AASB 18 Presentation and Disclosure in Financial Statements (AASB 18) will fundamentally reshape the income statement, promoting a more structured approach to presentation which will facilitate better analysis and comparability of financial performance across entities. It will also enhance transparency by requiring note disclosure about certain non-IFRS measures and by providing more detailed aggregation and labelling guidance.

It’s been a while since entities (insurers excluded) have had to deal with a brand-new accounting standard. Finance teams would, however, probably argue it has not been long enough, having implemented the ‘Big Three’ – AASB 9 Financial Instruments, AASB 15 Revenue from Contracts with Customers and AASB 16 Leases – only five or so years ago.

While not anticipated to be quite as complex and disruptive as any of the ‘Big Three’, AASB 18 will impact most, if not all, entities irrespective of size or industry and so should not be overlooked. To quote Andreas Barckow, Chair of the International Accounting Standards Board (IASB):

“IFRS 18 represents the most significant change to companies’ presentation of financial performance since IFRS Accounting Standards were introduced more than 20 years ago.”

Over a series of articles, we’ll take a closer look at the key changes introduced by AASB 18, when and how entities will be impacted and what steps they can take to prepare for the new standard’s implementation.

Why the need for AASB 18?

The main motivation behind developing a new presentation and disclosure standard was to improve entities’ story telling in their financial statements, especially when it comes to financial performance.

Existing guidance in AASB 101 Presentation of Financial Statements (AASB 101) is quite loose when it comes to matters such as classification of income and expenses, which totals and subtotals to present on the face of the income statement and how these are defined, as well as grouping of information both in the primary statements and within the notes.

Furthermore, entities also make use of and define nonIFRS measures differently (such as ‘adjusted’ profit, EBITDA, or operating profit excluding non-recurring items). While these can be useful, the absence of sufficient information about why these measures have been chosen and how they are calculated undermines their value to users of the financial statements.

AASB 18 therefore addresses a need for more detailed requirements to improve the consistency, comparability and transparency of financial performance reporting.

What are the key changes?

The first thing to note is that the current AASB 101 will be withdrawn and replaced by AASB 18. However, many of the general requirements that underpin financial statements that preparers are so familiar with will remain unchanged and will either be carried forward to the new AASB 18 or moved to other appropriate standards.

Secondly, the statement of profit or loss (income statement) will look somewhat different to what entities are used to. Importantly, AASB 18 will not change an entity’s net profit however the more prescriptive requirements are intended to promote a more structured format for the income statement.

At a high level, the three main changes that will impact the income statement structure are:

  • Classification of income and expenses into defined categories (three of which are new) based on an entity’s main business activities;
  • Presentation of two newly defined subtotals on the face of the income statement; and
  • Presenting operating expenses by nature, by function or on a mixed basis on the face of the income statement.

Another major change is the introduction of the concept of a ‘management-defined performance measure’ (or ‘MPM’). Specific disclosures for qualifying MPMs will have to be included in a single note to the financial statements. Consequently, these will be subject to audit procedures.

AASB 18 also provides improved guidance to help entities group information in the financial statements. Specifically, the added guidance:

  • Introduces defined and complementary roles for the primary statements and the notes to guide entities in their decisions about where to provide material information;
  • Addresses how to group transactions into line items presented in the primary statements and information disclosed in the notes based on characteristics of the items; and
  • Explains how to label and describe items in a way that faithfully represents an item’s characteristics.

Over the course of the next few months, we will delve into each of the above key changes and the practical implications for entities.

When does AASB 18 become effective?

For for-profit entities (other than superannuation entities applying AASB 1056 Superannuation Entities), AASB 18 will apply for the first time in annual periods beginning on or after 1 January 2027. Early adoption is allowed, with entities choosing this option disclosing this fact in the financial statements.

Not-for-profit entities and superannuation entities applying AASB 1056 have been given an additional year to adopt the standard while the AASB considers whether the changes introduced by the standard are relevant to these entities. We strongly advise that these entities do not early adopt the standard but rather wait for the outcome of the AASB’s deliberations.

AASB 18 is currently not available for Tier 2 entities to adopt. The AASB is considering application of the new requirements to these entities as part of the post-implementation review of AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities.

What will transition look like?

Retrospective application is required when adopting AASB 18 for the first time meaning that comparative information will need to be restated to be in line with the requirements of the new standard.

In the year of adoption, entities will need to disclose a reconciliation, on a line-by-line basis, between how the income statement was presented for the comparative period under the superseded AASB 101 and how that same period is presented under the new AASB 18.

How will interim financial statements be impacted?

When entities prepare half-year financial statements, they are required by AASB 134 Interim Financial Reporting (AASB 134) to present each of the headings and subtotals included in their most recent annual financial statements. This will not be possible in the first half-year an entity applies AASB 18. Instead, under the transitional provisions in AASB 18, entities will present the headings and subtotals it expects to use in its full-year financial statements in which AASB 18 will be applied for the first time.

The same transitional reconciliation required in the annual financial statements is required for the comparative period in half-year financial statements prepared under AASB 134.

This article was first published in Issue 22 of The Bottom Line.