtotals are necessary to provide a useful structured summary. Some examples here are. Gross profit. That's the difference between revenue and cost of sales, which many entities will continue to present. Profit before income taxes, profit from continuing operations, and for financial service entities, things like net interest income or insurance service result are some great subtotals there.

Blake Oliver, CPA: [00:34:09] And there are some guardrails around additional subtotals. They can't just be anything the entity wants to highlight.

Meredith Mednick, CPA, CA: [00:34:16] No, IFRS 18 mandates that any additional subtotals must comprise amounts recognized and measured in accordance with IFRS standards. It must be compatible with the statement structure required by IFRS 18. It must be presented consistently from period to period, and it must not be displayed more prominently than those mandatory totals and subtotals.

Blake Oliver, CPA: [00:34:39] Okay, this leads us nicely into the topic of management defined performance measures or mpms. We said we'd touch on this briefly. So what's the headline here?

Meredith Mednick, CPA, CA: [00:34:50] Well, what you need to know is this. If your entity uses a subtotal of income and expenses in public communications outside of those financial statements, things like press releases, investor presentations, earnings calls, and that subtotal communicates management's view of financial performance. Ifrs 18 requires specific disclosures about that measure in the financial statements themselves. A classic example is adjusted operating profit. That's where you would strip out items like restructuring charges or amortization of acquired intangible assets to present when management considers underlying performance.

Blake Oliver, CPA: [00:35:28] So those MPM disclosures bring management's non-GAAP measures into the financial statements in a controlled and transparent way.

Meredith Mednick, CPA, CA: [00:35:36] Exactly. It's a significant change for many entities. But as we said at the outset, the full NPM requirements deserve their own episode. We'll talk about those later. There's a lot of nuances in what qualifies as an MPM and what the disclosure requirements involve. Today, I think it's really important that our listeners just know MPM exist, and it will mostly affect publicly listed entities more.

Blake Oliver, CPA: [00:36:02] Let's do a quick recap on subtotals. There are two new mandatory subtotals. Operating profit and profit before financing and income taxes. Entities providing financing is a main business activity that elect to put all financing items in operating. Can't present the profit before financing. Subtotal. Additional subtotals like gross profit and profit before income taxes are common and encouraged, but they must meet specific criteria and management defined performance measures will require significant new disclosures for entities that communicate adjusted performance metrics externally.

Meredith Mednick, CPA, CA: [00:36:43] Blake. Before we get to transition, I want to quickly flag a few specific items that come up frequently in practice and where the classification may not be immediately intuitive.

Blake Oliver, CPA: [00:36:53] That's a great idea. Let's run through them quickly.

Meredith Mednick, CPA, CA: [00:36:56] First, let's talk about foreign exchange differences. Under IFRS 18, those differences go into the same category as the income and expenses from the item that gives rise to them. So if you have a payable owed to a supplier denominated in a foreign currency, the FX difference goes to operating. If you have a bond payable denominated in a foreign currency, that FX difference goes to financing. This is a change from how many entities currently present their foreign exchange differences. Those are usually lumped together in a single line item, and it will require those systems to track FX by individual asset and liability.

Blake Oliver, CPA: [00:37:36] There is a relief provision, though, if it would involve undue cost or effort to allocate. You can just put it all in operating.

Meredith Mednick, CPA, CA: [00:37:45] That's right. But that threshold is pretty high. You can't just claim it's inconvenient. Entities are expected to make a genuine effort to comply before invoking that relief.

Blake Oliver, CPA: [00:37:56] All right. What's the second item?

Meredith Mednick, CPA, CA: [00:37:58] The second item. Those are derivatives and hedging instruments. The general principle here is that those gains and losses on derivatives go in the same category as the income and expense of the item being hedged or the risk being managed. So a foreign currency forward contract used to hedge forecast export revenue that would be in the operating category, an interest rate swap. Managing the interest cost on a bond payable. Those would go in the financing category. That would apply whether or not hedge accounting is formally applied, as long as the derivative is genuinely used to manage an identified risk.

Blake Oliver, CPA: [00:38:34] What about the derivatives that are not used to manage identified risks?

Meredith Mednick, CPA, CA: [00:38:38] Well, if they're not related to a financing transaction, they'd go in the operating category. If they are related to a financing transaction, those would go to the financing category. Unless the entity provides financing to customers as a main business activity, in which case there is additional considerations and potential accounting policy choices.

Blake Oliver, CPA: [00:38:59] Here's the third item, and I know this one generates a lot of questions. What about employee benefits? Current service costs on pensions, for example.

Meredith Mednick, CPA, CA: [00:39:09] Well, the current service cost that would go to operating net interest on the net defined benefit liability or asset those will go to financing. And that's because the net interest component is an interest amount separately identified under IAS 19 Remeasurements. Those go to the other comprehensive income. So IFRS 18 profit or loss classification doesn't come into play for those.

Blake Oliver, CPA: [00:39:35] That's pretty clear. How about this one. Restructuring costs.

