Financial Reporting and Measurement of Management Performance (IFRS 18)

<p style="text-align: justify;" align="center"><strong><strong><span>DOI: </span><span><a href="https://doi.org/10.52340/ekonomisti.2025.01.04">10.52340/ekonomisti.2025.01.04</a></span></strong></strong> <p style="text-align: center;" align="center"><strong>Summary</strong> <p style="text-align: justify;"><strong><em>Topic</em></strong><em>:</em><em> On 9 April 2024, the International Accounting Standards Board issued a new Standard IFRS 18 </em><em>Presentation and Disclosure in Financial Statements. </em><em>This</em><em> is the result of the Board’s Project "Primary financial statements" (), on which work began in response to dissatisfaction with the comparability and transparency of investors’ financial reporting information. </em> <p style="text-align: justify;"><strong><em>Purpose and objectives</em></strong><em>:</em><em> </em><em>Familiarization</em><em> with the requirements of the new Standard (IFRS 18) issued by the IASB, and follow-up the recommendations of the “Big Four” regarding preparation and presentation of useful information to users of financial statements.</em> <p style="text-align: justify;"><strong><em>Methodology:</em></strong><em> </em><em>In the course of the research, relevant references, guidance and recommendation materials, scientific articles issued by IASB and "Big Four" are used.</em> <p style="text-align: justify;"><strong><em>Outcomes</em></strong><em>:</em>The requirements of IFRS 18 will help information users to measure the business management performance and its prospects. The requirements relate to the structure and disclosures notes of profit and loss statements . In the profit and loss statements, information is grouped into five categories by reflecting subtotals. The disclosures notes provide the management performance measures and the explanation of why the data submitted by them reflect the management performance, the technique of their calculation, reconciliation with the subtotals and the usefulness of this information. <p style="text-align: justify;"><strong><em>Keywords</em></strong><em>: Columnar format for the reconciliation; Management performance measures; Reconciliations of management performance measures; Subtotals.</em> <p style="text-align: center;"><strong style="text-align: center;">I. </strong><strong style="text-align: center;">Introduction</strong> <p style="text-align: justify;"><strong>The Objective </strong> of IFRS 18 is to improve the information submitted and disclosed in financial statements - to increase the comparability, transparency and usefulness of the information. According to the IASB, the requirements of the new Standard will provide investors with more perceptible and comparable information about financial indicators of entities, which will allow them to make more sound investment decisions. <p style="text-align: justify;">The Standard defines that the <strong>objective of financial statements</strong> is to provide financial information about a reporting entity’s assets, liabilities, equity, income, and expenses that is useful to users of financial statements in assessing the prospects for future net cash inflows to the entity and in assessing management’s stewardship of the entity’s economic resources (Standards, 2024). <p style="text-align: justify;">The board requires the submission of additional information, in the form of <strong>disclosures notes</strong>, which will allow investors to understand the content of the elements of primary financial statements, for which essential information must be submitted in the disclosures notes (Levan Sabauri, Nadezhda Kvatashidze, 2023). Primary financial statements and disclosures notes have different and mutually complementary roles in providing financial information (JAMES MELITSKI and AROON MANOHARAN, 2014).