AASB 18: Key changes in presentation of profit & loss of listed entities
31/10/2024
The introduction of a new accounting standard, AASB 18, represents a major change for financial reporting, particularly in the profit and loss statement for listed companies and Tier 1 reporters.
AASB 18 Presentation and Disclosure in Financial Statements has been introduced to enhance the presentation of financial statement as well as for transparency and comparability in reporting a company’s operating results.
This new standard will significantly impact financial reporting for listed companies and other Tier 1 reporters. However, AASB 18 also provides management an opportunity to more closely align how they measure, and view performance compared to how is presented on the face of the statement of profit or loss.
Why the changes?
Users of financial statements, especially investors, have raised concerns about the usefulness and comparability of information from financial statements.
Some common issues impacting the quality of information in financial reporting include:
- lack of clear definitions or guidance on how entities present their operating performance under previous standards
- divergence in practice regarding communication of alternative performance measures, commonly known as Non-IFRS measures or adjusted earnings
- material items being labelled as “other” in financial statements.
- AASB 18 was introduced to provide additional transparency and comparability for users of financial statements.
What are the changes?
There are three major changes under the new requirements:
1. New structure for presentation of profit or loss
The standard mandates that the profit or loss statement be structured into three categories:
- operating
- investing and
- financing.
It also introduces two new required subtotals:
- operating profit and
- profit before financing and income taxes.
AASB18 clarifies the definitions of the operating category and operating profit, ensuring consistency in how the company’s results are presented. There are new requirements for categorising and disclosing expenses, allowing for a more flexible presentation compared to the current binary classification based on function and nature.
2. Disclosure of how management views the performance
Many companies, especially listed entities, choose to report alternative performance measures, also referred to as “non-IFRS”, such as adjusted earnings, EBITDA, or adjusted EBITDA. Some of those measures will become Management-defined Performance Measures (MPMs) and will be subject to the new standard’s disclosure requirements.
If a company reports MPMs in other areas of reporting, such as the directors’ report, it must bring that information into the notes of the financial statements and reconcile it back to the nearest subtotal in the profit or loss statement. The tax and non-controlling interest (NCI) impacts of those reconciliation items must also be disclosed.
Management must explain in the notes the reasons for selecting the MPMs and any changes to these measures. All the MPMs and related disclosures will be subject to audit as they form part of the notes.
3. Grouping and labelling of information
There are enhanced requirements regarding the grouping of information and the disclosure of items labelled “other”. Further guidance is now available on how and when to aggregate or disaggregate information.
Although AASB 18 primarily impacts the profit or loss statement, the new aggregate and disaggregated requirements may also impact on other areas of the financial statements.
Companies are also now required to present interest and dividends received under ‘investing cash flows’, while payments must be recorded under financing. Previous accounting policy choices regarding such presentations have been removed.
What will be the impact?
The adoption of the new standards is expected to have a major impact across all Tier 1 financial reports. Management will need to consider whether any of its contracts and remuneration, often linked to profit or loss, will be affected. Loan covenants linked to profit or loss may also need to be clarified.
Depending on existing systems and reporting processes, the financial reporting impact ranges from remapping the chart of accounts to requiring changes in systems and processes. For example, properly categorising foreign exchange transactions could be complex.
Companies will need to train internal staff involved in financial reporting and communicate changes to various internal and external stakeholders, as these changes may also impact on budgeting and forecasting tools and reports.
When to take action?
The new standard will be mandatory for the first time on 1 January 2027. For entities with a December year-end, this means it will apply to the year ending 31 December 2027. Comparative information will also be required.
Many listed companies report interim financial reports; AASB 18 will be applicable for any interim reporting starting 1 January 2027.
Early adoption of the new requirement is permitted by the standard.
What about NFP and Tier 2 reporters?
For Tier 1 not-for-profit entities, the mandatory effective date is 1 January 2028, which is one year later compared to their for-profit counterparts.
At this stage, AASB 18 does not apply to those preparing financial reports under the Simplified Disclosures Standard, commonly known as “Tier 2”. AASB is currently working on strategies for Tier 2 entities.
How SW can help
Our team of audit and assurance experts are fully informed of the requirements of the new accounting standard and can assist with providing guidance for your business, as well as keeping you abreast of developments from an Australian reporting context.
We can:
- provide additional information and training for staff
- conduct an impact assessment and provide recommendations.
Reach out to your SW contacts or the key contacts here for a conversation.
