Changes to the presentation and layout of an organisation’s profit and loss (P&L) statement from 2027 might seem like a cosmetic change, but they will require significant work and preparation to implement. IFRS 18 Presentation and Disclosure in Financial Statements sets out overall requirements for the presentation and disclosure in financial statements, and aims to provide investors with better information about a company’s financial performance.

It provides new and enhanced guidance on where companies classify income and expenses in their income statement across operating, financing and investing activities. The change removes a lot of discretion companies previously had about how to classify income and expenses, but judgements will still be required. These classifications will also have to be reconciled back to the cash flow statement.

“That’s not always an entirely straightforward, simple matter. With these large, complex Tier 1 entities we’re talking about, it’s likely to be quite an involved process, hence why we’re recommending that our members and others involved get on as early as possible,” says Amir Ghandar FCA, reporting and assurance leader, advocacy, at CA ANZ.

The new standard also requires organisations to reconcile management-defined performance measures with the statutory numbers in the income report.

“That’s really critical because if you think of any large company that’s in the market, the incentive is to want to provide good information for investors to understand what the performance is,” says Ghandar.

While the standard is focused on the presentation of accounts, it is more than just a cosmetic change. “This goes right down to how companies are keeping track of different income and expense items, and classifying those between different activities within the company,” Ghandar says.

Critical deadlines

IFRS 18 takes effect from reporting periods beginning on or after 1 January 2027 for Tier 1 organisations in Australia, and Tier 2 organisations have until 1 January 2028 to comply, with early adoption permitted. In New Zealand, both Tier 1 and Tier 2 organisations are subject to the requirements from reporting periods beginning on or after 1 January 2027.

Accounting standard setters in both countries have been running educational sessions to help get preparers of financial statements up to speed. In Australia, three education sessions were held in October last year to introduce the standard in a greater level of detail, with the chance to ask questions.

“What we got from those sessions was that there’s a good general awareness that the standard is coming in,” says Keith Kendall CA, chair of the Australian Accounting Standards Board (AASB). “But beyond that, the understanding seemed a little bit on the low side. They weren’t completely across the details and the new requirements.”

However, he notes that the information sessions were held late last year and the level of knowledge has likely improved since then.

“It wouldn’t surprise me to find that there is a fair amount of disparity in terms of how active entities are in trying to implement and be concerned about this,” Kendall says. “The reason being, because a number of entities were probably already providing a lot of the information, so their transition would be lower. Whereas other entities that weren’t providing that sort of information already didn’t have the systems in place to capture it. They’ll have more work to do.”

Cost-benefit questions for Tier 2

Most Tier 1 organisations have the necessary resources to adopt the changes. A bigger challenge for them will be in making stakeholders aware that some of the changes might affect debt covenants or executive remuneration.

“For example, operating profit might be measured differently from what was contemplated when the relevant agreement was put in place,” Kendall says.

The AASB is also considering how to introduce the updated standards for Tier 2 entities – including not-for-profit entities, superannuation entities and non-publicly accountable for-profit entities. The board is mindful that the cost-benefit considerations for Tier 2 entities are different from Tier 1. As a result, it is planning to release a consultation paper later this year, which is currently being prepared.

“Starting with our reduced disclosure regime applied to Tier 2 entities, we’ve recognised for a long time that the considerations that are applied to Tier 1 don’t necessarily apply to Tier 2. We’re undertaking a consultation to see whether that is actually the case in this situation,” Kendall says.

The consultation will help answer the question about the cost-benefit ratio of implementing the changes, with a focus on the users of the financial statements.

“Assessing the impact of NZ IFRS 18 on the financial statements is important. It’s likely that most companies will require experienced finanacial staff to be involved.”

A chance to reflect

Michelle Lombaard, director of accounting standards at New Zealand’s External Reporting Board (XRB), describes IFRS 18 as an opportunity for companies to stop, pause, reflect and refresh their financials.

“It’s a new presentation and disclosure standard, and it’s aimed at enhancing companies’ communications with users. It does not introduce any recognition and measurement requirement,” she says.

“What IFRS 18 encourages companies to do is understand what is important for the users of the financial statements and then determine what appropriate information needs to be in the financial statements. IFRS 18 also provides enhanced principles for aggregation and disaggregation of information in the primary financial statements and notes.”