<strong> </strong> <ol style="text-align: justify;"> <li><strong>Profit and Loss Statement Structure </strong></li> </ol> <p style="text-align: justify;">Currently there is no clearly defined profit and loss reporting structure. Businesses / companies choose at their discretion which subtotals to reflect in their statements. Often companies reflect in their statements operating profit, but the method of calculating operating profit varies from company to company, which reduces the comparability of this indicator. To address these shortcomings, IFRS 18 introduces a defined profit or loss statement structure, which aims to reduce the diversity of profit or loss reporting, help financial reporting users to understand information and compare better the companies by this indicator. The structure provides for categorization of the profit and loss reporting items and the subtotals (Levan Sabauri, 2024). <p style="text-align: justify;" align="center"> √ <strong>Categories</strong> <p style="text-align: justify;" align="center"> <p style="text-align: justify;" align="center"> √ Items of The profit and loss statement are classified into five categories: operating, investing, financing, income tax, and discontinued operations. Of these, the first three are considered “basic” categories. IFRS 18 provides general guidance on how entities should classify items into these categories. <p style="text-align: justify;"><strong>Operating </strong><strong> category includes: </strong> <ul style="text-align: justify;"> <li>Income and expenses from an entity`s main business activities</li> <li> Currency differences arising from trade requirements (Tadeu Cendon; Jianqiao Lu; Elena Kostina, 2023);</li> <li>Any income and expenses that are not classified in other categories (so called “Residual category” ( PricewaterhouseCoopers LLP, 2023));</li> </ul> <p style="text-align: justify;">As a rule, currency change is classified in the same category of profit and loss reporting (operating, financial and investment) as income and expenses from the items that caused the currency difference. For example, currency differences on bank loans are classified into the financing category (Levan Sabauri, 2018). If the classification of currency differences in this way results in undesirable costs or efforts, the entity has the right to classify them in the operating category (IFRS Accounting, 2024); <ul style="text-align: justify;"> <li>Also includes volatile and unusual income and expenses </li> </ul> <p style="text-align: justify;"><strong>Investing </strong><strong> category includes </strong> <p style="text-align: justify;"><strong> </strong>Income and expenses from investments made individually and largely independently of the right`s main business activities (Levan Sabauri, 2017). These are: <ul style="text-align: justify;"> <li>Results from subsidiaries associates, and joint ventures; </li> <li>Rental income and investment property revaluation results; <ul> <li>Interest income and changes in the fair value of financial assets;</li> <li> Interest income from cash and cash equivalents;</li> <li>Dividends received and changes in fair values of equity instruments.<strong> </strong></li> </ul> </li> </ul> <p style="text-align: justify;"><strong>Financing Operating </strong><strong> category includes: </strong> <ul style="text-align: justify;"> <li>All income and Liabilities that arise from transactions that involve only the raising of finance</li> <li>Receipt and return of cash or the entity’s equity ;</li> <li>Reduction of financial liabilities;</li> <li>Bank loans;</li> <li>Interest costs from other liabilities and the consequences of changes in interest rates:</li> <li>Rental liabilities;</li> <li>Defined benefit pension liabilities. </li> </ul> <p style="text-align: justify;">These categories are not the same as what categories are in IAS 7 Statements of Cash Flow, cash flow statements according to although there are some similarities <p style="text-align: justify;">The grouping of income and expenses from operating activities is based on the basic business activity, thus, different entities define operating activities differently (Yoesoep Edhie Rachmad; Asri Ady Bakri;Sukma Irdiana;Juliana Waromi;Alfry Aristo Jansen Sinlae, 2024). If the basic business activity is investing in assets, then the expenses and income associated with investing in assets belong to the operating category (not investing). If the basic business activity is providing financing to customers, then the expenses and income of the business associated with the providing financing to customers, fall into the operating category (rather than financing). <p style="text-align: justify;"><strong> </strong><strong>Required subtotals</strong> <p style="text-align: justify;">IFRS 18 requires entities to submit totals subtotals. Entities submitted these indicators, but determined them differently. IFRS 18 determines the procedure for calculating them (Diem Nhat Phuong Ngo, Cong Van Nguyen , 2024). <p style="text-align: justify;"> On the basis of classifying income and expenses into categories in the profit and loss statement, three new subtotals should be submitted: <ul style="text-align: justify;"> <li><strong>Operating profit or loss </strong> - Includes all income and expenses of the operating category; </li> <li><strong>Operating profit or loss before financing and </strong><strong>profit tax</strong> <strong> - </strong> Includes operating profit or loss and all income and expenses of the investment category;</li> <li> <strong>Profit or loss - </strong>Includes all items of profit and loss.