Bookkeeping

What is IFRS 18?

IFRS 18 Presentation and Disclosure in Financial Statements was issued by the International Accounting Standards Board (IASB) in April 2024. It replaces IAS 1 and sets new rules for how companies present the statement of profit or loss and disclose performance measures.

IFRS 18 does not change how revenue, expenses, assets or liabilities are recognised or measured, so net profit stays the same. What changes is how profit is structured, labelled and explained, which affects figures such as operating profit that investors, banks and boards rely on.

When it applies in Pakistan

• IASB effective date: annual reporting periods beginning on or after 1 January 2027, with early application permitted.
• SECP notification: in Pakistan, IFRS standards apply to companies once they are notified by the SECP, usually on the recommendation of ICAP. Check the latest SECP notification for the date that applies to your company, but plan on the IASB timetable.
• Who uses it: listed companies, public interest companies and large-sized companies that prepare full IFRS financial statements, together with Pakistani subsidiaries reporting to foreign groups that adopt on the IASB date.
• Restated comparatives: comparative figures must be restated. For a company with a June year end, the first IFRS 18 accounts would cover the year to 30 June 2028 with restated 2027 comparatives; for a December year end, 2027 accounts with restated 2026 comparatives. Data for the comparative year needs to be captured as it happens.
• Transition reconciliation: in the first year, companies reconcile each line of the comparative income statement between the old IAS 1 presentation and IFRS 18.

A new income statement structure

Every item of income and expense is classified into one of five categories:

Two new subtotals become mandatory: operating profit or loss and profit or loss before financing and income taxes. For the first time, "operating profit" has a defined meaning under IFRS.

Classification depends on a company's main business activities. A bank, a leasing company or a modaraba that lends to customers, or an investment company, will classify some interest and investment income within operating profit.

Management-defined performance measures (MPMs)

Many companies use "adjusted EBITDA", "core profit" or similar figures in analyst briefings, PSX announcements and investor presentations. Under IFRS 18, subtotals of income and expenses used in public communications outside the financial statements, which reflect management's view of performance, are management-defined performance measures.

For each MPM, companies must disclose in a single note:

• a description of the measure and why management believes it is useful;
• a reconciliation to the most directly comparable IFRS subtotal;
• the income tax and non-controlling interest effect of each reconciling item;
• an explanation of any change in how the measure is calculated.

Measures that are not subtotals of income and expenses, such as free cash flow or ratios, are not MPMs, and nor are subtotals specified by IFRS, such as gross profit.

Grouping and disaggregation

• Items must be grouped by shared characteristics and shown separately when material, so useful information is not hidden in large totals.
• Labels such as "other expenses" should be used only when no more informative label is available, and their content must be explained.
• Expenses can be presented by nature, by function, or a mix. If any are presented by function (for example cost of sales or administrative expenses), a note must disclose depreciation, amortisation, employee benefits, impairment losses and inventory write-downs.

Cash flow statement changes

IFRS 18 also amends IAS 7. Under the indirect method, operating profit becomes the single starting point for operating cash flows. For most companies, interest paid is classified as financing, and interest and dividends received as investing. Dividends paid remain in financing.

Who is affected most

• groups with associates, joint ventures or significant investment income;
• listed companies that report adjusted profit figures to investors or the market;
• companies whose bank facilities or covenants refer to "operating profit" or EBITDA;
• businesses with large "other income" or "other expenses" lines.

How to prepare now

1. Impact assessment: map each line of your current income statement to the new categories and identify judgement areas such as main business activities.
2. Chart of accounts and ERP: add tags or accounts so that transactions are captured by category and by nature from the start of your comparative year.
3. MPM inventory: list every adjusted measure used in board packs, investor material and bank reporting, and decide which will be reported.
4. Covenants and KPIs: check how loan agreements, bonus schemes and budgets define operating profit, and talk to your bankers early.
5. Dry run: prepare a restated income statement and notes before the first year end under IFRS 18.

How Quantum Axis helps

Our chartered accountants support IFRS reporters with IFRS 18 impact assessments, chart of accounts redesign, restated comparatives, MPM reconciliations and draft financial statements. See also our financial reporting service.