Impact of the New Standard – IFRS 18 – on Information Presented in Financial Statements

At present, the Standard has not yet been endorsed, but its endorsement in the European Union is expected in early 2026. The primary objective of the new Standard is to improve the quality of reported information.

IFRS 18 is mandatory for annual reports beginning on 1 January 2027 or later, with an option for early application as from 2026. The new Standard will fully replace IAS 1 Presentation of Financial Statements. In developing IFRS 18, the IASB did not revisit all aspects of IAS 1; the focus was on the statement of profit or loss (P/L).

New key requirements

1. Two new mandatory subtotals must be presented in the statement of profit or loss.

2. Entities must disclose management-defined performance measures—subtotals of income and expenses that are not specified by IFRS Accounting Standards and that are used in public communications outside the financial statements to convey management’s view of an aspect of the entity’s financial performance.

3. New principles must be applied for the aggregation and disaggregation of line items.

IFRS 18 changes only the profit or loss section. Other comprehensive income is essentially carried over from IAS 1 without changes.

New categories in the profit or loss statement

1. Operating category — used for income and expenses that are not classified in any of the other four categories.

2. Investing category — used for income and expenses arising from investments in associates, cash and cash equivalents, and other assets that generate returns largely independently of the entity’s other resources.

3. Financing category — includes interest and dividends on financing liabilities (e.g., loans, bonds, redeemable shares) and interest on other liabilities (e.g., leases, decommissioning obligations).

4. Income taxes category — income and expenses arising from the application of IAS 12 “Income Taxes”.

5. Discontinued operations category — income and expenses from discontinued operations in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

It should be noted that the operating, investing, and financing categories in the statement of profit or loss do not have the same meaning as in the Cash flows statement (IAS 7 Statement of Cash Flows). The same line items may be classified differently in the two statements.

Entities with “specified main business activities” may classify additional income and expenses within the operating category rather than in the investing or financing categories. An entity may have more than one main business activity.

New subtotals in the statement of profit or loss

One of the most significant changes introduced by IFRS 18 is the requirement to present the following subtotals:

1. Operating profit (or loss);

2. Profit (or loss) before financing and income taxes.

Both subtotals must be presented even if they are identical. Gross profit and profit (or loss) before income taxes are not mandatory subtotals.

Statement of cash flows

IFRS 18 will amend IAS 7 Statement of Cash Flows.

When using the indirect method, the first line will now have to present Operating profit or loss, consistent with the subtotal presented in the statement of profit or loss.

Updates have also been made regarding the classification of certain income and expense line items within operating, investing, or financing cash flow categories.

Notes to the financial statements

IFRS 18 requires disclosure of management-defined performance measures. The note must include a statement that management-defined performance measures reflect management’s view of an aspect of the entity’s financial performance. An example of such a measure is EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

Potential challenges

When implementing the new Standard, entities will also need to provide comparative information for the prior period. This means that if the new requirements are applied in annual financial statements starting from 2026, the entity will have to present a 2025 statement of profit or loss prepared in accordance with the new requirements.

Digital reporting

In addition, the European Securities and Markets Authority (ESMA) has already developed a new taxonomy version (more about the IFRS taxonomy is here: https://www.orients.lv/en/blog/IFRS-XBRL-parskati/, the transition from IAS 1 to IFRS 18 (more details here: https://www.orients.lv/en/blog/IFRS18-IFRS19-XBRLTaxonomy/).

The Orients team is ready for the upcoming changes to provide clients with full support in adapting to the new IFRS requirements. If you would like to learn more or need assistance, email us at info@orients.lv.