</li> </ul> <p style="text-align: justify;">Table 1 provides Illustrative statement of profit or loss for a general corporate where income and expenses are classified into the categories, with reflecting subtotals <p style="text-align: justify;"> <em>Table 1</em> <p style="text-align: center;" align="center"> Illustrative statement of profit or loss for a general corporate <p style="text-align: center;" align="center">(nonfinancial sector) <p style="text-align: center;" align="center"> operating expenses by function <table style="width: 645px;" border="1" cellspacing="0" cellpadding="0" align="center"> <tbody> <tr> <td valign="top" width="425"> </td> <td valign="top" width="220"> <p align="center">Category </td> </tr> <tr> <td valign="top" width="425"> Revenue </td> <td rowspan="6" valign="top" width="220"> <p align="center"><strong>Operating</strong> </td> </tr> <tr> <td valign="top" width="425"> Cost of goods sold </td> </tr> <tr> <td valign="top" width="425"> <strong>Gross profit</strong> </td> </tr> <tr> <td valign="top" width="425"> R & D expenses </td> </tr> <tr> <td valign="top" width="425"> Administrative Expenses </td> </tr> <tr> <td valign="top" width="425"> Research costs </td> </tr> <tr> <td valign="top" width="425"> <strong>Operating profit </strong> </td> <td valign="top" width="220"> <p align="center">Subtotal </td> </tr> <tr> <td valign="top" width="425"> Profit share in associates and joint ventures (equity method) </td> <td rowspan="2" valign="top" width="220"> <p align="center"><strong>Investing</strong> </td> </tr> <tr> <td valign="top" width="425"> Interest income from cash and cash equivalents </td> </tr> <tr> <td valign="top" width="425"> <strong>Profit before financing and </strong><strong>profit tax</strong> <strong> </strong> </td> <td valign="top" width="220"> <p align="center">Subtotal </td> </tr> <tr> <td valign="top" width="425"> Interest costs for loan and rental liabilities </td> <td rowspan="2" valign="top" width="220"> <p align="center"><strong>Financing </strong> </td> </tr> <tr> <td valign="top" width="425"> Interest costs for other liabilities </td> </tr> <tr> <td valign="top" width="425"> Profit before income taxes </td> <td valign="top" width="220"> <p align="center">Subtotal </td> </tr> <tr> <td valign="top" width="425"> Income tax expense </td> <td valign="top" width="220"> <p align="center"><strong>Income Tax</strong> </td> </tr> <tr> <td valign="top" width="425"> Profit from continuing operations </td> <td valign="top" width="220"> <p align="center"> </td> </tr> <tr> <td valign="top" width="425"> Loss from discontinued operations </td> <td valign="top" width="220"> <strong> Discontinued operations </strong> </td> </tr> <tr> <td valign="top" width="425"> <strong>Annual profit</strong> </td> <td valign="top" width="220"> <p align="center">Total </td> </tr> </tbody> </table> <p style="text-align: justify;">The improved structure of profit and loss statements and new subtotals will give investors a consistent starting point for analyzing the entity’s performance and facilitate comparison of the entities <p style="text-align: justify;"><strong>Disclosure of expenses by nature </strong> <p style="text-align: justify;"><strong> </strong>IFRS 18 includes guidance for companies to assess and determine which approach is most appropriate based on facts and circumstances. When costs are presented by function, the company is required to disclose information (Disclosures) for specific costs. <p style="text-align: justify;">The Board has decided also that when an entity present the statement of profit or loss “by function”, the operating expenses should be present therein (not in the “Notes”), in the context of five categories “by nature”: Depreciation of property, plant and equipment, amortization of intangibles, staff costs, depreciation, write down of inventories). To calculate financial coefficients, it