IFRS 18, effective from January 1, 2027, replaces IAS 1, significantly enhancing the presentation and disclosure of financial statements by introducing a more structured income statement, clearer performance measurement, and increased transparency for users.
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Hello everyone, hope you all are doing
well. So in today's lecture we will
start if FRS 18 presentation and
disclosure in financial statement. It
replaces IS1. Previously we prepared the
financial statement as per IS1
but from the 2027
we will prepare the statement of
financial as per FRS8.
Before starting the IFRS8
let me tell you about the major changes.
It changes to statement of profit and
loss as additional defined totals will
provide better consistency.
Also, it is introducing disclosure
requirement of management performance measurement
measurement
that will increase the transparency
also strengthening the requirement of
aggregating and disagregating
information. Once we read the next
content or slides we will get the better idea
idea also
also
it is about the AS7 cash flows. If you
remember in the cash flows there are
three activities operating investing and
financing activities. Now as per IFRS8
profit and loss will also be further
expanded into five categories such as investing,
investing,
operating, investing, financing and
after that we have continued and
discontinued operations and taxes.
Now there is one important thing. In the
AS1 we often use the PBT profit before
tax. But now from the IFRS8N
implementation the PBT will change with
PBIT means profit before interest and taxes.
taxes.
Now in the AS7 cash flows if you guys
have studied IAS7 so you better
understand this thing. Then all the
components or balances are classified
into each of their categories. If any
amount spent or received with respect to
operating then the specific amount will
goes into operating
activities. It gives the better
transparency and better idea to the
users of the financial statement as the
users does not only relate to
shareholders. It is also for the
stakeholders mean general users. So for
the better understanding and better
transparency for the users now if 18
will further divided the profit and loss
account into five categories so that
non-financial users or non-financial
Now there are few students who may
confuse between IS8,
IFRS8 and IS1.
There is a little change in the title as
the title is rechanged
basis of financial statement or basis of
preparation of financial statement. So
nothing to worry as changes in
accounting estimates, changes in
accounting policies and prior period
error is still the same which you guys
have covered in the previous lectures.
Today's lecture is all about IFRS8 and
IS1. How will further progress in the
upcoming days or months or year? The
effective alternative date of the IFRS8
So before starting the IFRS8
reading, I would like to show you the
visuals how IFRS8 and how the statement
of profit and loss will be prepared as
per IFRS 18. Okay, there are few visuals
in the end of this slide. IFRS8 requires
to improve financial performance. IFRS18
requires a company or an entity to
classify income and expenses into
operating, investing and financing
which will given in the next visual
under the dark blue.
categories in the statement of profit or
loss plus income taxes and discontinued
operation. So now it is categorized into
five things and to present two new
defined subtotal. This is management
performance measurement operating profit
and profit before financing and income
taxes. AITA earning before interest tax
amotization and depreciation.
Now illustrative statement of profit or
loss income and taxes from company's
main business activities operations
income and expenses from additional
activities. Additional means can anyone
or also classified in the operating
category if there is a condition of if
those income and expenses do not meet
the requirements to be classified in any
of the other categories. It means if
there is any income or expenses which
category has not yet defined or which is
not identified then that specific income
or tax will also be categorized in the
operating activity head.
Now categories operating investing
financing then income tax then
discontinued operations. So now we have
covered the operating link. Now in the
operating let's see which items come
revenue cost of sales gross profit other
operating income
selling expenses research and
development expenses general and
administrative expenses goodwill
impairment loss other operating expenses
and the accumulate is operating profit
starting point for reporting cash flows
from operating activities I7 Seven.
Now in the investing we have share of
profit and gains on disposal of
associates and joint venture AS28 and
IFRS11. This is how you have to prepare
the statement of profit and loss as per
IFS 18. The required subtotals profit
before financing and income taxes. Now
in the financing we have interest
expense on borrowings and lease liabilities.
liabilities.
Interest expense on pension liabilities
and provision. Look how iff category
discloses all the particular information
into the relevant head. If you remember
in the previous IAS1 the all interest
club into the finance cost. Then in the
finance cost breakup you have to
identify either the interest come from
the bank charges or from the markup
approved markup or other ECL charges.
But from the IFRS implementation it's
very easy to understand for the users of
the financial statement that this
particular interest is from this and
that particular head.
Now PBIT profit before income and taxes
these are the main categories. Then we
have income taxes.
After that we have profit from
continuing operations, loss from
discontinued operations. It could be any
depend on the condition. Now for the
financing we have income and expenses on
liabilities such as bank loans,
overdrafts and bonds and interest
expenses on any other liability. For
example, lease and pension liabilities
means any income or expense on the
liabilities or on the debts will come
under the financing.
Income and expenses from assets that
generate returns separately from a
company's business activity. There is a
word separately from a that generate
returns separately from a company's
business activities and from cash and
cash equivalents and investments in
associates and JVS will become under the
investing activities.
Now there is a sample of profit and loss
versus FRS8. This is Colgate Palm Molive
Pakistan Limited statement of profit and
loss for financial year 23 presentation
under IAS1.