Meredith Mednick, CPA, CA: [00:39:40] Those go into the operating. And that's because restructuring provisions are liabilities that arise from transactions that don't involve only the raising of finances. And the expense or recognition of that provision is in interest, no matter how infrequent or large the restructuring program is, the cost goes into operating. You cannot carve it out of operating profit simply because management views it as a one off event.

Blake Oliver, CPA: [00:40:06] Which is going to be a meaningful change for entities that have historically presented restructuring charges below the line in their own version of operating profit.

Meredith Mednick, CPA, CA: [00:40:15] That's a great point, and it feeds directly into why the management defined performance measure. Disclosures matter so much because entities that want to communicate an adjusted figure, excluding restructuring, they'll need to disclose that in a way that is standardized and transparent.

Blake Oliver, CPA: [00:40:32] All right. Let's bring it home with transition requirements. Meredith, this is probably the most immediately actionable part of the episode for listeners. So what do entities actually need to do and when?

Meredith Mednick, CPA, CA: [00:40:47] Well, I think first we need to talk about the effective date. Ifrs 18 is mandatorily effective for annual periods beginning on or after the 1st of January 2027 for December year ends. That's December 31st, 2027. Financial statements for March year ends its March 20th 28th June year ends. That would be June 2028 and so on. Early adoption is permitted, though entities should confirm the position in their specific jurisdiction. In the EU and UK, endorsement has now been completed, and early adoption is permitted for periods beginning on or after the relevant endorsement date.

Blake Oliver, CPA: [00:41:26] And how about the transition approach?

Meredith Mednick, CPA, CA: [00:41:29] Well that's retrospective. Entities must restate all comparative periods presented. So if we think about our December year end entity adopting IFRS 18 for the first time in their 2027 financials, the 2026 comparative numbers will need to be restated to comply with those new IFRS 18 requirements. That means reclassifying income and expenses into those new categories and presenting all those new mandatory subtotals for the comparative period as well.

Blake Oliver, CPA: [00:41:58] That's a lot of work, especially for complex groups.

Meredith Mednick, CPA, CA: [00:42:02] It really is a lot of work and there's a specific transition disclosure required. You need a reconciliation between the amounts previously presented under IAS one and the restated amounts under IFRS 18 for the immediately preceding comparative figures. So for December year end, that means a reconciliation of the 2026 profit or loss statement.

Blake Oliver, CPA: [00:42:23] Interestingly, entities are not required to provide the full quantitative line item adjustment disclosure that's normally required under IAS eight for changes in accounting policy. The IFRS 18 specific transition disclosure replaces that.

Meredith Mednick, CPA, CA: [00:42:40] That's a huge relief given all the changes that are involved.

Blake Oliver, CPA: [00:42:43] What about the interim financial reports? I know there's some specific requirements for the first year of adoption.

Meredith Mednick, CPA, CA: [00:42:50] Great call out there Blake. Normally under eyes 34 condensed interim financial statements use the same headings and subtotals as the most recent annual financial statements. But here, in the first year of applying IFRS 18, that would create a problem. Your most recent annual statements were prepared under IAS one. Ifrs 18 overrides IAS 34. Here for that transition year and requires interim financial statements to already use the IFRS 18 headings and subtotals. That's even before the first annual IFRS 18 financial statements are issued. Entities also need to provide reconciliations in those interim statements showing how the comparative period line items have changed as a result of applying IFRS 18 retrospectively.

Blake Oliver, CPA: [00:43:39] So for a December year end entity adopting IFRS 18 in 2027, their first quarter or half year 2027 interim financial statements already need to be presented on IFRS 18 basis.

Meredith Mednick, CPA, CA: [00:43:55] That's right Blake. And that means the preparation work needs to be substantially completed before the first interim financial reporting date of the adoption year, not just before the annual year end.

Blake Oliver, CPA: [00:44:08] And there's one other transition item worth mentioning a special election available for certain entities around investments in associates and joint ventures.

Meredith Mednick, CPA, CA: [00:44:18] Another great call out. The short version is this at the date of initial application, some entities may have the option to change how they measure those investments, from the equity method to fair value through profit or loss. This matters because measurement method affects which category the returns fall into. Under IFRS 18, the detailed rules around who qualifies for this election are still being finalized by the iAsb. Amendments are expected before the 2027 effective date. So if this is relevant to your entity or your clients definitely need to check the current standard rather than relying on what you've heard to date.

Blake Oliver, CPA: [00:44:55] Meredith. Let's close out with some practical guidance for our listeners, given that we're not that far out from the mandatory effective date. What should practitioners be doing right now?

Meredith Mednick, CPA, CA: [00:45:05] I love that question because this is what it's all about, that practical advice for me. I'd start with the assessment of specified main business activities because that drives so many downstream decisions. If an entity has specified main business activities, the entire classification framework looks different. Getting clarity on this early means you can design your implementation approach with that conclusion built in, rather than having to rework it later.

Blake Oliver, CPA: [00:45:32] And this is something that needs to be done at multiple levels for group reporters.

Meredith Mednick, CPA, CA: [00:45:37] Yes. Subsidiary level, intermediate holding, company level. Consolidated group levels. They may all have different conclusions. Make sure you map all those out early.

