[Opinion] Developments in IFRS

Dr. T.P. Ghosh – [2024] 164 taxmann.com 430 (Article)

1. Introduction of IFRS 18 and IFRS 19

1.1 Executive Summary

International Accounting Standards Board has issued two new standards during April-May 2024 and amended classification and measurement principle of financial instruments. IFRS 18 will be effective for annual reporting periods beginning on or after 1st January 2027 with permission to earlier application by disclosure. This standard will supersede IAS 1 Presentation of Financial Statements. IFRS 18 intends to improve communication in the financial statements providing new profit measures and introducing five categories for classifying income and expenses.

IFRS 19 grants exemption to an entity which is a subsidiary without public accountability from full disclosure requirements of IFRS. These entities are allowed to apply limited disclosures specified in IFRS 19. This standard will be effective for annual reporting periods beginning on or after 1 January 2027 with permission to earlier application by disclosure.

2. IFRS 18 Presentation and Disclosures in Financial Statements

IFRS 18 introduces the principle of classified statement of profit and loss and presentation of operating profit. For this purpose, this standard sets out policies regarding categorisation of income and expenses into:

• the operating category
• the investing category
• the financing category
• the income taxes category
• the discontinued operations category.

Also, categorisation of foreign exchange differences, the gain or loss on the net monetary position, and gains and losses on derivatives and designated hedging instruments has been explained. This would enhance the usefulness of performance measures communicated through financial statements.

By this classification along with the identification of main business activity, an entity would be able to present operating profit with clarity. IFRS 18 emphasises on presenting operating profit in the Statement of Comprehensive Income which is expected to enhance usefulness of the financial statements as most of the users focus on operating profit as a performance measure. This standard guides categorization of income and expenses. IFRS 18 facilitates the presentation of operating profit even when an entity classified expenses by nature.

Identifying the main business activity of the entity is critical in determining income and expenses from the operating category. An entity would assess whether it has specified main business activity:

2.1 Investing in assets

Examples are –

1. investment entities as defined by IFRS 10 Consolidated Financial Statements;
2. investment property companies,
3. insurers.

2.2 Providing finance to customers

Examples are –

1. banks and other lending institutions;
2. entities that provide financing to customers to enable those customers to buy the entity’s products; and
3. lessors that provide financing to customers in finance leases.

An entity may have manufacturing and rendering of services as main business activities along with investing in assets and/or providing finance to customers. The categorisation of operating income and expenses by these entities whose main business activities include investing in assets and/or providing finance to customers is little different from other entities.

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