These visuals have been taken from the
PSX site. Now in the AAS1 we have
revenue, sales tax, trade and other
discount. Then we have net turn over
cost of sales. If we minus cost of sales
from the revenue we will get gross
profit. Let's see in the category as per
IFRS 18 same revenue sales tax same
trade net turnover but there is a
category of operating all these things
are categorized under the operating
activity head now we have cost of sales
if we less cost of sales from the
revenue we will have gross profit now
selling and distribution here we have
selling and distribution administrative
administrative other expenses other
Operating expenses. Please pay attention
and identify the keywordings. Other
expenses. Now we have other operating
expenses. Other income. Other operating
income. In the previous IAS1 the other
income cover any kind of income means
Now in the end we have operating profit
as per I FRS 18 but as per IAS when we
have profit from operations. Now finance
cost and bank charges look the thing
which I have discussed earlier but now
as per if the category is investing in
which income from financial assets. If
there is an income from the financial
asset then we have to categorize it
first before the financing
then we have taxation in the IAS1 in the
FRST and we have financing in finance
cost 150682.
Now we have PBT profit before taxation
income taxes taxation profit after tax.
If there is discontinued and continued
operation then you should have also
incorporated it. So this is the
structure and the visuals which I have
show you and I have explained you why 18
is better than IS1.
Let's start reading these slides then we
will get better and clear understanding.
Okay these are the detailed slides for
your better understanding.
read with you few content but
you have to read the remaining for your
own understanding.
In this slide I have also explained the
real life scenario example. So after
reading those case studies you will get
the better clarity how IFRS8 is
implemented as against the IAS1.
IFRS8 replaces IAS1. The summary IFRS8
is the new global presentation and
disclosure standard. It replaces IAS1.
It standardize the income statement
means it structure the income statement
into five categories which we have just
covered and requires new subtotals like operating
operating
profit and profit before financing and
income taxes. It introduced management
defined performance measurements such as
AITA recurring such kind of items will
strict note disclosures and reconciliations.
reconciliations.
Cash flow classification for interest
dividend is tightened and must align
with how related income expense is
classified in profit and lo. Now for the
each item there should be linking there
should be logical reasoning
effective annual periods beginning on
after 1st Jan 2027
early adoption allowed comparative must
Now after that we have why I1 was
replaced problem with IAS1 too much
flexibility how inconsistency subtotals
but now from the IFRS8 implementation
the subtotal should be consistent
everyone defined operating profit
differently yes it was the case nonFRS
measures like adjusted aa earning before
interest tax depreciation and amotization
amotization
were outside the audited financial
statement. Of course, hard for the
investors to compare means non-financial
persons, non-financial users.
Aggregation heavy set of other lines
limited guidance on what to split out.
Now we have scope or and effective date
applies to all entities reporting under
IFRS accounting standards. Effective for
annual periods beginning on or after 1st
Jan 27 early adoption permitted.
Retrospective means prior year comparatives.
comparatives.
Retrospective application with restated
comparatives provide a reconciliation
from previously reported comparative to
restated the amounts. Why it is
important? Because it gives you the
better understanding and the better
clarity of the previous year's balances
as well. Third statement of financial
position required only a
reclassification restatement has a
material effect on the opening balance
sheet because opening balances are very
very important.
Now the new statement of profit or loss
which we have covered individuals. Let's
go through this one as well. Categories
top to bottom order T
operating investing financing two
buckets from financing activities and
from cash and cash equivalents income
taxes discontinued operations with these
cases A to E which we will cover in the
later slide. You will get a practical
360 walk through of IFRS 18 changes
covering profit or loss subtotals,
expense presentation, cash flows,
goodwill and MPM all with relatable
examples. Foreign exchange differences,
foreign currency retransation or
differences are presented in the same
category as the items that generated
them. Means if it's from the revenue
sorry if it's from the assets or from the
the
non-current assets or from the liability
then the treatment would be as per them.
Now required subtotals on the phase
operating profit profit before financing
and income taxes profit or loss.
Entities can relable
total subtotals. Example use net income
instead of profit or loss. This is how
the structure will work as per IFRSC.
As long as labels are faithful and not
misleading means it will give the
Now classifying income and expenses rule
of thumb operating your core business
results excluding financing and
investing. Investing return from
investment generating a return
individually and largely independent of
other resources such as additional to
any new assets or disposal of an asset
or dividend
from associate.
Now financing effect of financing
activities interest on borrowing
dividend to NCI dividend by parent
company. Unwinding of discount and from
cash and cash equivalent.
If providing financing to customers or
investing in assets is a main business
activity. Some items otherwise in
investing financing move to operating
which I explained in the start. Share of
profit, loss of associates and JV's
equity method. We all know if there is a
joint venture then we will use equity
method is outside operating in
investing. The old integral non-
integral split is removed. Now
presenting operating expenses you can
present by nature by function or a mixed
approach choosing what gives the most
useful structured summary. If any
operating expenses are by function such
as cost of sales, admin and selling,
provide a single note disclosing totals
for five specified expenses by nature,
depreciation, amotization.
Employee benefit AS19 impairment losses
AS36 and write downs reversal of
inventories AS2.