Blake Oliver, CPA: [00:45:48] What else?

Meredith Mednick, CPA, CA: [00:45:49] So the next thing I would do is a detailed walkthrough of the current profit or loss statement and classify every line item into those five IFRS 18 categories. That's really an impact assessment exercise. Where are the reclassifications going to be? Which items currently sit outside? Your operating profit will now be required to move into it. Which items currently in operating must shift to investing or financing? This exercise will also quickly highlight the areas where your existing systems don't capture the data you'll need. We talked about the tracking of foreign exchange differences by underlying asset and liabilities. That's a common example there.

Blake Oliver, CPA: [00:46:29] And third.

Meredith Mednick, CPA, CA: [00:46:30] Well let's think about that operating expense presentation. Is your entity currently presenting expenses by nature function or as a mix. Will that remain the most appropriate approach under IFRS 18. And remember this analysis now has to be in the profit or loss statement itself, not in the notes. If that's a change from the current practice. Start thinking about what your statements going to look like.

Blake Oliver, CPA: [00:46:55] And what about for entities with Mpms?

Meredith Mednick, CPA, CA: [00:46:58] Well, I think it's really important to review every metric that your entity communicates externally. Those press releases, investor presentations, management commentary, if any of those are subtotals of income and expense that communicate management's view of performance and aren't specifically listed as exempt under IFRS 18, they're going to require a specific disclosure in the financial statements. Start thinking about those now and assess what the disclosure requirements will mean for each one of those.

Blake Oliver, CPA: [00:47:26] And overall, don't underestimate the implementation effort. This isn't just a presentation change that can be made at the last minute. It requires systems changes, process redesign, staff training and for groups, potentially significant consolidation procedure updates.

Meredith Mednick, CPA, CA: [00:47:44] Yeah, it's a really big shift. The iAsb gave a few years of transition for a reason. I think it's really important to use those years effectively.

Blake Oliver, CPA: [00:47:53] All right, let's bring everything together with a final summary of what we covered today.

Meredith Mednick, CPA, CA: [00:47:59] Let's start from the beginning. Ifrs 18 was issued in April 2024 and supersedes IAS one. It doesn't change how transactions are recognized or measured, but it fundamentally changes how they're presented. The Isb's motivation was to address the lack of consistency and comparability that arose under IAS one, particularly around the inconsistent use of operating profit and other subtotals.

Blake Oliver, CPA: [00:48:25] The centerpiece of the standard is a mandatory five category classification framework for all income and expenses operating, investing, financing, income taxes and discontinued operations. Operating is the residual category. Everything that doesn't meet the criteria for another one goes in there. Investing focuses on specified assets that generate independent returns such as equity holdings and investment properties. Financing focuses on liabilities with broader coverage for pure financing arrangements, such as bonds and bank borrowings, and narrower coverage for other liabilities like leases and pension obligations.

Meredith Mednick, CPA, CA: [00:49:09] And for entities with specified main business activities. Remember those that are investing in assets or providing financing to customers as a main business activity for them. Certain items that would otherwise be in investing or financing those are reclassified to operating. This is a fact based assessment, not a policy choice, and it could differ between a subsidiary and its consolidated parent.

Blake Oliver, CPA: [00:49:34] Ifrs 18 also introduces new aggregation and disaggregation principles. Requires the analysis of operating expenses to be presented in the profit or loss statement, rather than the notes, and brings new requirements around the use of labels, including the other category.

Meredith Mednick, CPA, CA: [00:49:54] Yeah, those two mandatory subtotals that must be presented. Operating profit and profit before financing and income taxes. Additional subtotals like gross profit and profit before income taxes are common and encouraged, subject to specific criteria. Management defined performance measures those adjusted performance metrics that are communicated externally. Those will require significant new disclosures.

Blake Oliver, CPA: [00:50:18] And when it comes to the transition, retrospective application is required with a reconciliation disclosure for the immediately preceding comparative period. The mandatory effective date is for periods beginning on or after the 1st of January 2027. But given the complexity involved, the work needs to start now, including being ready to present on an IFRS 18 basis in your first interim financial statements of the adoption year.

Meredith Mednick, CPA, CA: [00:50:47] It really is a significant standard, but if you approach it methodically, it's very manageable. And ultimately it should produce financial statements that are more comparable, more transparent and more useful to the people who rely on them.

Blake Oliver, CPA: [00:51:01] Well said. Meredith.

Meredith Mednick, CPA, CA: [00:51:03] Well, that's the episode for today. Thanks again for taking the time to listen to standard practice. We really hope this episode has given you the solid foundation to get you started with IFRS 18. And don't forget, this episode qualifies for CPE. Just head to earmark.app and take the quiz. While you're there, take some time to check out the other episodes that may interest you. Blake, it was a pleasure having you here today. Hopefully you'll join us again.

Blake Oliver, CPA: [00:51:31] Great to be here and I'd love to come back.

Meredith Mednick, CPA, CA: [00:51:34] Until next time.