was decided to use a simplified approach to measure the impact of the tax effect. <p style="text-align: justify;">Thus, IFRS 18 requires companies to analyze their operating costs directly in a profit statement, either by nature, function or using a hybrid (KPMG International Standards Group, 2024) presentation. According to the new Standard, this presentation provides “useful, structured summary” of these costs. So, for example, if any item is presented according to functions (for example, the cost of sales), then the entity provides more detailed information about their nature. <p style="text-align: justify;"><strong> Aggregation and disaggregation of Information </strong> <p style="text-align: justify;">Some companies manipulate with the presentation of the same indicators differently in financial statements in a way that does not violate the requirements of IFRS, since the standards provide only general guidance on the submission and disclosure of reporting data. Sometimes it happens that some entities legitimately do not present sufficiently detailed reporting information in their reports or hide certain information. <p style="text-align: justify;">In this regard, IFRS 18 establishes recommendations on how to organize the provision of information in primary financial statements and notes. IFRS 18 requires the entities to aggregate or disaggregate information about individual transactions and other events for reflecting it in the primary financial statements and notes. these requirements are based on the following principles of classification (Aggregation and disaggregation) of the information: <ul style="text-align: justify;"> <li>Items are aggregated by common features and are disaggregated by features that are not common;</li> <li>Items are aggregated and a disaggregated so that the primary financial statements and notes meet their purpose;</li> <li>Aggregation and disaggregation does not make essential information vague; </li> </ul> <p style="text-align: justify;">Requirements for the disclosure of information about those elements, which are outlined under the name “Other”. <p style="text-align: justify;"> The Board believes that even one different feature of information can be enough to disaggregate it if the information received is essential. Thus, entities are required to disaggregate information every time the information received is essential. If the entity does not insert such information in the primary financial statements, this information must be disclosed in the notes (Hema Diwan & Binilkumar Amarayil Sreeraman , 2023) <p style="text-align: justify;">Changes are expected to provide more detailed and useful information. IFRS 18 also requires entities to provide greater transparency regarding operating costs, which helps investors find and understand the information they need. <ol style="text-align: justify;"> <li><strong> </strong><strong> Management-defined performance measures </strong></li> </ol> <p style="text-align: justify;">The management may define its own performance measures which sometimes are referred to as APMs - alternative performance measures or non-GAAP measures). Currently, it is quite common to reflect financial ratios in statements (net cash flow, EBITDA, capital profitability, etc.). At the same time, IFRS (IFRS) do not contain clear formulas and requirements for their calculation (which allows manipulating them), and as a result, especially important indicators for investors are not comparable and fairly submitted. In this regard, IFRS 18 introduces the requirement for disclosure of financial activities in the form of “MPMs” (Management performance measures defined by management. (Table 2). Information related to these indicators should be disclosed in the financial statements by reconciliation (IFRS Accounting, 2024). between the most similar subtotals of MPM and IFRSs. This would in fact result in inclusion of some of the non-GAAP measures in the financial statements <p style="text-align: justify;"> <em>Table 2 </em> <table border="1" cellspacing="0" cellpadding="0" align="center"> <tbody> <tr> <td colspan="3" valign="top" width="650"> <p align="center"><strong>Performance measures (Standards, 2024) </strong> </td> </tr> <tr> <td colspan="2" valign="top" width="433"> <p align="center"> Subtotals of income and expenses </td> <td rowspan="2" valign="top" width="217"> <p align="center">Otter alternative performance measures (APMs) </td> </tr> <tr> <td