Explain the nature of expenses included
in each function life qualitative. If
you present cost of sales, it must
include total inventory expenses as per IS2.
IS2.
Now management defined performance
measures. What is an MPM? Might be this
time the examiner asked these things. A
subtotal of income expenses used in
public communication means outside the
scope of IFS that supplements IFRS total
subtotal examples AITA adjusted
operating profit adjusted AITA core
profit etc.
Okay. Now can anyone tell me why the
IFRS8 presentation and structure is more
similar to the IAS saving cash flows
because I don't know if you guys have
talked about any non-financial
background person such as from the IT
person or from any engineer or a doctor
that non-financial background person can
easily understand and prepare a basic
cash flow statement. You know, if you
don't know, just try to communicate this
thing with any non-financial background
person. Why? Because everything is
aligned within their specified category.
So, it's very easy and very
understandable for them to identify and
pick all the information or transactions
according to their specified category.
That's why for the better presentation,
faithful representation, consistency and
more objectivity, the IFRS8 is implemented.
implemented.
Where and how to present MPM in a single
note to the financial statement not as a
free form column with undue prominence
for each MPM. disclosed definition why
it's useful reconciliation to the most
directly comparable IFRS subtotal
operating profit or profit before
financing and income taxes PBIT
PBIT
tax and non-controlling interest effects
of each reconciling item or how you
computed them consistency over time
explain any changes in defining
calculation or discontinuations
EPS If you present additional earning
per share amounts based on IFRS subtotal
or MPM, they must be in the notes and
follow IAS33 rules. Now statement of
cash flows what's different? Indirect
method must start from operating profit. Yes.
Yes.
Remove old options for classifying
interest and dividends. Dividend trade
financing for all entities for entities
without a main business of investing in
assets or providing financing to
customers. Interest paid financing
interest and dividends received investing
investing
for entities with a main business of
investing in assets means additional of
PPE or providing financing to customer.
Classify interest, dividend received and
interest paid by reference to their
classification in profit or loss. But
present the total of each in one cash
flow category policy choice may be
needed. Then you have to think their
specified head. Apply the same
aggregation, disagregation and labeling
principles. Now this standard is
statement of FP financial position at
goodwill as a separate line item. Third
statement of financial position is
presented only when a retrospective
restatement reclassification as a
material effect on opening balances. Now
title structure and move requirements.
You can use alternative titles like
balance sheet or net income. Some IAS1
requirements were moved to IAS8 retitle.
Look it just retitle basis of
preparation of financial statement fair
presentation going concern accural
matching accounting policy to FRS7
portable instrument which I have
discussed in the IFRS9 lecture. Now real
life style case studies end to end. Case
A auto manufacturer no customer
financing business. Okay. No customer
financing business. Facts. Alpha Motors
makes car means manufactured car. Has
bank loans
cash on deposit. Some FX means foreign
gains on USD raw material payables. No
associates jeries
means alpha company manufacturers car.
They have a loan. They have no cash
deposits. Also they have foreign gain on
USD raw material no associates or joint
ventures. Now PL classification
operating revenue cost of sales R&D
selling admin FX differences on trade payables.
payables.
We covered this line regarding the
foreign exchange
and inventory purchase impairment of
PPE, inventory write down, depreciation,
amortization, employee benefit if any,
investing interest and dividends
received on term deposits and investment
securities, gain losses on sale of
surplus land if any. Financing, interest
expense on bank loans, unwinding of
discount on provision, interest on
lease, liabilities, FX differences
related to borrowings from cash and cash
equivalents, interest income on
overnight cash balances presented here
if required by the standards split
between from financing activities and
from cash and cash EQ validates
subtotals operating ing profit before
financing and income taxes profit.
So this is how you have to do the PNL
classification if the case related to
like this. Now operating expense
presentation by function disclosure in
one note totals for depreciation
amotization employee benefit impairment
and reversals inventory written down and
a qualitative description of what each
function includes. Cost of sales
includes the total inventory expense per IAS2.
IAS2.
Cash flows starting point operating
profit interest paid financing interest
and dividend receive interest investing
dividends paid financing
NPM example in the notes adjusted
operating profit excludes restructuring
cost and a oneoff environmental fine one
of event provide for reconciliation plus
tax and CI effects if any impact more
comparable operating profit cleaner
Separation of financing effects.
Investors see precisely how you adjusted
performance and tax effect of each
adjustment. Now there are three more
cases for your reading. After that we
have a project sorry we have a FAQ and
tricky areas like what
are the questions? Maybe you guys have
some questions in your mind. So for that
you can read it. Now we have a
conclusion again. we have a visual. Okay
guys, this slide contain 9 to
10 slides. So it's not necessary that
you can complete read and understand
each and everything. Look, the examiner
will not go into much detail for this
time. But maybe once we move to the next
stage or the next year, then the
examiner might get into more detail. But
for the time being you don't need to
worry at all. Most of these students
were just overwhelmed why how if FRS8
will be tested. Still if you guys facing
any issues in understanding the IFRS8
content or if you want me to upload or
explain questions on the IFR8
then what you have to do you just have
to comment down our question. I will
record a separate video on the questions
which might be tested in the
SPR and F7.
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