At the 2024 Finance Indaba, financial reporting expert KC Rottok Chesaina taught a masterclass on the International Accounting Standards Board’s (IASB’s) new reporting standards.
Beginning 1 January 2027, companies will be required to implement IFRS 18 and IFRS 19, the new reporting standards issued by the IASB. In a Finance Indaba masterclass, financial report expert KC Rottok Chesaina noted that the IFRS accounting standards in force today do not define operating profit, leaving room for companies to report it differently. Over time, investors have raised concerns about the difficulty in comparing financial performance, as companies’ statements of profit or loss vary in content and structure.
To remedy this, IFRS 18 introduces three defined categories to provide a consistent structure for the statement of profit or loss. These include operating, investing and financing. KC also noted that the new standards introduce two new required subtotals, namely operating profit and profit before financing and income tax, to enable analysis.
The operating category would encompass income and expenses, including all income and expenses from a company’s operations, regardless of whether they are volatile or unusual. It would also include income from its main business activities. According to KC, this would work for all business models and provide a complete picture of the company’s operations.
KC also expounded on the investing category, which would include income and expenses from assets that generate a return individually independent of other resources held by an entity. The category also includes: rental income and remeasurements of investment property; interest income and fair value changes on financial assets; dividends and fair value changes on non-consolidated equity investments; income and expenses from non-consolidated subsidiaries, associates, and joint ventures; and income and expenses from cash and cash equivalents.
The financing category would comprise: income and expenses from liabilities that arise from transactions that involve only the raising of finance; receipt and return of cash or company’s own equity instruments; extinguishment of a financial liability; and bank loans among others. Companies whose core business is financing and investing include income and expenses in their operating profit that, for other companies, would be included in the investing or financing categories.
KC also introduced attendees to the new disclosure requirements mandated by IFRS 18, including reconciliation back to IFRS-defined subtotals, explanations for how management-defined performance measures (MPM) will be calculated and reported, and explanations for any changes to MPM.
These are often included in public communications outside financial statements and are used to communicate management’s view of a company’s financial performance. Although investors often find these measures useful, they have raised concerns about the lack of transparency in how they are calculated. These alternative performance measures include adjusted operating profit, adjusted profit or loss, adjusted EBITDA, free cash flow and return on equity
Such a reconciliation might account for several factors such as impairment losses, restructuring expenses, gains on disposal of property, plant, and equipment, other operating income, research and development, general and administrative expenses, and goodwill impairment loss.
In calculating income tax effects, companies may employ a number of methods, including statutory tax rates, pro-rata allocation, or any other method that gives better information. However, if more than one method is used, disclosures of how the tax effects are calculated are required.
According to KC, the aggregation and disaggregation of information has been a cause for concern among investors, as some companies do not provide enough detailed information, while others provide too much. The IFRS 18 introduces guidance on whether information should be in the primary financial statements or the notes. It also imposes enhanced requirements for grouping of information and using meaningful labels for items presented or disclosed and specific disaggregation requirements for presenting and disclosing operating expenses.
The primary financial statements and notes are intended to provide useful structured summaries of a company’s assets, liabilities, equity, income, expenses, and cash flows. They also offer structured summaries of a reporting entity’s recognised assets, liabilities, equity, income, expenses, and cash flows, which are useful for obtaining an understandable overview, making comparisons between entities and reporting periods for the same entity, and identifying areas about which users wish to seek additional information in the notes.
KC advised accounting professionals to begin by identifying the requirements of IFRS standards, organise information within the draft financial statements, and review the draft, exercising judgement and considering the different roles of the primary financial statements and the notes.
Regarding the presentation of operating expenses, KC noted that companies are permitted to present some line items in the operating category by nature and others by function. The disclosure of specified expenses by nature requires the amounts to be included in each line item in the operating category of the statement of profit or loss for impairment, depreciation, and amortisation among others.
IFRS 18 also introduces changes to the statement of cash flows, requiring operating profit or loss subtotal to be the starting point for the indirect method of reporting cash flows from operating activities.
KC spoke briefly about IFRS 19, which will be a game-changer for subsidiaries without public participation as it will enable some of them to provide much reduced disclosure, which will be less time consuming for preparers and auditors.
The new standards will come into force on 1 January 2027, with early application permitted. They will also be applied retrospectively and in interim financial statements.
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