valign="top" width="217"> <p align="center">MPMs </td> <td valign="top" width="217"> <p align="center">IFRS </td> </tr> <tr> <td valign="top" width="217"> <ul> <li>Adjusted profit-loss</li> <li>Adjusted operating profit</li> <li>Adjusted earnings before interest, profit tax, depreciation and amortization</li> <li>Operating profit</li> <li> Operating profit before depreciation, amortization and impairment of assets under IAS 36</li> <li> Adjusted EBITDA</li> <li>Capital profitability</li> <li>Net liabilities</li> <li>Number of customers</li> <li>Satisfied customers</li> </ul> </td> <td valign="top" width="217"> </td> <td valign="top" width="217"> </td> </tr> </tbody> </table> <p style="text-align: justify;">The entity is required to disclose information on how the effect of profit tax is determined (the use of a simplified calculation method is allowed) (Alfred Wagenhofer, 2023). <p style="text-align: justify;">IFRS 18 establishes the requirement to disclose the following information: <ul style="text-align: justify;"> <li>Explanation of how MPM reflects management`s view and provides fair information;</li> <li>Explanation of how MPM is calculated ;</li> <li>Reconciliation with the subtotals determined by IFRS; (Table 3);</li> <li>Explanation of any changes in MPM.</li> <li style="text-align: right;"><em>Table 3</em></li> </ul> <p style="text-align: center;"><strong>Illustrative example of an MPM reconciliation (extract from the Illustrative Examples on IFRS 18)</strong> <table style="width: 600px;" border="1" cellspacing="0" cellpadding="0" align="center"> <tbody> <tr> <td rowspan="2" valign="top" width="265"> </td> <td rowspan="2" valign="top" width="74"> <p align="center"> <p align="center"><strong>IFRS</strong> </td> <td colspan="3" valign="top" width="318"> <p align="center"><strong> </strong><strong>Adjusting items</strong> </td> <td valign="top" width="69"> <p align="center"> <p align="center"><strong>MPM</strong> </td> </tr> <tr> <td valign="top" width="103"> <p align="center">Impairment loss </td> <td valign="top" width="104"> <p align="center">Restructuring costs </td> <td valign="top" width="111"> Profit from the sale of inventories </td> <td valign="top" width="69"> </td> </tr> <tr> <td valign="top" width="265"> Other operating income </td> <td valign="top" width="74"> <p align="center"> </td> <td valign="top" width="103"> <p align="center"> </td> <td valign="top" width="104"> <p align="center"> </td> <td valign="top" width="111"> <p align="center">(1,800) </td> <td valign="top" width="69"> </td> </tr> <tr> <td valign="top" width="265"> Research costs </td> <td valign="top" width="74"> <p align="center"> </td> <td valign="top" width="103"> <p align="center">1,600 </td> <td valign="top" width="104"> <p align="center"> </td> <td valign="top" width="111"> <p align="center"> </td> <td valign="top" width="69"> <p align="center"> </td> </tr> <tr> <td valign="top" width="265"> Common and administrative Expenses </td> <td valign="top" width="74"> <p align="center"> </td> <td valign="top" width="103"> <p align="center"> </td> <td valign="top" width="104"> <p align="center">3,800 </td> <td valign="top" width="111"> <p align="center"> </td> <td valign="top" width="69"> <p align="center"> </td> </tr> <tr> <td valign="top" width="265"> Goodwill depreciation </td> <td valign="top" width="74"> <p align="center"> </td> <td valign="top" width="103"> <p align="center">4,500 </td> <td valign="top" width="104"> <p align="center"> </td> <td valign="top" width="111"> <p align="center"> </td> <td valign="top" width="69"> <p align="center"> </td> </tr> <tr> <td valign="top" width="265"> <strong>Operating profit/</strong> <strong>Adjusted operating profit</strong> </td> <td valign="top" width="74"> <p align="center"><strong>57,000</strong> </td> <td valign="top" width="103"> <p align="center">6,100 </td> <td valign="top" width="104"> <p align="center">3,800 </td> <td valign="top" width="111"> <p align="center">(1,800) </td> <td valign="top" width="69"> <p align="center"><strong>65,100</strong> </td> </tr> <tr> <td valign="top" width="265"> Income tax </td> <td valign="top" width="74"> <p align="center"> </td> <td valign="top" width="103"> <p align="center"> </td> <td valign="top" width="104"> <p align="center">(589) </td> <td valign="top" width="111"> <p align="center">297 </td> <td valign="top" width="69"> <p align="center">(25,192) </td> </tr> <tr> <td valign="top" width="265"> <strong>Profit