The standard comes into effect in New Zealand for reporting periods beginning on or after 1 January 2027. Lombaard points out that companies will need to provide comparative figures, so the change effectively applies to the previous year.

“It’s about how you capture your information. From a practical side, organisations need to have systems in place to capture the information the year before, so they can have those comparatives ready,” Lombaard says.

She adds that companies should avoid leaving these changes to the last minute, to allow for comparative information to be correctly classified.

The XRB promulgated the standard in May 2024. It is seeing an increased number of people dial in to its ‘need to know’ series and subscribing to its monthly NZ IFRS 18 newsletter highlighting the changes.

The preparers of financial statements are mostly at the starting point of trying to understand the new standard and what it means for their company, but the impact varies and will depend on the complexity of the organisation. The first step for all entities is to understand how pervasive the effect of IFRS 18 will be on their financial statements.

“First and foremost, assessing the impact of NZ IFRS 18 on the financial statements is important. It’s likely that most companies will require experienced financial staff to be involved in this transition period, because you’ll need someone with in-depth knowledge of the company’s transactions and user needs,” Lombaard says.

They will have to identify what information the users will need in the financial statements and determine how this might be presented, considering the aggregation and disaggregation principles.

“This is a communication tool that you use for your investors. The financial statements are going to look different. We would encourage senior leadership involvement early on, to ensure that the financial statements are capturing the right information,” Lombaard says.

“You don’t want to send your finance team off to go and reframe financial statements and not have your senior leaders involved in that, because there are judgements to be applied when determining what information should and should not be disclosed.”

Lombaard says companies should also consider making the transition to the new standard sooner rather than later, and engage with their auditors on this. This allows the companies and their auditors time to agree to the changes to the financial statements, including the categories in the P&L, and the aggregation and disaggregation of note disclosures. This applies more so to companies with tight reporting and auditing deadlines.

Like Australia, New Zealand has a reduced disclosure regime for Tier 2 entities. The XRB is currently consulting on the disclosure concessions it will grant for NZ IFRS 18, particularly around management-defined performance measures, although many Tier 2 entities might not have any to report on.

It’s important for Tier 2 entities – in New Zealand generally a for-profit entity that doesn’t have public accountability – to understand that despite the concessions, there will be changes to the P&L statement incorporating the new categories, Lombaard says.

The standards for public benefit entities (including public sector and not-for-profit entities) are informed by the International Public Sector Accounting Standards Board, so IFRS 18 changes currently do not impact them.

Private practice perspective

From a private practice point of view, Melbourne-based partner in IFRS and corporate reporting at BDO, Dean Ardern, says companies are “slowly turning their minds” to the new standard but notes that they are also grappling with other changes, such as mandatory sustainability reporting. And while the revised standard doesn’t come in until 2027, the need to provide comparatives from the year before means companies should really be starting to think about the change now.

“By next June, they’re going to have to have a clear understanding of the impacts, particularly on their P&L, which for a lot of entities is the key statement. It’s the one that generates most of the headline numbers that will be used in communications with their stakeholders,” Ardern says.

Particular areas of focus are interest, foreign exchange, and gains and losses on financial instruments. Organisations are starting to focus on what’s generating these transactions and how they are related to the organisation’s main business activity and, ultimately, how they should be classified in the P&L statement.

While the changes in IFRS 18 are thought of mostly as presentation changes, they do raise issues in relation to the mechanics of how a company gets that information into its financial statements, Ardern says. Management will have to go back into their systems, and collect and document their basis for classifying information, so they can explain to their auditor and stakeholders any changes they do and don’t make when they transition to IFRS 18.

Another issue will be reconciling the new operating profit and loss subtotal in the P&L statement with the cash flows from operating activities. Where previously companies could use the optional treatment of interest and dividends, they will now have to be more rigorous in classifying these cash flows.

Ardern welcomes the new requirements around management-defined performance measures (MPMs), because now they have a clearer basis for inclusion in the financial statements. Although MPMs are a subset of the wider group of performance metrics published by companies, the new requirements should remove concerns around the legitimacy and transparency of these alternative performance measures.