from Continuing operations /</strong> <strong>Adjusted profit from continuing operations </strong> </td> <td valign="top" width="74"> <p align="center"><strong>32,100 </strong> </td> <td valign="top" width="103"> <p align="center">6,100 </td> <td valign="top" width="104"> <p align="center">3,211 </td> <td valign="top" width="111"> <p align="center">(1,503) </td> <td valign="top" width="69"> <p align="center"><strong>39,908</strong> </td> </tr> <tr> <td valign="top" width="265"> Profit attributable to non-controlling interest </td> <td valign="top" width="74"> <p align="center"> </td> <td valign="top" width="103"> <p align="center">305 </td> <td valign="top" width="104"> <p align="center">161 </td> <td valign="top" width="111"> <p align="center"> </td> <td valign="top" width="69"> <p align="center"> </td> </tr> </tbody> </table> <p style="text-align: justify;"> Management-defined performance measures: <p style="text-align: justify;"> Are used in public communications outside of financial reporting; <p style="text-align: justify;">Are used to inform investors about the vision of the management on the aspects of the financial performance of the entity as a whole; and <p style="text-align: justify;">Not listed in IFRS 18 nor in any other IFRS. <p style="text-align: justify;"><strong>IV. </strong><strong>Conclusion</strong> <p style="text-align: justify;">IFRS 18 introduces <strong>three sets</strong> of new requirements to improve companies ` financial performance reporting and give investors better fundamentals to analyze and compare companies. <p style="text-align: justify;">The standard deals with the submission and disclosure of information in financial statements, with a particular on to profit and loss reporting information. In this regard, the main new by IFRS 18 relate <ul style="text-align: justify;"> and loss reporting structure </li> performance measures: </li> <li> for the of and disaggregation of information </li> </ul> <p style="text-align: justify;">The change in the structure in the profit and loss statements provides for the grouping of income and expenses by five categories and the calculation of new subtotals In financial statements - in the primary financial statements and the requirements for and disaggregation based on their content and for the information to be submitted. is required also to disclose in the notes the performance measures with their starting with calculation formulas and with an explanation of the for the changes <p style="text-align: justify;">These changes will improve the of financial statements for investors <p style="text-align: justify;"> providing additional useful information about the results of financial <p style="text-align: justify;"> the to compare the results of the activities of companies and the reporting of the same and <p style="text-align: transparency to understand how management defines the performance measures <p style="text-align: justify;">The Board that these will allow investors to make more that will to a better of capital that will to financial ( PricewaterhouseCoopers LLP, 2023). <p style="text-align: justify;">IFRS 18 will be from and will IAS 1 of Financial <p style="text-align: justify;">The new standard will not the or of elements of financial statements, but may change what the company to be profit or The Board not the of of income and expenses in statement and in the profit and loss <p style="text-align: <p style="text-align: April <p style="text-align: from <p style="text-align: Financial in <p style="text-align: Nhat Phuong Ngo, Cong Van Nguyen . the financial and the financial reporting from an of Financial and <p style="text-align: Diwan & Binilkumar Amarayil Sreeraman . financial reporting to a of the in corporate and <p style="text-align: justify;">IFRS April from <p style="text-align: justify;">IFRS April from <p style="text-align: MELITSKI and AROON <p style="text-align: International Standards from <p style="text-align: in the of by into their the of in a The of of and International of and <p style="text-align: and of the financial reporting standards (IFRS) in and of Accounting & <p style="text-align: in of & <p style="text-align: Sabauri, Nadezhda reporting and <p style="text-align: April from <p style="text-align: Cendon; Jianqiao Lu; Elena from <p style="text-align: Edhie Rachmad; Asri Ady Bakri;Sukma Irdiana;Juliana Waromi;Alfry Aristo Jansen of The of Financial Information and Information on of Financial